Kat Jennings

It all started with the letter written by one of our members, 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 and to call out all tax professionals and taxpayers to help by sharing their experiences with us by commenting on this blog post. The more we can explain what is occurring with Form 3520 and 3520-A the more we are able to bring this issue to the attention of the IRS and NTA. We will start by sharing the stories and comments that have already surfaced but we need more to be impactful. Please share this with anyone you know and ask them to contribute to the comments on this post. Everyone counts so your input is valuable!

Here are some of the stories that have emerged:
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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)?

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It is perhaps not surprising to hear that non-U.S. (or “foreign”) trusts with U.S. owners can be tricky…

Individual U.S. citizens who hold such foreign trusts, for example, are expected to file a Form 3520, “Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts,” and the trusts themselves are required to file a Form 3520-A, “Annual Information Return of Foreign Trust With a U.S. Owner,” every year. If the trust doesn’t file a Form 3520-A, the U.S. owner of the trust is required to file a “substitute” Form 3520-A with their Form 3520. Definitely not for beginners.

Still, Gary W. Carter, a certified public accountant based in Minnesota, with decades of experience as a tax adviser, professor and revenue agent, knew all this. So he filed such forms on behalf of some of his overseas clients last year without a further thought.

Below, Carter explains, in his own words, how easily – and disastrously – things went wrong for five of his clients (“so far”, he says), and speculates that the scale of similar penalty notices could be huge: and consequently, a huge, if not a particularly tax-payer-friendly, money-maker for the IRS.

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