U.S. Government Concedes In Case Of Large Foreign Gifts

U.S. Government Concedes In Case Of Large Foreign Gifts

An American citizen got a big cash gift from his mom back in Poland. The U.S. government went after him for failure to report foreign gifts – but now has changed its tune regarding “reasonable cause” and “willful” failure to file.

The U.S. Department of Justice has conceded in Wrzesinski v US that an American citizen and a native of Poland does not owe penalties for failing to file IRS Form 3520, “Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts,” after receiving $830,000 from his mother in Poland.

Krzysztof Wrzesinski immigrated to America in 2005 at age 19 and for the past nine years he has been a Philadelphia police officer. In 2010, his mother, Barbara Wrzesinska, a citizen and resident of Poland, made a gift to her son of $830,000 after winning the Polish lottery.

Wrzesinski visited his mother in mid-November 2010 and while there phoned his tax advisor in the United States to ask if he needed to document the gift in the U.S. The advisor, a tax accountant and an Enrolled Agent, told Wrzesinski there was no need to include the gift on his U.S. tax returns and that there was no other U.S. legal requirement in connection with the gift. Wrzesinski received the money in four payments from December 2010 to March 2011.

A Problem Unearthed

In April of 2018, Wrzesinski wanted to give some of the money to his godson and, in an Internet search of “foreign gifts,” discovered various articles that mentioned the legal requirement imposed on U.S. taxpayers to report large gifts from foreign individuals. Reportedly “shocked” by the discovery, he immediately contacted a local tax attorney with expertise in the U.S. laws relating to foreign accounts and assets.

Turns out the gifts should have been reported to the IRS on Form 3520 – but that the IRS also offered “Delinquent International Information Return Submission Procedures” under which belated compliance was permitted if Wrzesinski could demonstrate “reasonable cause” for the untimely filing. He retained the tax attorney, who prepared and filed the delinquent forms and the signed Statements of Reasonable Cause certifying that Wrzesinski had been misinformed by his American tax advisor.

This erroneous advice had been “provided in response to a specific request which related the pertinent facts, and that Plaintiff had relied on the advice of his tax advisor, based on his apparent knowledge of and experience working with federal tax law,” according to court records.

‘Frivolous’

About a year later, Wrzesinski received an IRS Form CP15, “Notices of Penalty Charge,” assessing penalties totaling $207,500 for tax years 2010 and 2011 for failure to file 3520s. Ignorance of the tax laws was not a basis, the notices claimed, for penalty abatement under the “reasonable cause” standard. Wrzesinski filed a protest.

Court records affirm that this appeal was “somehow lost in the ‘system,’” requiring intervention by the Taxpayer Advocate Service, which ultimately resulted in the appeal being assigned to an Appeals Officer in the Los Angeles office of the IRS Appeals Division. In late 2020, the Appeals Division abated all but $41,500 of the penalties, which Wrzesinski paid – and by doing so was able to soon file a claim for refund and request for abatement of that amount. The IRS denied the refund for both years, calling one of the requests “frivolous.”

Here the ground of the IRS and Appeals began to look unsteady. Precedent cases relying on professional tax advice had resulted in full refunds. IRC Section 6039F, “Notice of large gifts received from foreign persons,” says clearly that penalties won’t apply if the taxpayer shows that the failure to file is due to reasonable cause and not “willful neglect.”

And if a full refund wasn’t warranted and willful neglect had been shown, why return four-fifths of the penalty?

The U.S. Department of Justice, in a “status report in lieu of answer,” recently conceded and said Wrzesinski will receive his refund by early April. “Hopefully,” said one observer of the case, “in light of this concession the IRS will acknowledge reasonable cause in more foreign gift penalty cases under … 6039F.”

Your tax specialist needs to stay on top of this and many other developments concerning wealth, foreign income and tax enforcement. If we can help, please let us know.

Have a question? Contact Alicea Castellanos, Global Taxes.

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Alicea Castellanos is the CEO and Founder of Global Taxes LLC. Alicea provides personalized U.S. tax advisory and compliance services to high net worth families and their advisors. Prior to forming Global Taxes, Alicea founded and oversaw operations at a boutique tax firm, worked at a prestigious global law firm and CPA firm.

Alicea specializes in U.S. tax planning and compliance for non-U.S. families with global wealth and asset protection structures which include non-U.S. trusts, estates and foundations that have a U.S. connection. She also specializes in foreign investment in U.S. real estate property, and other U.S. assets, pre-immigration tax planning, U.S. expatriation matters, U.S. persons in receipt of foreign gifts and inheritances, foreign accounts and assets compliance, offshore voluntary disclosures/tax amnesties, FATCA registration, and foreign companies wanting to do business in the U.S.

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