IRS Eases Penalty Policy on Late Foreign Gift Reporting

PREP Podcaster - ”Success Favours The PREPared Mind”

October 25, 2024 - Participants include:

Virginia La Torre Jeker - @VLJeker

John Richardson - @ExpatriationLaw

This was a podcast that came together quickly. On October 24, 2024 the IRS announced that it would no longer automatically assess penalties to file Form 3520 reporting the receipt of foreign gifts. (The requirement is found in Internal Revenue Code 6039F (see below).

Notably this does NOT end the penalty regime for the failure to report foreign gifts. It simply means that the penalties will no longer be assessed without considering reasonable cause.

In the words of the Taxpayer Advocate:

"Spoiler Alert

The IRS has ended its practice of automatically assessing penalties at the time of filing for late-filed Forms 3520, Part IV, which deal with reporting foreign gifts and bequests. And…

By the end of the year the IRS will begin reviewing any reasonable cause statements taxpayers attach to late-filed Forms 3520 and 3520-A for the trust portion of the form before assessing any Internal Revenue Code (IRC) § 6677 penalty. This favorable change will reduce unwarranted assessments and relieve burden on taxpayers by giving them the opportunity to explain their situation before the IRS assesses a penalty. TAS has recommended these changes for years and the IRS listened. IRS Commissioner Danny Werfel announced these changes during the UCLA Extension Tax Controversy Conference."

The complete blog post is here ...

https://www.taxpayeradvocate.irs.gov/news/nta-blog/irs-hears-concerns-from-tas-and-practitioners-makes-favorable-changes-to-foreign-gifts-and-inheritance-filing-penalties/2024/10/

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AI Description:

"In this episode, John Richardson from Toronto, Canada, reconnects with Virginia Latorre Jeker to discuss a significant announcement by the IRS regarding foreign gift reporting. The IRS has revised its procedure and will no longer automatically impose penalties for late filing of Form 3520 when a U.S. person receives a foreign gift or bequest exceeding $100,000. This change comes after years of advocacy, including efforts by the National Taxpayer Advocate, highlighting the unfairness of the previous policy.

Virginia explains that while the penalty regime remains in place, the IRS will now assess reasonable cause statements before issuing penalties, providing a fairer process for taxpayers. However, John and Virginia stress the importance of seeking professional advice to ensure compliance with reporting obligations and to craft strong reasonable cause statements if needed.

They also clarify that this procedural change applies solely to foreign gift and bequest cases, not to other 3520-related issues. Virginia shares resources available on her tax blog for those interested in understanding more about foreign gift reporting requirements. The episode wraps up with a hint at future discussions on related topics."

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Here is the text of Internal Revenue Code 6039F:

26 U.S. Code § 6039F - Notice of large gifts received from foreign persons (a)In general If the value of the aggregate foreign gifts received by a United States person (other than an organization described in section 501(c) and exempt from tax under section 501(a)) during any taxable year exceeds $10,000, such United States person shall furnish (at such time and in such manner as the Secretary shall prescribe) such information as the Secretary may prescribe regarding each foreign gift received during such year. (b)Foreign gift

For purposes of this section, the term “foreign gift” means any amount received from a person other than a United States person which the recipient treats as a gift or bequest. Such term shall not include any qualified transfer (within the meaning of section 2503(e)(2)) or any distribution properly disclosed in a return under section 6048(c).

(c)Penalty for failure to file information (1)In generalIf a United States person fails to furnish the information required by subsection (a) with respect to any foreign gift within the time prescribed therefor (including extensions)— (A) the tax consequences of the receipt of such gift shall be determined by the Secretary, and (B) such United States person shall pay (upon notice and demand by the Secretary and in the same manner as tax) an amount equal to 5 percent of the amount of such foreign gift for each month for which the failure continues (not to exceed 25 percent of such amount in the aggregate). (2)Reasonable cause exception

Paragraph (1) shall not apply to any failure to report a foreign gift if the United States person shows that the failure is due to reasonable cause and not due to willful neglect.

(d)Cost-of-living adjustment

In the case of any taxable year beginning after December 31, 1996, the $10,000 amount under subsection (a) shall be increased by an amount equal to the product of such amount and the cost-of-living adjustment for such taxable year under section 1(f)(3), except that subparagraph (A)(ii) thereof shall be applied by substituting “1995” for “2016”.

(e)Regulations

The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.

(Added Pub. L. 104–188, title I, § 1905(a), Aug. 20, 1996, 110 Stat. 1913; amended Pub. L. 115–97, title I, § 11002(d)(13), Dec. 22, 2017, 131 Stat. 2062.)