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Taxpayers Traumatized By Form 3520 And 3520-A (Please Add Your Personal Stories After Reading This Post)

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:

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

We ask you to provide your commentary on your personal experiences as we can get more done working together.

Kat Jennings, CEO TaxConnections

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9 thoughts on “Taxpayers Traumatized By Form 3520 And 3520-A (Please Add Your Personal Stories After Reading This Post)

  1. 3520 Victim says:

    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.

    • Angry taxpayer says:

      Very similar scenario here. 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.

      • 3520 Victim says:

        I submitted the appeal letter and am currently waiting. I’ve talked to someone who is experienced with this manner and was told this process could anywhere from 3 to 12 months. If my initial letter gets rejected, then I’m going to appeal again at the next level. Hopefully, it will not get to that point, but you never know..

        • Angry taxpayer says:

          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? My email is if you would like to send me a message.

  2. Another 3520 victim says:

    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.

  3. Michelle Grant says:

    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.

  4. Mark says:

    Hi all, I too got the same $10,000 penalty. I have USPS evidence that the form 3520-A extension was mailed by the March 15 deadline and received by them PLUS I have USPS evidence that they received the form 3520-A by the extended September 15 deadline.

    The kicker is that this was for 2017 and for 2018 my new CPA said that filing form 3520-A was not necessary for my account (a Canadian tax free savings account that I personally managed with absolutely no one else touching it on my behalf). So for 2018, my CPA checked the box on my behalf that I have no foreign trusts! I hired a tax attorney who sent in my appeal and contacted my local taxpayer advocate and the advocate also said she has 3 other of the exact same cases on her desk.

    While I am not happy other people are getting these penalty notices as well, it is good to know that clearly the IRS messed up and that we are not alone. I cried when I got that penalty notice in the mail as I am on a US visa and literally thought I was going to be arrested and/or deported. Stay strong everyone!

  5. Tom says:

    I am glad I found this page as it is very helpful to learn about what others have experienced (though I am sorry for you all). I will add my small tale of woe to this litany of misery in the hopes that it might help others. I got my form CP15 with a $10,000 penalty back in July. I immediately called the IRS to try to find out what this was about, as the form doesn’t really explain. After a couple of hours on the phone, they finally were able to tell me that I had made a mistake by leaving one required line blank on the form 3520A that I filed for 2017 for the Registered Education Savings Plan (RESP) that I established for my kids here in Canada. They also told me that they had sent correspondence to me in the summer of 2018 asking me to correct the error–but it was sent to the address of my bank in Toronto, where the account is located, rather than to me. The bank never forwarded it to me. So their next move was to apply a $10,000 penalty–which somehow they managed to get my correct address for. I sent in an appeal letter the day after receiving this penalty notice–according to the tracking it was received by the IRS July 25. Since then I have called back several times, the latest today, and every time they have told me that they have no record of receiving my appeal letter, but that it’s not unusual for them to take this long to process mail. The last person I talked to said that there’s no way to find out whether it is in a pile of paper waiting to be processed or whether it has been lost. I tried to fax my letter to them today but the person I talked to said that because they have a small number of fax machines for many employees to share they can only accept faxes of up to 6 or 7 pages–meaning I would have to send just my letter without most of the supporting documents and evidence, which I’m not sure would be a good idea. The person I talked to today also said I could try mailing my appeal letter again, but that this might cause further delays if more than one case gets opened if they find the first letter in the meantime. Every time I call them, they put a “hold” on the account for a few weeks, but then I have to call again to get the hold renewed. I didn’t call in time once, and I got a collections letter for the $10K plus interest. And every time I call, it takes about an hour on the phone because I have to explain the entire background of what I am calling about to a new IRS employee, who laboriously taps on a computer and makes sighing noises while I wait for them to see if they can find anything out. And also, because I received this penalty, I decided to go to an accountant to do my taxes this year (I had an extension to Oct 15), which wound up costing over $2000 because of the number of IRS forms–all just because I opened a college savings account for my kids. I have been filing these forms 3520 and 3520A for a few years now and thought I was doing it correctly, but apparently not. The instructions for these forms are so confusing that even my accountants admitted that no one is really sure how every line is supposed to be filled out. Yet we can be hit with a $10K penalty for making any mistake. This situation would never be tolerated if it was affecting mostly US residents, but because it hits mainly US citizens living abroad and immigrants in the US, no one in Congress seems to care that this is happening. Outrageous!

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