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News

IRS Puts an End to Automatic Penalties Related to Foreign Gifts

By:
Karen Sibayan
Published Date:
Oct 30, 2024

According to financial consulting firm RSM, on Oct. 24, while speaking at the UCLA Tax Controversy Conference, IRS Commissioner Daniel Werfel noted that the agency will stop the systemic assessment of penalties for late-filed forms related to foreign gifts or bequests. 

RSM wrote that the policy shift specifically targets the late submission of Form 3520, Annual Return To Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. This specifically pertains to Part IV, for U.S. recipients of large gifts or bequests from foreign persons. 

Americans must report any gifts or inheritances from foreign persons or estates if such transfers are more than $100,000 in the taxable year. Werfel said that the IRS will now review reasonable cause statements that are attached to the late-filed forms prior to issuing penalties. 

In his remarks, 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.”  

The announcement relieves many taxpayers since penalties for late-filed Form 3520 can be considerable. Not reporting large gifts and inheritances from foreign persons could mean penalties equivalent to 5% of the unreported transfer for each month the form is late, up to 25% of the foreign gift or inheritance. 

RSM stated that these changes are responding to criticisms regarding the IRS’s penalty administration for foreign information reporting. 

Journal of Accounting reported that the agency has not announced the policy in a news release. Quoting Erin Collins from the National Taxpayer Advocate, the Journal reported that taxpayers would usually file a Form 3520 late because they do not know about the filing requirement, given that there is no underlying tax liability.  

Collins also wrote that some were assessed large penalties of up to 25% of their gift or inheritance. In the foreign gift context, from 2018 to 2021, taxpayers who reported $400,000 or less in income got more than $235,000 of average penalty.