Foreign Trusts: IRS Continues To Issue Bogus Form 3520-A Penalty Notices – My Letter To The IRS

Gary Carter

When I was a kid we lived across the street from the Wolfermans. The Wolfermans got a dog. One day I was in my yard, and their dog was barking. Mr. Wolferman came out, clapped his hands and called the dog. The dog joyfully bounded to Mr. Wolferman. Mr. Wolferman then proceeded to spank the dog, apparently for barking. I remember thinking what a fool Mr. Wolferman was for doing that – the dog would never come to him again when called.

A couple of weeks ago I described the traumatic experience of a client who had received a $10,000 penalty notice from the IRS for a completely invalid purpose. As the owner of a foreign trust, my client had done all she could have done to comply with the filing requirements of a foreign trust owner. She was compliant, yet was slapped with a $10,000 penalty. See Foreign Trusts: IRS Penalty Notices For Late Forms 3520-A Traumatize Many Innocent Taxpayers!

Since then, I have learned firsthand of dozens of similar notices, and I suspect there have been thousands issued for the same invalid purpose. Then, this week, another client contacted me about receiving the exact notice under the exact circumstances.

Below is the letter I wrote to the IRS on behalf of the client who received the latest notice. The recipients of these notices represent  foreign trust owners who are doing their best to obey the law (the Wolfermans’ dog) only to be punished by a formidable but misguided tax collection agency (Mr. Wolferman). Would one blame the dog for wandering off to find someone kinder and wiser to pledge allegiance to (as in expatriation)?

. . . . .

July 22, 2019

Department of the Treasury
Internal Revenue Service Center
Austin,TX 73301-0010

Ref: [xxxxx]

Dear Sir/Madam:

In the attached Appeals Conference Request and Fact Declaration Statement under Penalties of Perjury, signed by our client Mr. [client], Mr. [client] acknowledges receipt of the CP15 Notice dated July 8, 2019, for the calendar year 2017. The Notice imposes a penalty of $10,000 and states, “You have been charged a penalty under Section 6677 of the Internal Revenue Code for failure to file Form 3520-A.”

The notice imposes the penalty on [client], but does not even specify the name of the trust for which the failure to file Form 3520-A is alleged. Mr. [client] is not a trust, or a fiduciary responsible for a trust, but an individual taxpayer.  The notice does not impose a penalty for failure to file substitute Form 3520-A by the owner of a trust, but for “failure to file Form 3520-A.”

Forms Timely and Properly Filed

Mr. [client] has ownership in two foreign trusts, [xxx] and [xxx]. We prepared, for 2017, Form 3520 for each of these trusts. Since the trustees of the trusts did not prepare Form 3520-A, we prepared and attached substitute Form 3520-A to Form 3520 for each trust.

Mr. [client] had timely filed Form 4868 to automatically extend the due date of his personal return to October 15, 2018 (the confirmation is attached). According to the instructions for Form 3520, Form 4868 also extends the due date for Form 3520. (See also IRM

Form 3520 for each trust, with substitute Form 3520-A attached, were mailed to the Ogden Service Center of the IRS by Mr. [client] on August 29, 2018, well before the extended due date of October 15. We presume, since no penalty was imposed for the late filing of Form 3520 for either trust, that you timely received both Forms 3520. If that is the case, you must have also received the attached substitute Forms 3520-A at the same time.

Legal Basis of Timely Filing

We acknowledge that a U.S. person who is treated as owning a foreign trust under the grantor trust rules of IRC Sections 671 through 679 has the obligation to “ensure that such trust makes a return for such year which sets forth a full and complete accounting of all trust activities . . .” (i.e. files Form 3520-A). (IRC Sec. 6048(b)(1)(A).)

IRC Section 6048 does not explain how an owner is to “ensure” that Form 3520-A is filed, but the instructions for Form 3520 instruct a U.S. owner of a foreign trust who has not received a Foreign Grantor Trust Ownership Statement from the foreign trust, to complete a “substitute” Form 3520-A to the best of his/her ability and attached it to his/her Form 3520. (See also CCA 201150029 – “Information With Respect to Certain Foreign Trusts.”)

Although the instructions for Form 3520 do not specifically address the due date for substitute Form 3520-A, it is assumed that an attachment to a form would be covered by the filing requirements of the form itself. The Internal Revenue Manual agrees: “If the foreign trust does not file Form 3520-A, but the U.S. owner completes and attaches a substitute Form 3520-A for the foreign trust to the U.S. owner’s timely filed Form 3520 in accordance with the instructions for Form 3520, the U.S. owner will not be subject to the penalty for failure to file Form 3520-A.” (IRM

Request For Penalty Revocation

There is no justification for Mr. [client] to have received a $10,000 penalty notice. The rules are very clear. No penalty is due. This is not a request for abatement, and Mr. [client] does not wish for an abatement to be place on his record. We request that you revoke the penalty as a mistake, and issue an apology to Mr. [client].

A Systemic Malignancy

Mr. [client] is not the first client of ours to have received the same CP15 notice under the exact same circumstances. Additionally, from communications with other practitioners, I am aware of dozens of other taxpayers in the identical situation. I suspect there are thousands. None of our previous protests, having been lodged months ago, have been resolved or even assigned to an agent. Similarly, I am aware of no similar case being resolved.

This is an egregious mistake that must be corrected soon. I realize this letter is probably sitting at the bottom of a large stack, not to be read by you for months as you work through your case load. Or, maybe it drifted to the floor when the envelope was opened, and was swept up into a batch of discarded mail to be shredded (I’ve had several letters lost by the IRS). I can only imagine how these letters are processed, or who and when someone might glance through this one.

Yet, I can assure you that it will be read shortly. I will publish it on the Web for review by influential tax professionals. I will send it to each of my Congressional representatives, and to each of Mr. [client]’s Congressional representatives, both Democrat and Republican. I will push for a Congressional investigation into abusive IRS tactics – an issue that should pique the interest of representatives from both sides. I will also copy it to Secretary Mnuchin and to Commissioner Rettig, and inform them of my call for a Congressional hearing. I have already submitted the issue to the Systemic Advocacy Management System (SAMS) of the Taxpayer Advocate Service, and have discussed the issue with a representative of SAMS who promised to work on it.

I assign no personal nefarious intent to anyone within the IRS. I see no opportunity for personal gain. I am sure you are all working hard to manage the tasks assigned to you and are proud of what you do. But whether this is a computer glitch or human error, it is terribly hurtful to countless taxpayers. It traumatizes people to the point of damaging their physical health. It is also damaging to the integrity of the IRS, and it must be stopped.


Gary W. Carter, CPA



Gary Carter, President of GW Carter, Ltd., was a tax professor at the University of Minnesota’s Carlson School of Management and the Associate Director of the Carlson School’s Master of Business Taxation Program until June, 2010. He received a B.A. in accounting from Eastern Washington University in 1977, a Master of Taxation degree from the University of Denver in 1980, and a Ph.D. in taxation from the University of Texas at Austin in 1985. Early in his career he worked as a revenue agent for the State of Alaska, and later in public accounting for both a regional CPA firm and a Big Four Firm. His current practice was started in 1999. He has conducted tax seminars on various tax topics and has published several books on taxation.

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19 comments on “Foreign Trusts: IRS Continues To Issue Bogus Form 3520-A Penalty Notices – My Letter To The IRS

  • Hi Gary,

    We have certainly seen a number of such notices for substitute forms 3520a issued to our clients. The notices have not been issued in every instance and this inconsistent application leads me to think that there is a person or a team who simply haven’t been adequately trained.

    If the IRS is empowering an employee to be in a position to issue a penalty for $10,000, it is incumbent on the IRS to not only provide the necessary training, but also ensure the right checks and balances exist to ensure that mistakes of this magnitude do not occur. I have had to deal with taxpayers who are in tears over the notices (in this instance the notice was issued in relation to a NZ pension fund which is treated as a trust, which contained around $600).

    None of us are infallible, but when errors do occur, it is only proper to have a system in place to correct it. In my discussions with the IRS processing team (I too have sent abatement requests and called), I have been informed that the current timeframe for my letters to be assigned is 250 days!

    So taxpayers, who have made their best efforts to comply with complex legislation are being penalised unfairly and having to wait the best part of a year to be heard! I fail to see how that will help the IRS’ goal of increased compliance in this area (the purpose of the LB&I division campaign announced last May). Taxpayers talk to each other, and if the wait time to resolve these issues cannot be reduced to a matter of a few weeks, its campaign will back-fire spectacularly.

    I agree that the proper course of action would be an apology. I am not convinced that the apology part of this scenario will come to fruition sadly.

  • Thanks for sharing this Stuart. Hopefully other practitioners with similar stories will come forward so we can put some pressure on and get this sorted out.

  • Hi Gary,

    Thanks for this update on this matter. I too have been unexpectedly hit with this same penalty in the exact same situation, and like your client, have found it traumatizing. While my accountants and I push back on the IRS, your post (and others online) suggest that it may take nearly a year for me to get a result. I’m eagerly awaiting any further updates on this matter – in particular around your contact with the National Taxpayer Advocate and the Tax Advisory Panel, and I hope for a resolution that helps everyone affected.

  • Hi Gary,

    Thank you so much for this post. I dealt with the exact same issue, and only wish that my tax attorneys had dealt with the IRS with such tenacity while providing this level of care for me, their client. The IRS not only lost the original 3520-A (signed for on delivery), they lost the evidence that was submitted (and signed for on delivery) TWICE. This led to my penalty increasing with interest and eventually being sent to collections. They threatened to seize my property. This all happened over the course of 8 months, and each letter increased my stress, upset and lack of faith in the system. Finally, my tax attorney got hold of someone who assessed my case on the spot and cleared the fine. Apparently I’ll receive a letter confirming this, but I highly doubt I’ll get an apology.

  • just little old me

    Thank you for both your articles on this, I just received my letter of penalty for failure to file 3520-A even though my accounting firm did so along with the 3520. But here’s the real kicker, the penalty fee is $246,000.05 and no that is not a typo! Where they came up with that figure is beyond me as it is meant to be the higher of $10,000 or 5% the asset value of the trust and I certainly don’t have that much in the way of assets for that to be 5%! It is somewhat comforting to know I am not the only one being targeted and my accounting firm is not the only one who did not understand the complex, complicated and confusing filing extension process. I am however disheartened to hear that you have not had any resolution. Keep up the good work, I wish you had been my accountant.

    • I strongly encourage you to explain your case to the Taxpayer Advocate Office. The TA is aware of the issue and the more cases like yours they hear about the quicker pressure will be put on the IRS to correct its procedures and resolve these cases.

      • just little old me

        Thank you so much for your time in helping to make this complicated issue known and understood. My accountants have now prepared a form for me to submit to the Taxpayer Advocate office. The stress is huge with the minimum fine let alone 25 times the minimum fine! I’m trying not to let it get to me too much but it’s hard with a quarter of a million bucks penalty hanging over my head!

  • Hi Bjorn – I agree with you 100% regarding RRSPs and RRIFs. The IRS has provided an exception to filing Forms 3520 and 3520-A for those accounts (Notice 2003-75). I also agree that generally, accountants who file Form 3520/3520-A as a protective measure are mainly concerned about protecting themselves rather than their clients. Most of the Canadian accounts you speak of are not “trusts” and should not be treated as such. Evil tends to ensue from filing these forms, so it should not be done for any account that is not actually a trust. However, evil could also ensue from not filing when you really have a trust. For a great discussion on foreign trusts in general and whether you should file Forms 3520/3520-A for a TFSA, see Phil Hodgen’s blog article at Canadian TFSAs and the Certification Test.

  • I have been having his same tax issue recently. Form 3520 with a 3520A substitute attachment was filed within the extension due date of the 1040 return. A penalty was assessed as if the 3520A was filed late. I agree the the instructions for Form 3520 and the IRM seem to indicate that things are timely filed under this scenario. I hope there is some type of REV-PROC or pronouncement that clears these things up; it would be great to know what the resolution is on your end.

  • Hi Brendan – There is no rev. proc. You are right and they are wrong. Feel free to copy my letter, but leave out the ranting part about a systemic malignancy. Also, contact the Taxpayer Advocate to add your voice. Expect to wait several months for resolution. It’s really unfortunate that this is happening, and someone at the IRS should be held accountable. I believe that person is John Cardone, Director of Withholding and International Compliance in the Large Business and International Division.

    • Hi Gary-I think one of the problem seldom discussed is the disproportionately complex obligations placed on taxpayers. A normal person making a normal salary residing abroad will simply not have the financial resources to file annual 3520s and 3520-As because his employer sponsored plan maybe considered a US trust. The fee might be higher than the plan balance or annual addition to the plan. Taxpayers are placed in a position of not having any choice but not complying. These profiles are much more frequent than taxpayers who have actually set up foreign trusts. The legal analysis required by a qualified attorney to make a determination that a foreign qualified retirement plan is a trust would by itself be completely out of reach. This is entrapment. De minimis rules and exceptions such as qualified foreign retirement plan with countries having a tax treaty with the US should be excepted. These are already reported on Form 114 and 8938. As a practitioner, it gets to a point where you turn down potential new clients because of this issue leaving them out there with no options. The magnitude of these penalties (25% or 35% of the value of the assets in question) when the income has been properly reported and taxed and no relief is possible based on an honest mistake by the taxpayer or his accountant is unreasonable and must be addressed by Congress because the IRS will not do anything about it and will continue to terrorize all involved. The IRS unprecedented rage to pursue flawless compliance with form 3520 and 3520-A is recent. I do not know what started it. It ruins peoples lives, health and faith in the values of their country. They are not crooks, they’ve been trapped. Best Phil

  • Thank you so much for posting your cases on this site. I have also been incorrectly accessed for penalty and I have reported my case with Taxpayer Advocate as you have suggested. I couldn’t even get through to an IRS agent because their phone line kept on dropping after a long hold. I hope IRS resolve this issue soon as it is causing a lot of unnecessary stress to me and my family. I agree with all the comments that you and fellow contributors posted. It is really hard to keep up with all the changes with regards to foreign assets every year and the benefit of keeping those assets now is really questionable with the added reporting burden. Thank you again and I look forward to your (all of you) updates and successes!!!

  • Hi all,

    I also received the $10K penalty in July 2019 and to say I was furious was an understatement. The kicker is that I filed the 3520-A extension on time, and submitted the 3520-A, which was received by the IRS on September 15 (I have evidence that the IRS received both via USPS tracking). My tax attorney contacted the local taxpayer advocate and the advocate said that she is also dealing with 3 other of these cases as well.

    I am glad to have found this forum not because misery loves company but it is clear that the IRS messed up royally and we are the ones being punished for their total and utter incompetence.

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