The Form 3520/3520-A Non-Compliance Campaign Ends 2022

The Form 3520/3520-A Non-Compliance Campaign Ends 2022

Form 3520/3520-A Non-Compliance Campaign Ends

Each year, the Internal Revenue Service develops various international noncompliance campaigns that are designed to enforce certain matters involving US tax and reporting compliance. One of the most aggressive campaigns that the IRS has pursued is the campaign enforcing Forms 3520 and 3520-A compliance campaigns for matters involving foreign gifts and foreign trusts. For several years, if a US Taxpayer only had a missed filing various international information reporting forms, then they could normally circumvent penalties and skirt fines by submitting to the Delinquent International Information Return Submission Procedures (DIIRSP). Since November 2020 the Internal Revenue Service has modified the program to reflect that a penalty waiver or abatement is not guaranteed. The IRS also discontinues or “retires” certain programs over time — and continuing its list of retired compliance programs, the IRS has now retired the forms 3520/3520-A Non-Compliance Campaign. Still, the IRS pursues Form 3520 penalties regularly so if you are out of compliance, you should consider getting into compliance.

Form 3520/3520-A Campaign

      • Practice Area:  Withholding & International Individual Compliance

      • Lead Executive: Deborah Palacheck

      • Campaign Point of Contact: Ursula Gee

      • This campaign will take a multifaceted approach to improving compliance with respect to the timely and accurate filing of information returns reporting ownership of and transactions with foreign trusts. The Service will address noncompliance through a variety of treatment streams, including, but not limited to, examinations and penalties assessed by the campus when the forms are received late or are incomplete.

 IRM Section

      • Penalty Computation

      • Gross Reportable Amount—The gross reportable amount is defined in IRC 6677(c) as follows:

        • Contributions to the foreign trust: The gross value of the property involved in the event (determined as of the date of the event) in the case of a failure relating to IRC 6048(a),

          • The gross value of the portion of the trust’s assets at the close of the year treated as owned by the U.S. person in the case of a failure relating to IRC 6048(b)(1), and

          • Distributions from the foreign trust: The gross amount of the distributions in the case of a failure relating to IRC 6048(c).

      • Inaccurate reporting: The penalty applies only to the extent that the transaction is not reported or is reported inaccurately. Thus, if a U.S. person transfers property worth $1,000,000 to a foreign trust, but reports only $400,000 of that amount, penalties may be imposed only on the unreported $600,000. See Notice 97-34.

        • If the return is not filed and the Service assesses a penalty based on available information, additional assessments can be made if additional information is received.

      • Each Filing Requirement Penalized Separately—Each Part of Form 3520 and Form 3520-A is considered a separate requirement when applicable, and the penalty for each requirement is calculated independent of the others.

      • Initial Penalty—Prior to 2010 under IRC 6677, the initial penalty for failure to timely file a complete and accurate Form 3520 or Form 3520-A was calculated based on the respective percentages below of the gross reportable amount. There was no minimum penalty. Beginning with 2010, a minimum threshold was added. In cases where the gross reportable amount is less than $10,000 the initial penalty is equal to the gross reportable amount. In cases where the gross reportable amount is $10,000 or greater, the initial penalty for each requirement is equal to the greater of $10,000 or the following:

        • . 35 percent of the gross reportable amount of any property transferred to a foreign trust for failure by a U.S. transferor to report the creation of, or transfer to, a foreign trust (Form 3520, Part I).

        • 35 percent of the gross reportable amount of the distributions received from a foreign trust for failure by a U.S. person to report receipt of the distribution (Form 3520, Part III).

        • 5 percent of the gross reportable amount of the portion of the trust’s assets treated as owned by a U.S. person for failure by the U.S. person to ensure that the foreign trust files a Form 3520-A (this penalty is imposed under IRC 6677(b) and is discussed further in IRM

      • In the case of a U.S. person treated as the owner of a foreign trust, penalties are imposed under IRC 6677(b) for a failure to report such ownership (pursuant to IRC 6048(b)) on Form 3520-A rather than on Part II of Form 3520.

    • Continuation Penalty—If any failure continues more than 90 days after the day on which the notice of such failure was mailed to the taxpayer (90-day period), additional penalties will apply. The continuation penalty is $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of the 90-day period. These additional penalties are also asserted on Form 8278using PRN 702 for Part I and/or Part III, and PRN 706 for Part II.

    • The maximum penalty (both initial penalty and continuation penalty combined) for each failure per year is the gross reportable amount. The penalty for each Part of Form 3520 required to be filed is considered separately.

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