Your Best Defense Against Form 3520 Violations, Tax Guidance

Your Best Defense Against Form 3520 Violations, Tax Guidance

The Defense to Form 3520 Violations  

One of the most unfair types of penalties that have been a key focus for the Internal Revenue Service in the past few years is the Form 3520 penalty. More specifically, it is the form 3520 penalty for US taxpayers who received a gift from a foreign person, did not report that gift timely to the IRS — and have now become subject to significant fines and penalties by the Internal Revenue Service. In this type of scenario, the taxpayer is not being penalized for having any unreported income, but simply for not reporting a gift – and oftentimes the gifts are from a parent or family member in a situation in which the taxpayer may have only recently graduated from University in the United States or received a foreign inheritance.  If you have been assessed a Form 3520 penalty (or will be filing a late form 3520), there are defenses to consider:

26 U.S.C. 6039F (Notice of Large Gifts)

The laws involving form 3520 violations are codified in 26 USC 6039F, which provides the following:

      • (2) Reasonable cause exception

        • Paragraph (1) shall not apply to any failure to report a foreign gift if the United States person shows that the failure is due to reasonable cause and not due to willful neglect.

Reasonable Cause and Not Willful Neglect

The key phraseology in this code section is for the taxpayer to be able to show that the failure to report the foreign gift was due to reasonable cause and not willful neglect. Depending on whether the taxpayer has already been penalized or not will determine whether they should submit the reasonable cause letter upfront along with the late-filed form or if they have already been penalized and it will serve as the crux of the protest letter that the taxpayer must file (usually) within 30 days of receiving the Form 3520 violation notice on a CP-15 Notice.

How to Prove Reasonable Cause

There is no one-size-fits-all argument when it comes to reasonable cause. It is based on a totality of the circumstance test and while two different taxpayers may have similar circumstances, they will not have an identical set of facts.

The letter should be detailed and focus on the facts that illustrate reasonable cause.

For example:

      • Was it the first time the taxpayer received a large foreign gift?

      • Did the taxpayer use a CPA or other tax professional when filing?

      • Did the taxpayer conduct their own due diligence?

      • Has the taxpayer been penalized on this type of issue previously?

      • Has the taxpayer been filing timely tax returns for the past years?

      • Has the taxpayer filed their other international information returns timely?

The 3520 Dispute Process is Long (and Winding)

There are many steps a taxpayer may have to take to resolve a Form 3520 gift issue, from filing the form to reaching a resolution with the IRS. These types of penalties are referred to as assessable penalties and are normally issued once the IRS has noticed that the form was filed late –– and generally not issued in scenarios such as audits or examinations. This puts the taxpayer at an immediate disadvantage because they do not have a chance to dispute the penalty before it is issued to them by the IRS. If the protest letter is successful, then that is great –– but when it is not successful then the taxpayer must continue onto another alternative such as an appeal, collection due process hearing, tax court, or federal court (each with their own sets of pros and cons).

Hire Experienced Form 3520 Counsel

You should be working with a Board-Certified Tax Law Specialist that specializes exclusively in offshore tax matters. The firm should offer a flat-fee, and full-service representation. Realizing, that the IRS is very disorganized and understaffed and it can take many, many hours to even resolve the simplest issues with the IRS, and if you are being charged hourly, those hours can quickly add up and far surpass what you would have paid in a flat-fee situation.

About Our International Tax Law Firm: Golding & Golding

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.

Contact our firm today for assistance with getting compliant.