IRS halts foreign gift penalties

Executive summary

IRS will stop its practice of systemic assessment of late-filed penalties for Forms 3520, Part IV, and will begin reviewing reasonable cause statements before imposing IRC section 6039F and 6677 penalties. 

On Oct. 24 at the UCLA Tax Controversy Conference, IRS Commissioner Daniel Werfel announced that the IRS will immediately halt the systemic assessment of penalties for late-filed forms related to foreign gifts or bequests.

The policy change specifically addresses the late submission of Form 3520, Annual Return To Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, particularly Part IV, for U.S. recipients of large gifts or bequests received from foreign persons. Generally, US persons must report any gifts or inheritances from foreign persons or estates if such transfers exceed $100,000 in the taxable year.^[1] Werfel explained that the IRS will now review reasonable cause statements that are attached to the late-filed forms before issuing any penalties.

Werfel stated, “A person may be with parents living overseas; a parent dies, now you’re dealing with the estate, you’re dealing with grief, you’re dealing with all the moving pieces, and maybe in the middle of all this, you late file your form that you’re required to file.” He explained that part of the IRS’s mission to serve taxpayers involves demonstrating an emphatic approach.

The announcement is a significant relief for many taxpayers because penalties for late-filed Form 3520 can be substantial. The failure to report large gifts and inheritances from foreign persons is 5% of the unreported transfer for each month the form is late up to 25% of the foreign gift or inheritance.

These changes aim to address criticisms of the IRS’s penalty administration for foreign information reporting. Commissioner Werfel acknowledged national Taxpayer Advocate Erin Collins for highlighting the issue and expressed a desire for further changes in IRS policy.

^{[1] A lower threshold applies to gift transfers from foreign entities.}