Foreign Trust Form 3520 penalties are huge. This Form reports inheritances and gifts from foreign family members and distribution from their trusts.
The AICPA in an attempt to have the IRS Commissioner to stop the terrorizing letters wrote this letter.
Here is what happens. Americans receive a gift or bequest from a family member who is a non-citizen. Being tax compliant they hire and pay a CPA to prepare Form 3520.
Remember, these are the honest and compliant taxpayers. Meanwhile, the Commissioner of the IRS has the IRS back office in chaos (more on this link exposing theft of taxpayers refunds). The back office staff gets confused and tells the computer to send out a big penalty notice as they input the Form 3520.
The taxpayer receives a penalty notice for 35% of the gift or bequest. They or their CPA writes to the IRS, but the IRS computer continues to send out the penalty letter. The letter has no contact person or telephone number. Eventually, the computer starts the collection process.
The taxpayer receives repetitive terrorizing letters, until it goes to collection. Now, the good news is that for a few $1,000 dollars you can hire an attorney to stop the collection process. Until then, expect sleepless nights.
No income tax is due on a bequest, inheritance or gift. The reporting a foreign trust’s income and distributions to an American is on Form 3520-A.
So, why is the Form 3520 required? As far as I can tell, merely to assess a penalty.
I look forward to your comments on either my blog or on LinkedIn. If you would like to brainstorm your tax planning, then please call me, Brian Dooley CPA, at 949-939-3414 for a free one-hour consultation.
P.S. After posting this, a CPA colleague contacted me. His client was being terrorized. The CPA called the IRS taxpayer advocate (the part of the IRS that is an advocate for taxpayers). The advocate said nothing can be done. When it goes to IRS collection, a human being will contact the client as they seize his property.
P.S.S. Case in Point – Recent District Court Case- Compliant Tax Payer facing $600,000 Form 3520 Penalty. Here the Form 3520-A was properly filed, reporting all of the foreign trusts income. The taxpayer paid the $600,000 penalty. He has sued the USA (that is us folks) for a refund.
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If you wish to brainstorm your tax ideas with me, Brian Dooley CPA, then please call me at 949–939–3414 for a free one-hour brainstorming consultation.
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UNITED STATES DISTRICT COURT MIDDLE DISTRICT OF FLORIDA-TAMPA DIVISION
2012 PTC 237 August 14, 2012
BRIAN CHIVAS JAMES, Plaintiff, v. UNITED STATES OF AMERICA, Defendant.
THIS CAUSE comes before the Court upon Defendant’s Motion for Summary Judgment (Dkt. #17), Plaintiff’s Response (Dkt. #18), Defendant’s Reply (Dkt. #23), and Plaintiff’s Sur-Reply (Dkt. #28). Upon reviewing the motion and responses, and being otherwise advised in the premises, the Court concludes that Defendant’s motion should be denied.
Plaintiff Brian Chivas James is a Sarasota physician specializing in pain management. In 2001, looking to protect his assets from potential malpractice claims, James proceeded to create an irrevocable foreign trust in Nevis, West Indies, with First Fidelity Trust Limited (FFT) as its trustee. James initially funded the trust in 2001 with a contribution of $192,000. He made additional contributions of $805,000 in 2002 and $607,146 in 2003.
Under 26 U.S.C. 6048, the trust was required to file Form 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner, which the trust timely filed for all relevant years. Also, as an owner of the trust, James was required to file IRS Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. James failed to file the required Form 3520 for years 2001, 2002, and 2003.
James argues that his failure to file Form 3520 is the fault of his former accountant, George Famiglio. Famiglio had prepared James’s personal and business taxes for some years, and James relied on Famiglio to properly oversee and advise him about the tax requirements of the foreign trust. According to James, he or his agent timely provided Famiglio with all appropriate trust documents and information, for each year in question, yet Famiglio failed to timely file Form 3520, and/or advise James that it should be filed. James further contends that he was personally unaware of the requirement to file Form 3520.
James argues that he acted prudently and with sound business judgment in engaging Famiglio to handle all issues related to the foreign trust, and that his accountant simply dropped the ball. Although James does not remember the details of most conversations he had with Famiglio or any specific advice he received, he recalls that they “talked a pretty good bit” about the trust, and he believed at the time that “[Famiglio] had filed all the-everything required with the IRS.” In short, James argues that he had “reasonable cause” for failing to file Form 3520 by reasonably relying on Famiglio.
The Government contends that James lacks a reasonable cause. Noting that James was put on notice of the requirement to file Form 3520, the Government argues that his reliance on Famiglio cannot constitute reasonable cause. In 2006, the Government assessed penalties of $67,200, $281,750, and $230,000, for failure to file Form 3520 in years 2001, 2002, and 2003, respectively. James now sues for a refund of tax penalties, arguing that his failure to file Form 3520 was due to reasonable cause and not willful neglect.
If you want the full case, then please send me an email at [email protected]