IRS Stops Automatic Penalties for Late Forms 3520 that Report Foreign Gifts, Revises Penalty Policy for Forms 3520 and 3520-A

 

IRS Commissioner Danny Werfel announced at a tax conference on October 24 that the IRS has ceased its practice of automatically imposing penalties for late submissions of Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, that report foreign gifts in Part IV.

The commissioner noted that, starting at the end of 2024, the IRS will generally begin reviewing reasonable cause statements that accompany late submissions of Forms 3520 and Forms 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner. National Taxpayer Advocate Erin Collins shared this announcement on her blog the same day.

The announcement indicates that this policy change ending the practice of automatic penalties is limited to late filings of Form 3520 that report foreign gifts. The IRS may continue to automatically impose penalties for late submissions of Forms 3520 and 3520-A related to foreign trust reporting until at least the end of 2024.

Automatic penalties will still apply to late submissions of Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, and Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business.

This IRS policy change does not exempt taxpayers from information reporting requirements regarding foreign gifts and transactions with foreign trusts; it only modifies how the IRS will assess penalties for late reporting. Importantly, the IRS will consider whether there is reasonable cause for the late filing before imposing a penalty. Practitioners and taxpayers should nonetheless remain vigilant in identifying their information reporting obligations related to foreign gifts and foreign trusts and ensure timely filing of these forms.