Think the IRS is quiet during the Shutdown? Think Again! Another Form 3520 Trap for the Unwary

By: Randall P. Andreozzi

Things are emerging from the abyss that is the longest government shutdown in United States history.   Yes, there exist some things so resilient, so pervasive, so constant they can survive and proliferate even in a governmental vacuum.  Our friends who are U. S. citizens living abroad know this species all too well and are likely collectively sighing and rolling their eyes — IRS foreign  information penalty notices.  But these penalty notices are unique.

This subspecies of penalty notice “charges” stiff penalties alleging that the recipient failed to timely file a 2017 Form 3520 (Annual Return to Report Transactions with Foreign Trust and Receipt of Foreign Gifts).  The amount of the penalty is the greater of $10,000 or 35% of the gross reportable amount transferred to or distributed from a foreign trust.  The notice then threatens so-called “continuation penalties” of $10,000 per month if the “failure to file “continues after 90 days.  The two-page notices almost look like unprofessional scams, as many of them refer to the Form 3520 as “Form 3250.”  But they are very real.  And the troubling part is that practitioners and taxpayers are receiving these failure-to-file notices for Forms 3520 that they filed — or at least thought they filed – timely. Wait, what?  Yes, you may have thought you timely filed your 2017 Form 3520, but the IRS says you did not.  It’s easier to explain with the actual instructions themselves:

HERE ARE THE 2016 INSTRUCTIONS ON WHEN AND WHERE TO FILE FORM 3520 ….

In general, Form 3520 is due on the date your income tax return is due, including extensions. In the case of a Form 3520 filed with respect to a U.S. decedent, Form 3520 is due on the date that Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, is due (including extensions), or would be due if the estate were required to file a return.  Send Form 3520 to the Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409.  Form 3520 must have all required attachments to be considered complete.

Note. If a complete Form 3520 is not filed by the due date, including extensions, the time for assessment of any tax imposed with respect to any event or period to which the information required to be reported in Parts I through III of such Form 3520 relates, will not expire before the date that is 3 years after the date on which the required information is reported. See section 6501(c)(8).

HERE ARE THE 2017 INSTRUCTIONS ON WHEN AND WHERE TO FILE FORM 3520….

In general, the due date for a U.S. person (defined later) to file a Form 3520 has changed to the 15th day of the 4th month following the end of the U.S. person’s tax year. In the case of a Form 3520 filed with respect to a U.S. decedent, the due date to file a Form 3520 is no longer connected to the due date of the Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, but rather, has changed to the 15th day of the 4th month following the end of the decedent’s last tax year. If the U.S. person’s estate is also required to file a Form 3520, the estate will have to file by the 15th day of the 4th month following the end of the estate’s tax year, just like any other U.S. person.  If the due date falls on a Saturday, Sunday, or legal holiday, file by the next day that is not a Saturday, Sunday, or legal holiday.

Note. If a U.S. person is granted an extension of time to file an income tax return, the due date for filing Form 3520 is the 15th day of the 10th month following the end of the U.S. person’s tax year.

Send Form 3520 to the Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409.

Form 3520 must have all required attachments to be considered complete.

Note. If a complete Form 3520 is not filed by the due date, including extensions, the time for assessment of any tax imposed with respect to any event or period to which the information required to be reported in Parts I through III of such Form 3520 relates, will not expire before the date that is 3 years after the date on which the required information is reported. See section 6501(c)(8).

 

HERE ARE THE 2018 INSTRUCTIONS ON WHEN AND WHERE TO FILE FORM 3520 ….

In general, a U.S. person’s Form 3520 is due on the 15th day of the 4th month following the end of such person’s tax year. If, however, on the due date of your income tax return, you are a U.S. citizen or resident who qualifies for one of the following conditions, then your Form 3520 is due on the 15th day of the 6th month following the end of your tax year. You must include a statement on the Form 3520 showing that you are a U.S. citizen or resident who meets one of these conditions.

• You live outside of the United States and Puerto Rico and your place of business or post of duty is outside the United States and Puerto Rico.

• You are in the military or naval service on duty outside the United States and Puerto Rico.

In the case of a Form 3520 filed with respect to a U.S. decedent, the due date to file a Form 3520 is the 15th day of the 4th month following the end of the decedent’s last tax year. If the U.S. person’s estate is also required to file a Form 3520, the estate will have to file by the 15th day of the 4th month following the end of the estate’s tax year, just like any other U.S. person.  If the due date falls on a Saturday, Sunday, or legal holiday, file by the next day that is not a Saturday, Sunday, or legal holiday.

Note. If a U.S. person is granted an extension of time to file an income tax return, the due date for filing Form 3520 is the 15th day of the 10th month following the end of the U.S. person’s tax year.

Send Form 3520 to the Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409.

Form 3520 must have all required attachments to be considered complete.

Note. If a complete Form 3520 is not filed by the due date, including extensions, the time for assessment of any tax imposed with respect to any event or period to which the information required to be reported in Parts I through III of such Form 3520 relates, will not expire before the date that is 3 years after the date on which the required information is reported. See section 6501(c)(8).

Got it?  No?  Take a closer look.  Real close.  Here’s a hint.  Focus on 2017.  Notice any difference?  No?  Look closer.  See it now?  The 2017 instructions change the due date for filing the Form 3520 to April 15 (or in legal terms “the fifteenth day of the fourth month of the year”).  Here’s the trick – for most of us U.S. persons, April 15 is “the date your income tax return is due.”  But, those of us U.S. persons living outside of the U.S. during the year get a two-month administrative reprieve and may file their returns by June 15.  So, their Forms 3520 were due on June 15 every single year up to and including 2016.  For 2017, the Form 3520 was due on April 15, 2018.  And then, the instructions changed back and made the due date for 2018 and (I guess) thereafter June 15.

As best we can tell, here’s what caused this mess.  A provision buried deep within the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015  Public Law 114-41 established due dates for FBARs (FinCEN Report 114), Forms 3520, and some other forms, to April 15 to correspond with the statutory due date for Federal income tax returns.  As we know, the statutory due date for Federal income tax returns is April 15, but the IRS provides a two-month administrative extension to those living outside of the U.S. to June 15. Congress directed the Secretary of Treasury to write guidance implementing the new set of statutory due dates for tax years beginning after December 31, 2015.  The IRS did nothing for 2016.  It then changed its instructions for 2017 as referenced above.  It then later changed the instructions for 2018 and beyond back as shown above to clarify that they conform with the instructions as they had always been and with Section 6081 and its corresponding regulations.

The 2017 instructions are therefore anomalous as they implement Congress’ intent and reaffirm the April 15 due date for Forms 3520, but they never mention the two-month extension for U.S. persons living abroad.  The IRS fixed this for 2018 to be consistent with Congress’ intent of keeping the due dates consistent with due dates for income tax returns.

But now, the ghost in the shut-down IRS machine is haunting those who fell into the short-lived instruction trap.  Taxpayers and practitioners are receiving penalty notices from the IRS, dated apparently at various times in December, 2018, “charging” taxpayers with penalties and requiring a response within 10 days of the date of the letter.  The problem is that these taxpayers reside outside of the United States and are receiving the notices after the expiration of the 10-day window.  The notice implies that the taxpayer is out of luck and may only challenge the “charged” penalty through a refund claim and a suit in Federal District Court.

The professionals at Andreozzi Bluestein advise and represent clients before the IRS and in the courts on matters involving Forms 3520 and other foreign asset and account reporting. We are currently working with many clients to address these notices and eliminate any unforeseen penalties.  If you’ve received such a notice, it is important that you address it promptly.     If you think you may have an urgent or imminent Form 3520 matter and are unsure how to proceed, please contact the professionals at Andreozzi Bluestein.

Disclaimer

This communication is for general informational purposes only which may or may not reflect the most current developments. It is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decision of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult an independent licensed attorney before making any decision or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between Andreozzi Bluestein LLP and the recipient.

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