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IRS Challenges to Foreign Gifts Received: Failure to File Forms 3520 and 3520-A

Current and Notable Cases, Best Responses to Penalty Assessments

Note: CLE credit is not offered on this program

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Wednesday, December 13, 2023

Recorded event now available

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This webinar will address the IRS' current and often overreaching effort to collect penalties related to the filing of Forms 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, and 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner. Our panel of international tax experts will review the IRS' penalty regime for inadequate reporting, recent cases regarding the receipt of foreign gifts, and provide examples of the best responses to IRS assessments of penalties relating to reporting foreign gifts received in specific scenarios.

Description

Under Section 6677, the IRS can assess a penalty for incomplete, inaccurate, or failure to file Forms 3520 and 3520-A. The penalties imposed are the greater of $10,000, 35 percent of the gross value of any property transferred to or distributed from a foreign trust, or five percent of the gross value of the portion of the foreign trust's assets owned by a U.S. person in a grantor trust. Additional penalties apply when taxpayers fail to remedy noncompliance 90 days after notification from the IRS.

IRS' 2018 Compliance Campaign focusing on foreign trusts, Form 3520, and Form 3520-A is thriving. The IRS continues to assess these reporting penalties, knowing many taxpayers are oblivious to the information filing requirements surrounding the receipt of foreign gifts. Although the IRS is required to allow abatement of these penalties for reasonable cause (IRC Section 6039F(c)(2)), many believe the IRS fails to offer this relief for reasons that should qualify. Since a definition of reasonable cause is not codified, litigation is often the only recourse taxpayers have.

The IRS admittedly is looking for untaxed income disguised as gifts; however, the results of its egregious campaign have been numerous cases brought against the Service including those for "stacking" penalties (Wilson v. U.S., No. 20-603 (2d Cir. 2021)), ignoring valid reasonable cause exceptions (Wrzesinski v. U.S., No. 2:22-cv-03568 E.D. Pa. Mar. 7, 2023), and time-barred assessments (Fairbank v. Comm'r, T.C. Memo. 2023-19). The scope and excessive penalties the IRS imposes on unreported foreign gifts make understanding the application of and defenses to these penalties critical for international tax advisers.

Listen as our panel of federal tax litigation experts reviews the current state of IRS challenges to individuals and trusts receiving and distributing foreign gifts.

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Outline

  1. IRS challenges to foreign gifts received: introduction
  2. IRS' attempts to impose taxes on foreign gifts
  3. Recent notable cases
  4. Responding to IRS penalty notices
  5. Best practices and strategies

Benefits

The panel will review these and other critical issues:

  • Calculating penalties imposed under IRC Section 6677
  • The current state of the IRS' 2018 compliance campaign targeting receipt of foreign gifts
  • Current cases against the IRS for assessment of penalties for inadequate or non-filing of Forms 3520 and 3520-A
  • Appropriate responses to assessment of penalties for non-filing Forms 3520 and 3520-A

Faculty

Agostino, Frank
Frank Agostino
President
Agostino & Associates

Mr. Agostino is the founder and president of Agostino & Associates, P.C.  Prior to entering private practice,...  |  Read More

Roberts, Matthew
Matthew L. Roberts, J.D., LL.M.
Partner
Gray Reed

Mr. Roberts is a tax litigator and trusted advisor with considerable experience helping U.S. and international clients...  |  Read More

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