Disclaimer: The following is for informational purposes only. It is not intended to constitute legal advice, or to recommend a course of action, and does not create an attorney-client relationship between the reader and Renuka Somers, or Somers Tax Law, PLLC.

Some good news for taxpayers with international information disclosure requirements!  The IRS announced on October 24, 2024, that it would cease its practice of automatically assessing certain international information return penalties with respect to foreign gifts and bequests, and transactions with foreign trusts.

• Foreign gifts and bequests: Where a US citizen or resident receives gifts or bequests from a foreign person or foreign estate which exceeds $100,000 in (aggregate) value in any tax year, they are required to report that receipt to the IRS on Part IV of IRS Form 3520. Failure to do so results in penalties of 5% of the value of the gift / bequest for each month in which Form 3520 was outstanding, up to a total of 25% of the value of the gift, unless the taxpayer had reasonable cause for the failing to file timely or accurately (IRC § 6039F).
• U.S. persons (and executors of estates of U.S. decedents) are also required file Forms 3520 and 3520-A to report transactions with foreign trusts, and information relating to U.S. grantors/ owners and U.S. Beneficiaries of foreign trusts [see An overview of the U.S. grantor trust rules].  Failure to file these forms results in penalties of the greater of $10,000 or 5% of the gross reportable amount (the amount of the distribution that was not reported), unless such failure is shown to be due to reasonable cause and not due to willful neglect (IRC § 6677(b), (d)).

The IRS adopted a practice of automatically assessing the penalties for late filings of Forms 3520 and 3520-A, even when taxpayers filed reasonable cause statements with Forms 3520 and 3520-A, and later abated penalties when reasonable cause was confirmed or when taxpayers appealed the penalty assessments.

The IRS announcement is long overdue and represents a positive change for taxpayers with international information reporting obligations.

For more information, please contact Renuka Somers, Esq.