The IRC 6751 Hail Mary for Removing 6039F Penalties (3520)

The IRC 6751 Hail Mary for Removing 6039F Penalties (3520)

The IRC 6751 Hail Mary for Removing 6039F (3520) Penalties 

When a US Person has failed to report a foreign gift to the US government on Form 3520, they may, unfortunately, find themselves on the receiving end of an assessed penalty — resulting in significantly high fines and penalties. Some less-experienced tax counsel will try to convince taxpayers of different low-chance (but high attorney fee) strategies, without explaining the pros and cons of the approach. One of these strategies to try to remove the Form 3520 penalty is with the 26 USC 6751 argument that the Internal Revenue Service did not follow its own proper procedures when issuing the penalty. Unfortunately, based on the procedures generally used by the IRS to assess Form 3520 penalties in particular (they are oftentimes electronically assessed), this strategy does not have a high probability of success, while the attorneys will still charge the client many hours in attorneys fees — so please be aware of any tax attorney attempting to sell you that they will get your penalty waived by way of making a 6751 maneuver. In addition, this type of argument will usually also require the Taxpayer to make a FOIA request which comes with its own set of issues that can inadvertently put the taxpayer in a worse position.

Form 3520 Gift Example

Jennifer is from China and resides in the United States as a Lawful Permanent Resident. She recently graduated from medical school but does not have any credit yet, so her foreign national (nonresident alien) parents gifted her $800,000 to help pay for her first home. Since Jennifer thought of this as a little more than a gift from her parents, she did not report the gift on Form 3520. About two years later when working with a new CPA, Jennifer learns that she did not properly file this form and filed the form late. The Internal Revenue Service assessed her a 25% penalty — representing the maximum penalty which is simply based on 5% a month for up to five months – of $200,000.

Penalty Waiver

In order to get the Form 3520 penalty waived, there is (usually) a long and arduous path that the Taxpayer will follow that begins with a CP15 notice and ends with a Collection Due Process Hearing — unless it can be resolved at the protest letter phase.

26 USC 6751 (Procedural Requirements)

      • (a) Computation of penalty included in notice

        • The Secretary shall include with each notice of penalty under this title information with respect to the name of the penalty, the section of this title under which the penalty is imposed, and a computation of the penalty.

      • (b)Approval of assessment

        • (1) In general No penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.

        • (2) Exceptions

          • Paragraph (1) shall not apply to—

            • (A) any addition to tax under section 6651, 6654, 6655, or 6662 (but only with respect to an addition to tax by reason of subsection (b)(9) thereof); or

            • (B) any other penalty automatically calculated through electronic means.

            • (c) Penalties

              • For purposes of this section, the term “penalty” includes any addition to tax or any additional amount.

Automatically Calculated Through Electronic Means Exception

There is an exception to having to receive an immediate supervisor’s approval, which is that as long as the penalty was automatically calculated through electronic means, then paragraph (1) — requiring written approval by the immediate supervisor — is not necessary. And, since oftentimes the Form 3520 penalty is issued as a result of an automatic calculation through electronic means (5% multiplied by the number of months), it is a failed argument.

FOIA Request to Support a 6751 Argument Can Backfire

In order to pursue the 26 USC 6751 avenue, taxpayers typically have to obtain a FOIA request. And when that FOIA request comes back – assuming it was approved and shows that the IRS followed procedures by having it electronically calculated based on the number of months and the total value of the penalty — that document will now be front and center in your file. Now, instead of objectively assessing the facts and circumstances, it can put the taxpayer in a seemingly worse position because now the IRS may simply refer to the FOIA request on the top of the file (which was a headache for the IRS to respond to) as means to reject the penalty abatement. While you can continue and go onto tax court if you made a Collection Due Process Hearing request — the overall fees you have paid an attorney making these hail mary arguments may make it financially less beneficial to the client.

Be sure to speak with a Board-Certified Tax Law Specialist team that specializes exclusively in offshore/international tax matters first to discuss the different cost-effective strategies.

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