The IRS has announced a significant shift in its approach to penalties for late-filed Forms 3520 and 3520-A, particularly concerning foreign gift and inheritance reporting. Effective immediately, the IRS will no longer automatically assess penalties for foreign gifts and inheritances reported on Form 3520 and will start reviewing reasonable cause statements for late-filed Forms 3520 associated with foreign trust reporting. This change aims to address concerns over the fairness of previous automatic penalties, providing hope for taxpayers facing steep fines. Taxpayers are encouraged to submit strong reasonable cause statements to potentially avoid penalties entirely.

In a recent Forbes article, Gray Reed Partner Matt Roberts explores the implications of this policy change for taxpayers and tax professionals alike. Matt is a tax litigator and trusted advisor with considerable experience helping U.S. and international clients successfully resolve all types of federal tax controversies involving civil or criminal liability, from tax audits and investigations to litigation, appeals and collection matters. Having served nearly three years as an attorney-advisor to the Chief Judge of the U.S. Tax Court in Washington, D.C., Matt brings unique insight to navigating intricate government processes and developing innovative and cost-effective solutions to his clients’ tax problems.

Excerpt:

Based on an October 24, 2024, announcement from the National Taxpayer Advocate, Erin Collins, the IRS appears ready to change course, at least with respect to IRS Form 3520 and 3520-A penalties. In her NTA Blog, Ms. Collins announced that the IRS will no longer make automatic penalty assessments for late-filed IRS Forms 3520 associated with foreign gift or inheritance reporting (i.e., Part IV). In addition, Ms. Collins indicated that the IRS intends, as of the end of this year, to start reviewing reasonable cause statements that are attached to a late-filed IRS Form 3520 or 3520-A for foreign trust reporting.

Read the full article here.