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IRS Eases Penalty Policy on Late Foreign Gift Reporting

October 25, 2024 - Participants include: Virginia La Torre Jeker - @VLJeker John Richardson - @ExpatriationLaw This was a podcast that came together quickly. On October 24, 2024 the IRS announced that it would no longer automatically assess penalties to file Form 3520 reporting the receipt of foreign gifts. (The requirement is found in Internal Revenue Code 6039F (see below). Notably this does NOT end the penalty regime for the failure to report foreign gifts. It simply means that the penalties will no longer be assessed without considering reasonable cause. In the words of the Taxpayer Advocate: "Spoiler Alert The IRS has ended its practice of automatically assessing penalties at the time of filing for late-filed Forms 3520, Part IV, which deal with reporting foreign gifts and bequests. And… By the end of the year the IRS will begin reviewing any reasonable cause statements taxpayers attach to late-filed Forms 3520 and 3520-A for the trust portion of the form before assessing any Internal Revenue Code (IRC) § 6677 penalty. This favorable change will reduce unwarranted assessments and relieve burden on taxpayers by giving them the opportunity to explain their situation before the IRS assesses a penalty. TAS has recommended these changes for years and the IRS listened. IRS Commissioner Danny Werfel announced these changes during the UCLA Extension Tax Controversy Conference." The complete blog post is here ... https://www.taxpayeradvocate.irs.gov/news/nta-blog/irs-hears-concerns-from-tas-and-practitioners-makes-favorable-changes-to-foreign-gifts-and-inheritance-filing-penalties/2024/10/ ________________________________________ AI Description: "In this episode, John Richardson from Toronto, Canada, reconnects with Virginia Latorre Jeker to discuss a significant announcement by the IRS regarding foreign gift reporting. The IRS has revised its procedure and will no longer automatically impose penalties for late filing of Form 3520 when a U.S. person receives a foreign gift or bequest exceeding $100,000. This change comes after years of advocacy, including efforts by the National Taxpayer Advocate, highlighting the unfairness of the previous policy. Virginia explains that while the penalty regime remains in place, the IRS will now assess reasonable cause statements before issuing penalties, providing a fairer process for taxpayers. However, John and Virginia stress the importance of seeking professional advice to ensure compliance with reporting obligations and to craft strong reasonable cause statements if needed. They also clarify that this procedural change applies solely to foreign gift and bequest cases, not to other 3520-related issues. Virginia shares resources available on her tax blog for those interested in understanding more about foreign gift reporting requirements. The episode wraps up with a hint at future discussions on related topics." __________________________________________________________ Here is the text of Internal Revenue Code 6039F: 26 U.S. Code § 6039F - Notice of large gifts received from foreign persons (a)In general If the value of the aggregate foreign gifts received by a United States person (other than an organization described in section 501(c) and exempt from tax under section 501(a)) during any taxable year exceeds $10,000, such United States person shall furnish (at such time and in such manner as the Secretary shall prescribe) such information as the Secretary may prescribe regarding each foreign gift received during such year. (b)Foreign gift For purposes of this section, the term “foreign gift” means any amount received from a person other than a United States person which the recipient treats as a gift or bequest. Such term shall not include any qualified transfer (within the meaning of section 2503(e)(2)) or any distribution properly disclosed in a return under section 6048(c). (c)Penalty for failure to file information (1)In generalIf a United States perso

Broadcast on:: 25 Oct 2024
Audio Format:: other

October 25, 2024 - Participants include:

Virginia La Torre Jeker - @VLJeker

John Richardson - @ExpatriationLaw

This was a podcast that came together quickly. On October 24, 2024 the IRS announced that it would no longer automatically assess penalties to file Form 3520 reporting the receipt of foreign gifts. (The requirement is found in Internal Revenue Code 6039F (see below).

Notably this does NOT end the penalty regime for the failure to report foreign gifts. It simply means that the penalties will no longer be assessed without considering reasonable cause.

In the words of the Taxpayer Advocate:

"Spoiler Alert

The IRS has ended its practice of automatically assessing penalties at the time of filing for late-filed Forms 3520, Part IV, which deal with reporting foreign gifts and bequests. And…

By the end of the year the IRS will begin reviewing any reasonable cause statements taxpayers attach to late-filed Forms 3520 and 3520-A for the trust portion of the form before assessing any Internal Revenue Code (IRC) § 6677 penalty. This favorable change will reduce unwarranted assessments and relieve burden on taxpayers by giving them the opportunity to explain their situation before the IRS assesses a penalty. TAS has recommended these changes for years and the IRS listened. IRS Commissioner Danny Werfel announced these changes during the UCLA Extension Tax Controversy Conference."

The complete blog post is here ...

https://www.taxpayeradvocate.irs.gov/news/nta-blog/irs-hears-concerns-from-tas-and-practitioners-makes-favorable-changes-to-foreign-gifts-and-inheritance-filing-penalties/2024/10/

________________________________________

AI Description:

"In this episode, John Richardson from Toronto, Canada, reconnects with Virginia Latorre Jeker to discuss a significant announcement by the IRS regarding foreign gift reporting. The IRS has revised its procedure and will no longer automatically impose penalties for late filing of Form 3520 when a U.S. person receives a foreign gift or bequest exceeding $100,000. This change comes after years of advocacy, including efforts by the National Taxpayer Advocate, highlighting the unfairness of the previous policy.

Virginia explains that while the penalty regime remains in place, the IRS will now assess reasonable cause statements before issuing penalties, providing a fairer process for taxpayers. However, John and Virginia stress the importance of seeking professional advice to ensure compliance with reporting obligations and to craft strong reasonable cause statements if needed.

They also clarify that this procedural change applies solely to foreign gift and bequest cases, not to other 3520-related issues. Virginia shares resources available on her tax blog for those interested in understanding more about foreign gift reporting requirements. The episode wraps up with a hint at future discussions on related topics."

__________________________________________________________

Here is the text of Internal Revenue Code 6039F:

26 U.S. Code § 6039F - Notice of large gifts received from foreign persons (a)In general If the value of the aggregate foreign gifts received by a United States person (other than an organization described in section 501(c) and exempt from tax under section 501(a)) during any taxable year exceeds $10,000, such United States person shall furnish (at such time and in such manner as the Secretary shall prescribe) such information as the Secretary may prescribe regarding each foreign gift received during such year. (b)Foreign gift

For purposes of this section, the term “foreign gift” means any amount received from a person other than a United States person which the recipient treats as a gift or bequest. Such term shall not include any qualified transfer (within the meaning of section 2503(e)(2)) or any distribution properly disclosed in a return under section 6048(c).

(c)Penalty for failure to file information (1)In generalIf a United States person fails to furnish the information required by subsection (a) with respect to any foreign gift within the time prescribed therefor (including extensions)— (A) the tax consequences of the receipt of such gift shall be determined by the Secretary, and (B) such United States person shall pay (upon notice and demand by the Secretary and in the same manner as tax) an amount equal to 5 percent of the amount of such foreign gift for each month for which the failure continues (not to exceed 25 percent of such amount in the aggregate). (2)Reasonable cause exception

Paragraph (1) shall not apply to any failure to report a foreign gift if the United States person shows that the failure is due to reasonable cause and not due to willful neglect.

(d)Cost-of-living adjustment

In the case of any taxable year beginning after December 31, 1996, the $10,000 amount under subsection (a) shall be increased by an amount equal to the product of such amount and the cost-of-living adjustment for such taxable year under section 1(f)(3), except that subparagraph (A)(ii) thereof shall be applied by substituting “1995” for “2016”.

(e)Regulations

The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.

(Added Pub. L. 104–188, title I, § 1905(a), Aug. 20, 1996, 110 Stat. 1913; amended Pub. L. 115–97, title I, § 11002(d)(13), Dec. 22, 2017, 131 Stat. 2062.)

Good morning. This is John Richardson speaking with you from Toronto, Canada. It is Friday, October the 25th at 9 a.m. in the morning, my time and later in the day for my return guest, Virginia Latora Jieker. And this is a podcast that we agreed to do just a couple minutes ago, actually, because of a very interesting, and I would say significant, important. I think we'll figure that out as we go along. And now it's been from the IRS yesterday. And I think at this moment, let me hand the baton over to Virginia. And that announcement was what? Oh, it was great news for individuals having received a foreign gift or bequest and who failed to file a form 3520, part four, telling the IRS that they received this foreign gift or bequest, assuming it exceeded the $100,000 threshold. So the great news was that the IRS has ended its practice of automatically assessing a penalty, which can be 25% of the value of the gift or bequest. Once they see that you have late filed this form 3520 and submitted what's called a reasonable cause statement to explain why it's late. Before this announcement came, penalties were automatically being assessed in this kind of situation, even though the person had submitted a reasonable cause statement. So IRS is now no longer automatically assessing penalty. Okay, now to be clear here, I noticed you're, you know, you always struck me as somebody uses language, is very uses language carefully. And you said this was great news, as opposed to let's imagine we take the word great, greater greatest. So you're kind of being the minimalist that you often are, right? So let's be clear. Maybe a little context here. So this is internal revenue code section 6039 app, which along with treasury regulations and practical terms means that if a US person receives a gift from a nonresident alien, that is worth more than $100,000, that that has to be reported on form 3520 to the IRS. And the failure to do that will subject the person to a 25% penalty assessment, presuming it's been formed, which it always is because people find out about this late. Okay, and that is the problem. And although in previous history, there was the opportunity to file these things late without a penalty assessment at all about four years ago, they simply made the decision, you know what, once these things are finally, we're just going to assess the penalty. And then they can argue with us about whether it should be debated because of reasonable cause, right? Yes, I'd want to make one clarification there, John, that when the people were submitting their late form 3520, if they were using the delinquent information procedure that the IRS has in place, they were always submitting a reasonable cause statement with that late form. Right. The thing is, the IRS was not reading necessarily reading or paying heed to that reasonable cause statement. They were assessing the penalty of 25% on the value of the gift or the inheritance. And then you were stuck as a taxpayer with trying to argue with them about, gee, I have reasonable cause, the penalty shouldn't apply. And they were put into this vicious cycle of gee, the IRS didn't seem to be listening to that argument and they had to pay the penalty and then go to court to sue for a refund. We've seen cases like this happening. And the national taxpayer advocate had been writing about this problem and pointing out this problem to the IRS for years, nothing was done until yesterday. Right. And I think that was largely the result of, you know, in May of the IRS, the Treasury was trying to improve their general regulations on these reporting issues, form 3520, etc. And there were a number of submissions made on this point, and to their credit, I think that they're responding to this. But I really think that taxpayer advocate deserves a huge shout out for staying on this topic. Would you agree? Absolutely, absolutely. And I think one of the important points that NTA made was that they did a statistical analysis of how many penalties for this 3520-late filing were actually at the end of the day abated by the IRS once the IRS was kind of forced to read the reasonable cause statement. And that was a very significant percentage. I can't quite remember it off the top of my head, but they were finding that most of the penalties ended up being abated due to reasonable cause. And so the whole point that national taxpayer advocate was making was that, hey, these penalties should never have been assessed in the first place, because the taxpayer did have reasonable cause, but they've had to go through hoops to try and get the penalty issue resolved, which costs them professional fees, costs them time. And you know, this is not a cheap thing to go through, especially if you end up having to go to court to get your money back that you paid in a penalty. Absolutely. So this is good news, but I think it's important to clarify that this is a procedural change in the process and not a substantive change in the sense that it doesn't mean that penalties are not going to be assessed, okay? And it doesn't somehow water down the test for reasonable cause either. All it means is that they're not going to automatically assess before the discussion starts. So this is good news. It's great news. It's greater than we had a year ago, but it's certainly not the greatest news, right? Because the greatest news would be, you know, something that was further down the road to ending that's this penalty regime on the stuff, what's, you know, for all times, right? But anyway, that's not going to happen, John, that is not going to happen because the law. Well, and the law, you know, provides for the 25% penalty. So and it's majestic morality and equality. Yes, but that's covered. And let's just remind, let's just remind our listeners that when you get a gift or bequest from anyone, whether they're U of S or foreign, there is no tax to be paid by the recipient on that gift or bequest, okay? So it's not like the government was losing tax dollars because you didn't report this foreign gift or bequest. Just one caveat on that, the foreign gift or bequest can actually be taxed the recipient if it is received by someone, if it's given to them by someone who's called a covered expatriate. So that would be someone who's given up their citizenship or long term residency, meaning the green card, and who were covered expatriates under the tax law rules. When they give a gift or bequest to a U S person in the future, then there is a 40% tax on that gift or bequest from the covered expatriate. But that is a completely separate issue. In the normal case, a gift or bequest is never taxed to the recipient. So this 3520 penalty was extremely onerous, given that it's 25% of the value. And the government has not lost any tax revenue. Well, I'm a penalty continuous to exist. So it's pretty horrible. A marriage abroad need to really be on the lookout for this, particularly American citizens who are married to non citizens, right, and receive gifts. You know, this is a big problem, big problem, you would apply to that. But at the present time, it does. Well, Virginia, this is great. People find your blog and that I, my guess is that I could actually see writing writing this up on a blog post. Is that am I right? I probably will, but I do have category on foreign gifts and bequest on my tax blog, which they can find at www.us-tax.org. And I know I've brought up this issue many times before I have a Forbes article on getting a gift or bequest from a foreigner, the reporting you need to do. And I would just say this, John, now that we've had this change from the IRS, their change in stance on they will read the reasonable cause statement before assessing a penalty. If people have a solid, reasonable cause argument to make, and I think, you know, for that, you need professional assistance to see if you really do have one. It's not just sending a little paragraph off about why you think you shouldn't have the penalty. Now's the time to be looking at, Gee, do we want to fix this up? Because if the Form 3520 is missing and should have been filed, that tax return has an unlimited statute of limitations. The IRS can come after you forever with regard to that tax year and that entire tax returns. So this might be something people want to think about fixing up if they have a 3520 that's not been filed. Yeah, I do think it changes the dynamic. One closing point here, my understanding is that this change in procedure applies only with respect to the receipt of foreign gifts and requests. It does not apply to the other 3520 penalties related to trust and things like that, right? That's my understanding. I want to read that a little bit more carefully because I think there was some discussion on that as well. So in the IRS announcement, but I think you're correct, but I need to look back. Then we've got our next podcast set up. Yes, we have our next podcast, John. Right, Virginia. Wonderful. Great to connect with you. And thanks for your insight. Actually, you were the first person, the first person today to notify me of this. Oh, well, I'm pleased that I'm still on the ball. Johnny on the spot is that you certainly have to laugh and then you work. All right. Thanks very much. Okay, John, you take care. Have a great one. Bye.