Navigating the world of international taxation can often be a complex and intimidating task, particularly regarding I.R.S. Form 3520. This form is designed to report transactions with foreign trusts and large gifts from foreign entities.
However, its complexity often leaves many U.S. taxpayers perplexed, making it difficult to file the form accurately and timely. Considering the hefty penalties for non-compliance, working with our team can make all the difference in your case. We can help you prepare your Form 3520 correctly and file it on time while providing guidance throughout the process. We can also challenge any penalties you might have already been assessed by showing you had reasonable cause for your error. Through an abatement, it is possible to avoid penalties for understandable mistakes.
For your free case consultation, call our international tax attorneys at McCormick Tax Law at (215) 630-0861.
When You Must File Form 3520 to Avoid Penalties
Form 3520 is a complex tax form used to report certain transactions with foreign trusts, gifts, or inheritances. Failure to comply with the Internal Revenue Service’s (I.R.S.) regulations regarding Form 3520 can result in substantial penalties, which is why it is essential to understand when and how to file this form correctly. If you are having trouble, our experienced international tax attorneys can review your case so that you avoid common mistakes and remain compliant. The following scenarios will likely require you to file Form 3520:
You Received a Gift from a Foreign Person
If you are a U.S. citizen or resident alien who receives a gift or inheritance from a foreign individual or estate, you will likely be required to report it under I.R.S. Form 3520. Specifically, if the total value of the gift or inheritance received from a non-resident individual or foreign estate during the tax year exceeds $100,000, you must file Form 3520. Additionally, if the gift or inheritance comes from a foreign corporation or foreign partnership and its value is greater than $16,388, you are also required to file this form.
However, certain transfers might be exempt from this requirement. For example, gifts between spouses, gifts from a U.S. person who received them from a foreign person within the previous year, and gifts from foreign charitable organizations are generally exempt.
If you fail to report the gift or inheritance and file Form 3520, you might face severe penalties, which can be as high as 5% of the gift’s value for each month it remains unreported, up to a maximum of 25%. Therefore, it is vital to understand your specific reporting obligations and comply with them to avoid any potential penalties.
You Own a Foreign Trust
If a U.S. person owns a foreign trust, they are also required to file Form 3520. In this context, the term “U.S. person” includes U.S. citizens, resident aliens, and certain types of entities like corporations. The term “foreign trust” refers to any trust other than a U.S. trust.
The I.R.S. considers you to be the owner of a foreign trust if you have control over the trust’s assets under the grantor trust rules. This means that you are considered to be the owner of the trust if you have the power to revoke or modify the trust, if you are the beneficiary of the trust, or if you have certain other powers over the trust.
If you are required to file Form 3520 for your foreign trust, you must report your ownership of the trust, provide information about the trust’s U.S. beneficiaries, and ensure that the foreign trust completes a yearly income tax return. Failure to comply with these requirements can result in penalties, including a fine of up to 35% of the gross value of any property transferred to a foreign trust.
You Received a Distribution from a Foreign Trust
Lastly, if you are a U.S. person who has received a distribution from a foreign trust during the tax year, you will also be required to file Form 3520. This requirement applies to both direct and indirect distributions. Direct distributions are those that you receive directly from the foreign trust, while indirect distributions include those made through an intermediary or those that the I.R.S. deems to have been received by a U.S. person.
To complete the form, you will need to provide detailed information about the distribution, including the amount, date of receipt, and details about the foreign trust. Additionally, a separate Form 3520 must be filed for each foreign trust from which you receive a distribution.
Keep in mind that failing to report these distributions can lead to significant financial penalties, including a fine of up to 35% of the gross value of the distributions. Therefore, it is crucial to correctly report these distributions and timely file your Form 3520 to avoid these costly penalties.
Abatement Can Help You Avoid Penalties for Form 3520 Violations
If you have made a Form 3520 violation, the I.R.S. will send a CP15 Notice to inform you of the penalty assessed against you for failing to comply. If you have received a CP15 Notice, it means the I.R.S. has assessed a penalty against you automatically without a response from you for either not filing the form, not providing all the information required, or providing incorrect information.
Receiving a CP15 Notice can be alarming, but it is important to remember that you have options to avoid these penalties. Although the penalties are automatically assessed, the I.R.S. allows 30 days from your notice date to request an abatement.
To do this, you must submit a Reasonable Cause Letter explaining the situation. In this letter, you need to argue that the failure to file or the errors made were because of reasonable cause and not willful neglect. The I.R.S. considers various circumstances as reasonable cause, including fire, casualty, natural disaster, inability to obtain records, death, serious illness, and more.
To be effective, your letter should be detailed and persuasive. You should clearly explain the circumstances that led to the failure to file or the errors made, which usually require providing any supporting evidence you can to support your claims, and demonstrate how these circumstances affected your ability to comply with the requirements.
If the I.R.S. finds your explanation satisfactory, it can abate the penalty immediately in most cases. This means the I.R.S. reduces or eliminates the penalty, relieving you of the financial burden. If not, you should receive a Letter 854C explaining the reasons for the denial. However, you can appeal this denial further, which our team can help you litigate.
Our Tax Attorneys Can Help You File Your Form 3520 Correctly and in a Timely Manner
For a free case review, contact our international tax attorneys by calling McCormick Tax Law at (215) 630-0861.