IRS Ends Automatic Penalties for Late Filing of Form 3520 or 3520-A

 Posted on November 29, 2024 in Taxation Law

U.S. taxpayers who own foreign assets or receive assets from foreign sources face a variety of complex reporting requirements. Failure to file the correct forms with the IRS can result in substantial penalties. However, a recent policy change by the IRS may provide some relief for these taxpayers. The IRS will no longer impose automatic penalties for late filing of certain forms, and taxpayers may be able to avoid penalties by demonstrating that they had a reasonable cause for failing to file.

The procedures that must be followed when reporting foreign assets and income can be complicated, and taxpayers need to understand the steps they can take to avoid penalties and minimize their tax burdens. Assistance from a skilled and experienced San Jose, CA attorney can be crucial when dealing with tax law concerns.

Penalties Related to Form 3520 and 3520-A

Taxpayers are required to report transactions with foreign trusts and assets received from foreign trusts. Form 3520 must be filed when a person receives distributions from foreign trusts or gifts or bequests from foreign persons. This form must be filed by the 15th day of the fourth month after the end of the person’s tax year (which, for calendar-year taxpayers, would be April 15th). Form 3520-A must be filed on an annual basis by a taxpayer who owns a foreign trust. This form must be filed by the 15th day of the third month after the end of the trust’s tax year.

Failure to file these forms on time can result in penalties. If a taxpayer does not file Form 3520 or 3520-A to report transactions with foreign trusts, they may be required to pay a penalty of 5 percent of the gross reportable amount or $10,000, whichever is larger. An additional $10,000 penalty may be imposed for each 30-day period the required forms are not filed after receiving notice of failure to file from the IRS. The aggregate amount of penalties may be as high as the total gross reportable amount.

Taxpayers who receive gifts or bequests of $100,000 or more from foreign persons are required to report these by filing Form 3520. Failure to report gifts or bequests can result in penalties of 5% of the amount of the gift or bequest. This penalty may be assessed for each month in which the taxpayer failed to file Form 3520, and it is capped at 25% of the amount of the gift or bequest.

Automatic Penalties for Late Filing Will No Longer Be Imposed

In the past, the IRS would automatically assess penalties against taxpayers who failed to file Form 3520 or 3520-A on time. However, the IRS recently announced that it will no longer impose automatic penalties. Instead, it will consider information submitted by taxpayers along with these forms explaining why they were not filed on time. Taxpayers may provide reasonable cause statements that demonstrate that they had valid reasons for their failure to file and that they did not willfully neglect their reporting requirements.

With this policy change, taxpayers will have more options for defending against penalties related to their foreign tax reporting requirements. Rather than challenging the incorrect assessment of penalties, taxpayers can make sure they include detailed reasonable cause statements and other supporting documents. An attorney with a strong understanding of foreign tax reporting and experience defending against penalties can help ensure that the proper information is provided to the IRS.

Contact Our San Jose, CA Foreign Tax Attorney

Because the penalties for failing to report foreign income or assets can be steep, it is crucial for taxpayers to make sure they meet their requirements. At John D. Teter Law Offices, our San Jose, CA tax lawyer can provide guidance on how to avoid or minimize penalties that may apply when reporting information to the IRS. To learn how we can help you address taxes and penalties related to foreign assets and income, contact us at 408-866-1810.