US IRS ends practice of automatic penalties for non-filing of foreign gifts

Thursday, 31 October 2024
The US Internal Revenue Service (IRS) has declared an end to its policy of issuing automatic penalties for late reporting of foreign gifts and bequests and certain foreign trust transactions.
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The decision was announced by the IRS on 24 October 2024, and has immediate effect. It is being described as a ‘major victory’ for US taxpayers and their advocates. ‘For years, both groups have argued that the IRS was systematically and improperly assessing penalties for late-filed Forms 3520 and Forms 3520-A without reviewing the reasonable cause statements that would abate them,’ notes law firm Baker McKenzie. ‘The result was that US taxpayers were forced to engage in lengthy and expensive processes to challenge the penalty assessments only to have the IRS eventually agree with them and abate the penalties.’

US taxpayers who receive gifts or bequests exceeding USD100,000 from non-US donors must report the fact on Form 3520, even though gifts and bequests are excluded from their income. However, failure to report the receipt may subject the recipient to significant penalties that mount up every month the filing is delayed, up to a maximum of 25 per cent of the amount of the gift.

In late 2020, the IRS posted a notice on its website notifying taxpayers that it reserved the right to impose penalties for late-filed international returns without any consideration of an attached reasonable cause statement. It would simply assess the penalties automatically.

Under the IRS’ new procedure, taxpayers will be given the chance to submit reasonable cause statements for not submitting Forms 3520 and 3520-A. Potentially, this will reduce the burden for a taxpayer who wishes to correct unintentional reporting omissions.

A similar change in policy is being made with respect to the foreign trust reporting sections of Form 3520. The penalties for late filing of these sections are even more drastic, capped only at the gross amount of the reportable receipt from the trust. Automatic penalties for these violations are also now suspended, although it is not clear how the IRS will respond to late filings that do not include a reasonable cause statement.

Automatic assessment procedures for other late-filed international information returns, such as Form 5471, remain in place.

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