The Tax Times: Automatic Foreign Gift Reporting Penalty For Late Filed Form 3520, Part IV Ending

According to Law360, the Internal Revenue Service Commissioner Danny Werfel told the UCLA Tax Controversy Conference audience on October 24, 2024 that the agency will no longer automatically assess penalties for the late reporting of large foreign gifts, with the announcement eliciting applause from the audience of several hundred tax attorneys and tax professionals.

Werfel appeared for the second year in a row as a keynote speaker for the event at the Beverly Hills Hotel in Beverly Hills, California, and credited the policy change to the lobbying of National Taxpayer Advocate Erin Collins, who was sitting in the audience near the front.

Failure to disclose large foreign gifts can result in penalties of up to 25% of the gift under Internal Revenue Code Section 6039F, with the penalty being automatically assessed even though the gift is likely not a taxable event. The penalty can be challenged in court and overturned, but only if it is paid first.

"So We Have Decided To Stop Assessing Penalties
Immediately For Late-Filed Forms 3520, Part IV,
Which Deals With Foreign Gifts,"
Werfel Said As The Crowd Applauded.

"And Also, Erin Just Said, 'That's Not All,'
We Also Will Now Review Reasonable Consideration Statements That Are Attached To These Late-Filed Forms Before
We Issue A Penalty. So Those Are The Two Changes."

"So victory for your taxpayer advocate there," Werfel continued. "I think this is an important change for taxpayers and I think this room understands the type of situations this was causing for a person maybe with parents living overseas, a parent dies, now you're dealing with the estate, you're dealing with grief, you're dealing with all the moving pieces, and maybe in the middle of all this you late-file your form, even though it's not a taxable event, and then all of a sudden you get hit with a penalty."

"What we were seeing is a there were a lot of immigrants who had families overseas who were receiving gifts and not knowing about the form, not a big surprise because taxes are complex," Collins said. "Who thinks about filling out a form for a non-taxable event?"

Collins was named the taxpayer advocate in February 2020, with the role being the Internal Revenue Service's independent watchdog. Collins spent 20 years as the director of KPMG's western tax controversy services, and before that spent 15 years as an attorney in the IRS Office of Chief Counsel.

Collins said late-filers can explain in an attached form called a reasonable consideration statement why they were late in filing the form and the circumstances that surrounded it. Challenged penalties are overturned about 67% of the time, Collins said, which demonstrates that the IRS is spending a lot of wasted energy on the issue with little to show for the effort.

Collins said. "Because it's taking a lot of our employees' time and then for taxpayers, it's a really scary thing to open up that piece of paper and see that large penalty. So it's a win-win, I think, for both taxpayers and for the IRS."

"We don't want to penalize people for doing to the right thing and voluntarily coming in and falling on their sword and saying, 'I didn't know,' for whatever reason, and then they get penalized," she continued. "So it really is a good thing for taxpayers."

On automatic assessment of other foreign information forms, Collins said "I want them all to stop,"

Collins said. "Have the IRS review them before they assess the penalty because of the very high rate of abatement, anywhere from 60% to 80%, depending on the year."

She added that she hoped the IRS "will take additional steps over systemic assessment. Give people an opportunity to say, 'I have reasonable cause and under the law you should not be assessing.'"

In addition to a first-time abatement for Section 6039F penalties, the group recommended a review of reasonable cause prior to penalty assessment. Section 6039F contains exceptions for penalties based on reasonable cause, but over the past several years, the IRS has been assessing penalties without first making this consideration, according to the letter.

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