On October 24, 2024, IRS Commissioner Daniel Werfel announced that the IRS will no longer automatically assess international civil penalties for late-filed Forms 3520 and 3520-A.1

Background on Forms 3520/3520-A filing requirements and penalties

Internal Revenue Code §6048 requires United States tax residents and citizens to report beneficial interests and/or ownership in a foreign trust (grantor or non-grantor) on IRS Forms 3520 and 3520-A.  Failure to file Form 3520 may result in a penalty equal to the greater of 35% of the gross reportable amount or $10,000. Failure to file Form 3520 is also subject to $10,000 in continuation penalties. Failure to file Form 3520-A may result in a penalty of the greater of $10,000 and 5% of the gross value of the trust’s assets.

Internal Revenue Code §6039F(a) requires US tax residents2 and citizens to report foreign gifts or bequests that exceed US$100,000, in aggregate, within the same calendar year on IRS Form 3520, Part IV. Failure to file Form 3520, Part IV, on time may result in a penalty equal to 5% of the total amount of such foreign gifts, and it applies for each month that failure to report continues (not to exceed a total of 25%). No penalty will be imposed if the taxpayer can demonstrate that the failure to comply was due to reasonable cause3 and not willful neglect. Since calendar year 2018, the IRS has had an internal practice of automatically assessing late-filed penalties on Form 3520, Part IV, without considering attached reasonable cause statements:

“In the foreign gift context, the penalties can be huge; over the years 2018-2021, even taxpayers who reported $400,000 or less in income received an average penalty of over $235,000.  Over this same four-year period from 2018-2021, the IRS abated IRC §6039F penalties assessed with respect to Form 3520, Part IV, totaling more than $179 million. The abatement rate was 67 percent of the penalties assessed and 78 percent of the dollars assessed.”4

What changed in October 2024?

On October 24, 2024, IRS Commissioner Daniel Werfel announced that the IRS will no longer automatically assess international civil penalties for late-filed Forms 3520 and 3520-A. Instead, the IRS will consider attached reasonable cause statements before making a determination to assess an international civil penalty (as indicated above).

The IRS has published guidance related to “reasonable cause” in the Internal Revenue Manual (see IRM §§ 20.1.1.3.2.1 –20.1.1.3.2.8).  In March 2023, the IRS conceded a dispute with a taxpayer in the “Polish Lottery Case”5 regarding the late filing of Form 3520, Part IV.  Many practitioners wanted to see the case litigated because the dispute over what constitutes “reasonable cause” in the context of a late-filed Form 3520, Part IV, would have been central to the matter.  To date, the art of crafting proper reasonable cause defenses is left to the purview of tax practitioner experience, the taxpayer’s facts and circumstances, the aforementioned sections of the IRM, and an IRS Practice Unit from 2021.6

What are the current options for obtaining relief from late filing of Forms 3520/3520-A and which is the most advantageous?

In the context of late-filed Forms 3520 and 3520-A, the most conservative path to compliance has historically been to use the IRS Amnesty Program known as the “Streamlined Filing Compliance Procedures.”7  However, taxpayers—with the advice of tax practitioners—may now consider an alternative option of remitting late-filed Forms 3520 and 3520-A (along with a statement of reasonable cause) to report a foreign trust (grantor or non-grantor), foreign pension, usufruct, foundation, other unique foreign entity classified as a foreign trust, or a large foreign gift or bequest.

The impact of this shift could be significant depending on the taxpayer’s specific facts and circumstances.  For example, if a taxpayer is using the Streamlined Domestic Offshore Procedures8 then they must pay a 5% Title 26 Miscellaneous Penalty based on the amount of unreported foreign financial assets. Whereas if this same taxpayer utilizes the submission of Forms 3520/3520-A and a reasonable cause statement, the 5% penalty would not apply.

In a converse example, if a taxpayer is using the Streamlined Foreign Offshore Procedures,9 this option may offer the more favorable US tax treatment because the 5% Title 26 Miscellaneous Penalty does not apply to a streamlined foreign offshore submission. This type of submission also offers more protection to a taxpayer than submitting Forms 3520/3520-A with a reasonable cause statement because the IRS may deny reasonable cause, which then requires the taxpayer to engage in a costly and lengthy appeals process that may ultimately require dispute in a court of law.

Other considerations:

  • Are there other International Informational Reports that also require remediation in the fact pattern? Examples are Forms 5471, 8992, 8865, 926, 8854, 8621, 8938, and FinCEN Form 114 (FBAR).
  • How strong are the facts and circumstances for reasonable cause? Is the tax practitioner preparing the reasonable cause statement well versed in this type of analysis and presentation? Will they represent the taxpayer upon appeal if needed, or in tax court or another court of law if needed?
  • Has the taxpayer incurred other international civil penalties prior to the current late-filed Forms 3520/3520-A?
  • Has the taxpayer previously utilized the Offshore Voluntary Disclosure Program, Streamlined Filing Compliance Procedures, or been granted reasonable cause relief for international civil penalties?
  • Does the taxpayer have a history of late-filed tax returns?
  • Does the taxpayer have good books and records related to the Forms 3520/3520-A filings?

What does The Wolf Group recommend?

Should taxpayers find themselves in a situation where they would encounter late-filed Forms 3520/3520-A, The Wolf Group recommends obtaining an analysis of the facts and circumstances by a well-versed and experienced tax practitioner or practitioners (this generally includes both an accountant and an attorney). The considerations above (non-exhaustive) and other important viewpoints can assist the taxpayer with the best possible data points to make a proper determination on the best path to compliance whether it be via the Streamlined Filing Compliance Procedures or the now-available reasonable cause submission.

The Wolf Group is a Certified Public Accounting firm in Fairfax, Virginia, with over 40 years of experience with international informational return disclosure, including Offshore Voluntary Disclosure, Streamlined Filing Compliance Procedures submissions, and other related paths to disclosure.