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You Received an IRS CP15 Notice (re: Form 3520 Penalty), What Now?

Overview of IRS Notice CP15

As our previous firm Insights discuss, there is a numbered notice for almost any communication the IRS provides to a taxpayer. See, e.g., CP518 and CP504. In some cases, the taxpayer may safely review a communication without taking any further action. For example, the IRS routinely sends a summary of tax debts owed annually to taxpayers as a reminder of outstanding tax owed. But, in other cases, a taxpayer must act promptly to preserve certain procedural rights permitted under the Internal Revenue Code (the “Code”) or existing IRS guidance. Without doubt, the IRS CP15 Notice (“CP15”) is one that falls squarely in the latter group, requiring quick action by the taxpayer.

As the name implies, the IRS uses CP15 to notify taxpayers that it has assessed certain civil penalties against the taxpayer. Generally, the CP15 will provide a short (indeed, very short) reason for the imposition of the civil penalty and also will provide the taxpayer of notice of the amount of the assessed civil penalty.

Although the IRS uses the CP15 for various civil penalties, the remainder of this article focuses solely on the IRS’s use of the CP15 for assessment of the civil penalty associated with a taxpayer’s failure to timely file a proper and complete IRS Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts (“Form 3520”). Moreover, this article will leave to another day a discussion of the civil penalty for receipt of certain foreign gifts, focusing solely on the reporting obligation applicable to foreign trusts.

What is the Form 3520?

The Form 3520 reporting obligation arises only in certain instances. First, there must be a foreign trust involved in the transaction. Second, only certain types of transactions result in a Form 3520 reporting requirement. To break all of these requirements down even further, taxpayers must generally determine the following:

Whether the entity at issue is a trust?
If the entity is a trust for federal tax purposes, whether it is foreign or domestic?
If it is a foreign trust, whether the transaction with the foreign trust must be reported.

Each of these is discussed more fully below.

What is a Trust?

Written by Matthew Roberts | Posted in IRS CP15 Notice

(This Article Reposted By Popular Demand)

It was early on a Monday morning, and I dragged myself in after a long weekend of reg. buzzing and Code section perusing. I was not looking forward to the day. I played a message on my answering machine that made me want to return home and crawl back into bed. It was left in the middle of the previous night by a crazed and panicked client living in Norway. She had just gotten a CP15 Notice from the IRS that said she had been charged a penalty in the amount of $10,000 under Section 6677 of the Internal Revenue Code (IRC) for failure to file Form 3520-A, under the requirements of IRC Section 6048(b).

The client was the owner of a foreign trust, and I knew we had properly filed Form 3520, “Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.” Foreign trusts with U.S. owners have the responsibility to file Form 3520-A, “Annual Information Return of Foreign Trust With a U.S. Owner,” which few of them do. So since IRC Section 6048(b) requires the owner of a foreign trust to ensure that this happens, we attached “substitute” Form 3520-A to Form 3520, in accordance with the instructions to Form 3520. Form 3520 and the attached substitute Form 3520-A were filed in August, but we had filed an automatic extension for the client’s tax return, which, according to the instructions to Form 3520, also extended the filing date for Form 3520.