TaxConnections

 
 

Access Leading Tax Experts And Technology
In Our Global Digital Marketplace

Please enter your input in search


Shocking Behind The Scenes Story: Tax Professionals Advocating For Taxpayers On 3520-A IRS Penalties



Form 3520-A

Taxpayers have been privately emailing TaxConnections asking if there is anything happening behind the scenes to address the problems they have encountered with IRS Form 3250 A. Many taxpayers were kind enough to share their stories which include the following:

It all started with the letter written by member Gary Carter who wrote an article titled Foreign Trusts: IRS Penalty Notices For Late Forms 3520-A Traumatize Many Innocent Taxpayers. The purpose of my post today is to share some of the stories that have followed from this original article when we were asked to call out all tax professionals and taxpayers to sharing their experiences with us.

It is important to note to that the tax professional community works very hard to solve many matters with the IRS. This article is enlightening as there are comments here you would rarely see regarding how the system works for those who represent you. Your tax advisors are often unsung heroes and taxpayers rarely know what the real battles are behind the scenes with the tax advisors representing them. Although we are keeping everyone’s name anonymous to protect them, you are about to receive a real world inside look at the unresolved issues on Form 3520-A.

Here Are Responses We Have Received From Taxpayers

Comment From Post On Topic

We (husband and wife) have gotten the 3520-A filing notices for the $10,000 (each? still unclear) penalty with regards to our daughter’s Canadian RESP (Registered Education Savings Plan) which is basically a college fund here in Canada. We submitted the 3520-A form when we filed the 1040 and so it was considered late! How is it fair taxation to tax a fund more than the fund may be worth? We have since submitted 3 appeals, and just got notice that the first one was rejected – It was sent 9 months ago!
The really frustrating thing is that I get notices in my name at home, in my husband’s name at home, and then our bank gets notices sent to them with my name on it!?! I have made a tracking chart – we are up to 12 because of the triplicate paperwork! I will keep fighting and, until it is resolved, they can continue to keep my tax refunds for the rest of my life if they want.

Comment From Post On Topic

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!!!

Comment From Post On Topic

I am a foreigner living in U.S. in a work visa (not green card holder or citizen). My parents, who are living in my home country, sent me money for helping me apply for green card via investing in the U.S. EB-5 program. Without evening getting the green card yet, I received an extremely scary penalty from IRS of $170k for late filing of form 3520, because my CPA was not aware of the due day of the ‘foreign gift’ reporting requirement and didn’t file it until 2 years later. IRS assumes me, as a foreigner, to know their specific form that even a professional tax accountant does not know well. And they refused to recognize relying on CPA is a reasonable cause for late filing. I’m in such desperation and panic and don’t know what to do. Please, please help here!!

Comment From Post On Topic

I was also assessed a CP15/$10k fine for late filing of 3520/3520-A for 2017 (my tax preparer wasn’t aware that the March 15th deadline was being strictly enforced). I have written the IRS to request abrogation, first letter was “lost”, despite sending registered mail, and I wrote them again upon receiving a notice of levy. It’s quite stressful to deal with the situation due to the long delivery times for the notices (sometimes up to 6 weeks or more to deliver to Europe) and needing to call, check status, request putting collection on hold, etc. IRS cannot tell me when to expect an answer to the request for abrogation. Overall I find this situation quite distressing, I don’t understand why such a large fine is immediately imposed when I have made all efforts to demonstrate good faith in filing the forms. What if the form is lost in the mail, as I’ve seen others mention on this thread? It’s all completely unreasonable.  I would appreciate any suggestions about how to raise this concern with anyone who can help rectify the situation.

Comment From Post On Topic

Well we just yesterday received the dreaded failure to file on our trust, dated Oct 6 with 30 days to respond before they start heaping fines on us. Our accountant flipped today when we told him, and said he’d filed everything properly and to join the stacks of other people in Canada receiving the same letters. I’ve been informed by Laura Snyder, Americans abroad rep with the Taxpayer Advocacy Panel that TAP has submitted a recommendation about this to the IRS. They’re now waiting for the IRS’s response. It does not expect to receive their response for another few weeks at the earliest. I don’t know what basis the IRS to do this – perhaps they’re just shaking the trees to see what falls out.

Comment From Post On Topic

Husband was international student in 2017 and did not receive permanent residency until this year. I am a citizen and worked. Still we filed jointly by October deadline with extension granted. Both together received penalty over 100k for failure to file form 3520. What’s with the IRS nowadays? Very ridiculous like you said. Have you had any updates? Also seeking help here and would like to contribute to this group.

Comment From Post On Topic

I definitely agree with you on the part that IRS should be held accountable for delaying the notice till it reached the 25% maximum fine. 99% of the reps don’t even know about this form, let alone layman good citizens like us to navigate the complex system and choose to report with honesty. You never know, there’s always a chance for traps and setback whether you do or don’t do. Do you think we can get connected and keep each other in the loop?

Comment From Post On Topic

I had a similar experience as the comments above. I got a gift from my parents who live outside of US in 2016, but was not aware of such specific requirement to submit form 3520. In 2018, I learnt that there was such a requirement so I submitted a delinquent form with a reasonable cause letter voluntarily to comply with the policy. However, I got a penalty for failure to submit the form.

I agree with the comments above that this requirement is so specific that even many CPAs and Tax attorneys may not know, how can we know it as normal taxpayers? I used Turbotax but this particular requirement was not mentioned either. I also agree with above on the point that this hidden requirement is like a trap. It’s not fair at all to impose such high penalty (25% of gift received) for an information return that doesn’t yield tax liability and is not easy to know as a normal person. I think the stand point of IRS policy should encourage good faith effort and impose penalty on tax evasion activities. The taxpayers who comply with policy in good faith like us shouldn’t be penalized.

Do you think we can get connected and keep each other in the loop? Thanks.

Comment From Post On Topic

First off, thank you so much for your efforts regarding this problem. I was an international student prior to 2017 and since I had never worked in the US until I received my permanent residency in 2018, I wasn’t exactly familiar with taxes, let alone the form 3520. I received over a $100,000 in 2017 and found out about form 3520 a couple months after the due date. I immediately hired a tax attorney and filed this form. A year later, I received a $38,000 penalty for failure to file this form.. This is absolutely ridiculous and makes no sense to receive a penalty this high whatsoever. As other victims, I did not owe any taxes on the money received and I did my best to file this form with good faith before I received any type of penalty.

Another issue that really bothers me is that, the initial penalty is 5% of the total amount received which is still terribly high. If there is a problem, the IRS must let the taxpayer know right away. Instead, they waited until the 25% maximum limit was reached to send me the penalty notice. I don’t even know what to say about this and it is just wrong on all levels.

As all of the other victims, I’m also seeking for help and I’d like to contribute to the resolution of this problem in any way I can. Please make me a part of this solution and once again, thank you so much for your efforts. ~Barin

Comment From Post On Topic

It gets worse. We have submitted 3520-A clearly marked “Protective Submission: This is not a Foreign Trust” and explained why not. In one case one of two trustees of a testamentary trust had renounced citizenship, but the trustees had no discretion, all matters listed in the law and regulations to make a trust “foreign” being fixed by the Will, including delegating investment decisions to a named broker. We attached the 3520-A to the usual 1041 and K-1. Typically, IRS refused to address the question of whether the trust is (at least until a replacement U.S. citizen co-trustee can replace the renunciant one, a complicated procedure involving court approval in N.Y.S.) indeed foreign. And we have had arguments in other non-grantor cases whether there is indeed a “U.S. owner”: the IRS seems not to appreciate that the child born abroad to an “accidental American” is likely not a U.S. citizen but there is no way to prove that aside from applying for a passport and being refused: not a good idea if one can’t find positive proof that the (single) mother (of a child born prior to June 12, 2017) never in her 45 years of life spent 365 uninterrupted days in the USA. We have never in fact been charged with the $10k penalty, but such threats, coupled with the nastiness of PFIC taxation, taxation of foreign exchange phantom gains, risk of taxation of foreign government disability and tax-sparing accounts and subsidies, and pension anguish (another 3520 and PFIC morass for U.S. citizens in most foreign countries) motivate renunciation; Or total noncompliance and “going underground” since (according to our research, to be published by NYU Law’s GlobaLex in November) there have been almost no prosecutions of overseas dual-national Americans without U.S. income, assets, presence or family.

In the second case above, IRS Ogden continues, every 90 days, to send us a letter saying they need more time. That’s been every 90 days for two years, and despite the fact that over a year ago we sent them a copy of the trustee’s CLN.

As an advisor one has to advise every client or prospective client to be totally compliant with every relevant country’s tax law. But what about when those laws clash, or conflict with the rights of non-U.S. Persons? Often enough it is in the client’s best interest to do some self-study in matters of “wilfulness”, “statutes of limitation”, “jurisdiction”, “community property”, “transferee liability” and risk-taking. Things that may be inconsistent with the ethics of the advisor accepting that individual as a client. At least unless and until the non-U.S. spouse and family have counsel of their own.

The very rich (well advised and able to afford the costs and taxes) and the very poor (with little to report and nothing to lose, especially dual nationals living abroad who don’t need their U.S. passports) are largely free of the concerns of 3520, 3520-A, 5471, FBAR and other penalties. It’s the middle class for whom a $10,000 penalty is likely more than a month’s pay, would require liquidation of assets belonging to a non-U.S. spouse or impossibility of payment, that these vicious penalties for ignorance, inadvertence, slothfulness are tragic and family-breaking.  ~Andrew Grossman

Comment From Post On Topic

Thanks for sharing your experience and the response that you sent to the IRS Gary. Appreciate you shining a light on this awful and traumatising development. I’ve just received a $10,000 penalty notice too. I have only ever tried to do the right thing. I now live in fear, not just about whether I have submitted & ticked all the right boxes for this form, but about remaining in compliance. Until know there seemed to be an obviously naive belief in forums and blogs that duals and/or “expats” would not be targeted in such a cavalier and brutal way. I’ve contacted my preparer but I feel despondent that the IRS would act in this way and that those impacted, some far worse than me, will have to live In uncertainty and fear for so long, possibly, it seems, up to a year.~Metoo

Comment From Post On Topic

“I couldn’t help but notice your article on the $10,000 late filing penalty relating to the 3520/3520-A and in spite of going through the streamline process with HR Block I’ve been hit with this (in the UK) and in spite of sending a letter requesting an abatement, the IRS keeps sending me letters saying they need more time whilst also sending bills with interest. The latest being an intention to cease assets as I’d go bankrupt trying to pay a fine that is worth more than an ex workplace pension plan that I can’t even access until 2040! Any advice on this matter would be appreciated!

Comment From Post On Topic

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, it’s 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. ~ Stuart

Comment From Post On Topic

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) suggests 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.~ Peter

Comment From Post On Topic

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. ~ Xavier

Comment From Post On Topic

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. ~ littleoldme

Comment From Post On Topic

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. ~ Brendan

Comment From Post On Topic

Well! I have contacted my elected representative Senator, and I have expounded on the problem! In addition, I have brought it to the attention of the Taxpayer advocate representative, thanks to the assistance of my representative senator assigned to my case! I have also contacted the Tax Compliance industry Law Office that made the error, in filling a FORM 3520 and to date they have been hiding under the carpet! You see, when you work via email and fax, being located in Europe, eye to eye physical presence contact is not a readily available option! As for myself, being the victim thrown under the bus, I resort to the established procedure filing appeals within the IRS system! ~ George

Comment From Post On Topic

Interestingly we are seeing a shift in attitude from “when in doubt file Form 3520” to “when in doubt (as long as the doubt is reasonable) do NOT file Form 3520”. The whole idea of what conservative filing means is evolving.

The 3520 problem is a specific instance of the reality that (1) it’s very difficult for Americans abroad to know what is expected of them and (2) the penalties for “so called” mistakes are outrageous.

People are not renouncing U.S. citizenship because they want to. They are renouncing U.S. citizenship because they have to. ~ John Richardson

After All Of These Taxpayer Comments The Shocker Is The Communications Received From Tax Professionals Representing Their Clients.

Here Is A Copy Of Some Of These Communications Below

Received From Tax Professional Working Diligently To Help Client

Thank you for your efforts to expose this problem.  There may indeed be an active IRS campaign of harassment, but remember the principle known as Hanlon’s Razor:  “Never attribute to malice that which can be adequately explained by stupidity.”

A couple of practitioners have heard that, due to resource constraints at the IRS “campus,” the processing folks are just assessing the penalty as a matter of course—just “kicking the can down the road” to Appeals.  Whatever the underlying motivation or cause, the apparent abuse of assessment authority under Section 6677 has devastating effects on individual taxpayers as well as on the credibility of the Internal Revenue Service.

My client filed Forms 3520 and 3520-A related to a pension arrangement arising from employment in the UK two decades ago.  The filings, under Delinquent International Information Return Submission Procedures, were accompanied by a sworn statement of reasonable cause—reliance on a CPA who, provided with full details of the accounts each year, advised specifically that there was no filing or tax obligation until benefits were received.  It also asserted that the filings were protective in nature due to doubt as to whether the arrangements were, in fact, trusts.  Upon changing CPA’s (for other reasons) the client received contrary advice, and acted promptly to resolve any possible problems.  It was, in every respect, a perfect and complete “reasonable cause” defense.”

Fourteen months later, the client received Notice CP15; the subsequent Letter 854C looked like this:

Kind Of Penalty: Late Filing Form 3520-A

 

 

 

 

 

 

 

 

 

 

It is clear from the language in Letter 854C that the penalty defense was noticed, but at best only “skimmed,” not actually read.

The appeal I submitted to Odgen eight weeks ago has yet to show up on the Appeals radar.  Meanwhile, the penalty has been paid—by offset against the client’s 2018 income tax refund.

Last week, I met the Executive Director for Systemic Advocacy at a CPE seminar.  I had previously sent her a description of this situation, pointing out that Appeals cannot be happy about having work pushed to them this way, and that taxpayers and practitioners will lose confidence in published disclosure programs.  In our brief conversation afterward she acknowledged that there is a story here that “needs to be told.”

Received From Tax Professional Working Diligently To Help Client

I agree AICPA or a state board might be able to get IRS to listen. I am aware of a few letters NYSCPA sent to IRS and never received even an acknowledgement for, so that is somewhat disheartening. One is attached. Back in 2010 and 2011 I spent 25+ hours with Taxpayer advocate and Systemic Problems department at IRS. That was simply due to them separating substitute 3520As from the 3520 in Ogden, then asking for a missing 3520A. That took 2 years and covered 2 filing years to resolve.

Over the past few years, my goal is not to waste my time getting IRS to simply do their job. I spend my time thinking on how to file to avoid the incompetence that I have very little tolerance for. I look like the moron in a client’s eyes regardless of how I explain it.

Regarding the 3520A LTR 2645C they sent to my business personally I talked with them at 5:00am – they answered the phone! Agent advised that they had “new people” that entered my data from a 3520A instead of the taxpayer, by mistake. Is it reasonable to think that this level of incompetence can ever be corrected under current conditions?

Received From Tax Professional Working Diligently To Help Client

I had an almost hour long conversation with IRS Chief Counsel in charge for foreign trusts. (202) 622-3880 The technical analyst that called from LB&I would not provide me with his name for the record. As expected, there was no written email response.

The analyst advised

  1. They always levied penalties up until 2012 but “they were getting so many wrong” the penalty program was suspended.
  2. “A new campaign was approved at LB&I late 2017 for all returns filed after 1/1/18” – no details available
  3. “LB&I announced this new campaign in an email to him on 5/21/2018 and later through a public press release”. – nothing I have ever been able to find
  4. “Taxpayers can have penalty abated for reasonable cause”

What the analyst suggested was happening in our conversation was far removed from the reality back then. It’s worse now.

Received From Tax Professional Working Diligently To Help Client

The AICPA IRS Advocacy Relations Committee needs to step up and be an advocate for us and our clients. The Committee is meeting with the IRS on November 15, and promised they would bring this up. That’s really not enough.

Since this campaign was organized by the leadership of the LB&I division, raising the issue with lower level representatives will not help. I would like to see the Committee go much further by writing a letter to the Commissioner, with a copy to the Treasury Secretary and the Congressional tax committees.

It was suggested that everyone should write their senators and congressional representatives, but I tried that. I wrote a letter with a very detailed description of the problem and sent it to both of my senators and my congressman. They’re all democrats, so I thought they would love to exploit the issue, but they were all too stupid to. One of my senators is Amy Klobuchar, who is running for president. What a great issue to exploit! She responded by signing my up for her newsletter, and explaining that she was committed to reducing government waste.

A letter from a single practitioner simply does not get taken seriously. A letter from the AICPA has weight and will get noticed. Please help put some pressure on the Committee!

Received From Tax Professional Working Diligently To Help Client

In my client’s case, his attorney included a statement that the forms were being filed “protectively” because of doubt as to whether the foreign retirement arrangements constituted trusts.  The IRS ignored that, as well as what I consider a perfect sworn statement of reasonable cause. I have emphasized to the Taxpayer Advocate that careless application of penalties is counterproductive, as it destroys public trust and discourages, rather than encourages, compliance.

Your comments and stories are most welcome. We will make certain the AICPA and National Taxpayer Advocates Office Receives A Copy Of This Post.

It will take the AICPA and National Taxpayer Advocate To Solve This Problem Once And For All

 

TaxConnections Admin

TaxConnections Admin

TaxConnections is where you will find leading tax experts and resources worldwide. Please join us at: https://www.taxconnections.com/membership/sign_up

One thought on “Shocking Behind The Scenes Story: Tax Professionals Advocating For Taxpayers On 3520-A IRS Penalties

  1. Avatar Dean Smith says:

    The IRS gone completely nuts on this. The whole 3520 and 3520-A issue is a new compliance program being administered by the Large Business and International (LB&I) unit of the IRS. It is clear, in my opinion, that they clearly (i) do not understand the issues and (ii) don’t have the manpower to properly address this. In addition, to the best of my knowledge, the IRS has never issued any guidance as to the correct treatment of Canadian RESPs, TFSA, and RDSPs. These are not common laws= trusts as defined under US tax law. It is questionable whether 3520/3520-A are technically required in the first place. Many firms have recommended these be filed as a protective measure so that these penalties wouldn’t be assessed (not working out so well now!). If the IRS wants these entities disclosed how about a simple form like the old 8891?

Leave a Reply