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Consider the following common scenario: A U.S. taxpayer (let’s call her Sylvia) has family in a foreign country and receives devastating news of a close relative’s passing. She flies abroad for the funeral, helps the family go through personal belongings, breaks the news to friends and neighbors, and grieves. The fact that Sylvia will receive a large bequest from the deceased family member is far from her primary concern. But since she is unfamiliar with the tax treatment of foreign assets, she eventually consults with a tax professional, who advises Sylvia that she will not owe any income taxes on the bequest. Years later, a cousin (who also received an inheritance) tells Sylvia that she was supposed to inform the IRS about the foreign bequest even though no taxes were due. Although it’s late, Sylvia submits a Form 3520, Part IV (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts) to report the bequest and attaches a statement explaining the delayed filing. Before October of this year, the IRS would have immediately and automatically assessed a penalty on Sylvia’s filing, potentially of up to 25% of the inheritance received, and started the collections process. Sylvia would not have had a chance to appeal the penalty before collections started. It also would not have mattered that no tax was due on the bequest or that Sylvia came forward of her own accord; the penalty would have been the same as if the IRS had discovered the delinquent filing.
If this seems unfair to you, you are not alone! For years, the National Taxpayer Advocate of the Taxpayer Advocate Service (TAS) and other tax practitioners have pushed to end the automatic assessment of penalties for those taxpayers who voluntarily submit late informational returns. In October 2024, the IRS explicitly acknowledged this advocacy and announced that it would stop the automatic assessment of penalties on certain late-filed Forms 3520 and 3520-A International Information Returns (IIRs). By year-end, the IRS will begin reviewing reasonable cause statements attached to IIRs before assessing a penalty. As a result, there is an incentive for those taxpayers who realize they have missed filing these IIRs to come forward independently.
IRS Commissioner Danny Werfel referred to this new approach as being more empathetic, pointing to the fact that the IRS is now taking into account the myriad reasons for delays in taxpayers’ reporting of the receipt of foreign gifts or bequests. For one, taxpayers may not realize they have to submit these filings, particularly when no tax is due on the foreign gift or bequest (which is often the case). No matter the reason for a delayed filing, encouraging individuals to report their foreign gifts and bequests supports the overall goal of IIRs—to combat U.S. taxpayer tax avoidance and hiding of assets abroad.
Also, these automatic penalties were often assessed in error. The TAS reported that from 2018 to 2021, “the IRS abated … 67% of penalties assessed and 78% of the dollars assessed” with respect to Form 3520, Part IV. The new approach will lessen the burden on taxpayers and the IRS alike. It will give taxpayers time and incentive to submit the required IIRs, even if late, and will reduce the administrative burden on the IRS associated with collecting penalties and responding to taxpayers’ appeals of automatically assessed penalties.
Overall, this new approach to penalty assessments for late-filed Forms 3520 or 3520-A is beneficial across the board. Ideally, the practice of automatically assessing late-filing penalties will be expanded to apply to other IIRs. Erin Collins, the National Taxpayer Advocate, is pushing for such an expansion. We hope the IRS is listening.
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