Form 3520 Late Filing Penalty
Form 3520 Late Filing Penalty: The Form 3520 Late Filing Penalty is extremely disproportionate to the “violation.” Sometimes (and oftentimes) it is simply a gift from a foreign parent to a U.S. person. The U.S. person is unaware that the gift must be reported to the IRS, so the form 3520 is never filed. Most of the time, there is no unreported income associated with the gift. The problem is that in recent years, the Internal Revenue Service has taken an aggressive position on matters involving foreign accounts compliance. This includes unreported foreign income and unreported gifts from foreign person. Since the Form 3520 offshore penalty can be staggering, it is important to get into compliance. The IRS has developed various abatement or “amnesty programs” to assist taxpayers, including the Streamlined Program.
Late Filed Form 3520 Penalties & the IRS
Form 3520 Late Filing Penalty is tough. The 3520 form is an IRS form which is used by U.S. persons to report gifts or trust distributions (including inheritance) received from a foreign person. Technically, the form is referred to as: “Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.”
The concept, is that in United States when a U.S. person gifts money or assets over the annual exclusion amount, they are required to file a form 709 gift tax returns. In all reality, most people don’t file the form, because they are U.S. persons and the IRS does not enforce it to the same degree as they do for foreign persons.
With a foreign person, the concern is the IRS does not have any way of tracking the gift.
For example, if David in United States receives a $15 million dollar gift from his parents in Taiwan, the IRS will not know about it. Sure, depending on how the money is transferred and which particular foreign financial institution (FFI) is being used, the IRS may, at some point receive notice of such a large transfer –but that is besides the point. Rather, the IRS wants to know the value of the gift, now.
This becomes a bigger issue in the future, when the U.S.person recipient passes away, and now may be subject to estate tax. The IRS wants to be able to accurately value the estate.
Form 3520 Penalty is Extremely Lopsided
The form 3520 penalty is very lopsided.
For one thing, many individuals will only have to file the form 3520 once or twice in a lifetime. It is not the same as having a foreign financial asset or foreign bank account which requires annual reporting.
In addition, when the reporting involves a gift from a foreign person (as opposed to an entity), the reporting requirements are relatively simple – and yet the potential penalty can be devastating.
Did you receive an IRS CP15 Notice?
If you received an IRS CP15 Notice, you have a very limited time to respond. Learn more about CP15 Notice and Foreign Gift Penalties.
IRS 3520 Penalty
As provided by the IRS:
A penalty applies if Form 3520 is not timely filed or if the information is incomplete or incorrect (see below for an exception if there is reasonable cause). Generally, the initial penalty is equal to the greater of $10,000 or the following (as applicable).
• 35% of the gross value 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 in Part I.
• 35% of the gross value of the distributions received from a foreign trust for failure by a U.S. person to report receipt of the distribution in Part III.
• 5% of the gross value of the portion of the foreign trust’s assets treated as owned by a U.S. person under the grantor trust rules (sections 671 through 679) for failure by the U.S. person to report the U.S. owner information in Part II.
Such U.S. person is subject to an additional separate 5% penalty (or $10,000 if greater), if such person
(a) fails to ensure that the foreign trust files a timely Form 3520-A and furnishes the required annual statements to its U.S. owners and U.S. beneficiaries, or
(b) does not furnish all of the information required by section 6048(b) or includes incorrect information. If a foreign trust fails to file Form 3520-A, the U.S. owner must complete and attach a substitute Form 3520-A to the U.S. owner’s Form 3520. See section 6677(a) through (c) and the Instructions for Part II of this form and Form 3520-A.
Additional penalties will be imposed if the noncompliance continues for more than 90 days after the IRS mails a notice of failure to comply with the required reporting. For more information, see section 6677.
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