There are two recent taxpayer-friendly updates of note in the international tax filing arena.
First, Internal Revenue Service ("IRS") Commissioner Danny Werfel recently announced that the IRS is ending its automatic assessment of penalties for late-filed Forms 3520 reporting the receipt of foreign gifts and bequests. Under Internal Revenue Code Section 6039F, U.S. persons who receive large foreign gifts or bequests (for example, gifts or bequests exceeding $100,000 received from a nonresident individual or foreign estate) must report such gifts or bequests on Form 3520. Because such gifts or bequests are not subject to U.S. federal income tax, many taxpayers are unaware of this filing obligation. However, for the past decade or so the IRS has automatically been assessing penalties, which can be up to 25% of the foreign gift or bequest. Historically, the IRS ultimately abated the majority of these penalties and now, in light of these statistics, has changed its approach to the imposition of penalties for failure to report large foreign gifts or bequests. At the same time, the IRS also announced its decision to consider taxpayers' reasonable cause statements prior to assessing penalties for delinquent Forms 3520 filed to report transactions with foreign trusts and Form 3520-A filed by foreign grantor trusts with U.S. owners, reversing its prior position of imposing such penalties prior to considering reasonable cause statements.
Second, in Mukhi v. Commissioner (163 T.C. No. 8, November 18, 2024), the U.S. Tax Court held that the IRS does not have the authority under Code Section 6038(b)(1) to assess a penalty for failure to file Form 5471 (Information Return of U.S. Persons With Respect To Certain Foreign Corporations). Code Section 6038(b)(1) provides for a penalty of $10,000 per year for failure to file Form 5471. During an examination, the taxpayer (Mukhi) filed under protest delinquent Forms 5471 in connection with certain foreign corporations he had created. The IRS assessed $120,000 in penalties under Code Section 6038(b)(1) and the taxpayer challenged this assessment. The Court held that the IRS lacks authority to assess the penalty under Code Section 6038(b)(1) and can only enforce this penalty by a civil action and not an assessment.
The reporting by U.S. persons of transactions with foreign individuals and entities (whether they are trusts, estates or corporations) is a complex topic and many U.S. persons unwittingly fail to comply with such reporting requirements. The penalty for such non-compliance is often draconian relative to the violation, so any taxpayer-friendly guidance on point is a welcome development.
A link with additional information on the IRS announcement can be found here: IRS Hears Concerns from TAS and Practitioners, Makes Favorable Changes to Foreign Gifts and Inheritance Filing Penalties – Taxpayer Advocate Service
A link to the Mukhi case can be found here: MUKHI v. Commissioner, 163 TC 8 – Tax Court 2024 – Google Scholar
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