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
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 220.127.116.11.2.)
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 18.104.22.168.3.)
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