IRS Stops Automatic Penalties for Late Filing of Form 3520
January 27, 2025
At a glance
- The main takeaway: The IRS has decided to end its practice of automatically imposing penalties for late filings of Form 3520, subject to reasonable grounds.
- Impact on your business: This significant IRS change can reduce taxpayer burden and unwarranted penalties.
- Next steps: Connect with Aprio’s Global Mobility Consultants if you need assistance with filing Form 3520 and an administrative review of your tax filings before the IRS assessment.
Schedule a consultation
The full story:
Last October 24, 2024, the Internal Revenue Services (IRS) released a statement at the UCLA Extension Tax Controversy Conference explaining the end of its practice of automatically imposing penalties for late filings of Form 3520, but subject to reasonable grounds. With inaccurate assessments and financial hardships in mind, the IRS will now review taxpayers’ reasonable cause statements for their late filings, and taxpayers will have a better chance of refraining from getting penalized.
This significant IRS change can reduce taxpayer burden and unwarranted penalties. But what exactly does the IRS base their penalties on?
International Information Return (IIR) penalties
The IRR penalty was implemented to reduce tax avoidance and prevent U.S. taxpayers from concealing tax liabilities. Generally, the penalty negatively affected small businesses and lower-income individuals due to lack of resources and the ability to enlist tax professionals who can prevent triggering the penalty. Many of the IRS’s penalties can be applied even when there is no underlying tax liability and are usually a source of confusion to taxpayers and tax professionals.
Due to many years of applying penalties unfairly, the IRS acknowledged the presence of life circumstances (e.g., death of a family member while living overseas or going through a major life change) for late filing. This marks the IRS’s effort to collaborate with taxpayers in helping them stay compliant with the law.
Foreign gifts and inheritance information filings
Since foreign gifts and inheritance are non-taxable, taxpayers do not commonly report them. IRC § 6039F requires U.S. individuals who acquire a hefty inheritance to submit information returns through Form 3520 – Part IV. Previously, individuals who received a large amount of money and submitted late filings were penalized up to 25% of their gift or inheritance. From 2018-2021, the IRS’s abatement rate was up to 67% of penalties assessed and 78% dollars assessed, most of which are inaccurate. The recent IRS change alleviates taxpayer burden and reduces unnecessary work for the IRS themselves.
Transactions with foreign trust reporting
IRC § 6048 requires taxpayers to report information about foreign trusts through Forms 3520 and 3520-A. Late filing of Form 3520 will be subjected to the IRC § 6677 penalty, which imposes the maximum penalty amount. Additionally, the IRS does not acknowledge reasonable cause provided by taxpayers for late filing. Before the change, most of the penalties were automatically imposed and widely applied to late filings without consideration of the reasonable cause.
The bottom line
Keep in mind that this IRS change does not relieve taxpayers from their duty to report requirements regarding foreign gifts and transactions with foreign trusts. Essentially, the IRS will review the cause of the late filing before imposing any penalty and emphasize the importance of transparency on the reason for late filing. We encourage taxpayers to remain compliant with reporting tax liabilities and assure the timely submission of these forms.
Connect with Aprio’s Global Mobility Consultants if you need assistance with filing Form 3520 and an administrative review of your tax filings before the IRS assessment.
Related Resources/Assets/Aprio.com articles/pages
Recent Articles
About the Author
Shivam Malhotra
As Aprio’s Global Mobility Services (GMS) Leader, Shivam oversees the growth and development of the firm’s GMS practice. He has a decade of experience in professional services, assisting multinational companies with international business matters such as navigating taxation and compensation, transferring individuals and managing expatriate needs across all aspects of global mobility. He works closely with CEOs and CFOs of global organizations, global mobility managers, human resources leaders, high-net-worth individuals and cross-border individuals.
Stay informed with Aprio.
Get industry news and leading insights delivered straight to your inbox.