20.1.9  International Penalties (Cont. 1)

20.1.9.8 
IRC 6038C – Information with Respect to Foreign Corporations Engaged in U.S. Business

20.1.9.8.2  (03-21-2013)
Penalty Letters, Notice Letters and Notices

  1. Computer Paragraph (CP) Notices—Once a penalty is identified by the campus or a penalty case is closed by the field and the Form 8278 is processed, a BMFCP 215, Notice of Penalty Charge, for penalties assessed on MFT 13 with PRN 603 is generated and sent to the taxpayer. A sample of a CP 215 notice (for a different penalty) is shown at Exhibit 20.1.9-16, Sample CP 215 Notice.

20.1.9.8.3  (03-21-2013)
Penalty Assertion

  1. An initial penalty is asserted on Form 8278 using PRN 603 when the examiner determines a penalty under Treas. Reg. 1.6038A-4(a).

20.1.9.8.4  (03-21-2013)
Penalty Computation

  1. Initial Penalty—Generally, if a reporting corporation fails to furnish the information described in Treas. Reg. 1.6038A-2 within the time and manner prescribed by Treas. Reg. 1.6038A-2(d) and (e), fails to maintain or cause another to maintain records as required by Treas. Reg. 1.6038A-3, or (in the case of records maintained outside the United States) fails to meet the non-U.S. record maintenance requirements, within the applicable time prescribed in Treas. Reg. 1.6038A-3(f), a penalty of $10,000 shall be assessed for each taxable year with respect to which such failure occurs. See Treas. Reg. 1.6038A-4(a)(1).

  2. Continuation Penalty—Generally, if any such failure continues for more than 90 days after the day on which the Service mails notice the failure to the reporting corporation, the reporting corporation shall pay an additional penalty of $10,000 with respect to each related party for which a failure occurs for each 30-day period during which the failure continues after the expiration of the 90-day period. Any uncompleted fraction of a 30-day period shall count as a 30-day period for this purpose. See Treas. Reg. 1.6038A-4(d)(1). These additional penalties are also asserted on Form 8278 using PRN 705.

    Note:

    Prior to January 2013, PRN 619 was used for this continuation penalty.

20.1.9.8.5  (03-21-2013)
Reasonable Cause

  1. No reasonable cause should be considered until the taxpayer has furnished and maintained the required records for all open years (not on extension).

  2. Generally, certain failures may be excused for reasonable cause, including not timely filing Form 5472, not maintaining or causing another to maintain records as required by Treas. Reg. 1.6038A-3, and not complying with the non-U.S. maintenance requirements described in Treas. Reg. 1.6038A-3(f). See Treas. Reg. 1.6038A-4(b)(1).

  3. Generally, if there is reasonable cause for a failure, the beginning of the 90-day period after mailing of a notice by the Service of a failure shall be treated as not earlier than the last day on which reasonable cause existed. See Treas. Reg. 1.6038A-4(b)(1).

20.1.9.9  (04-22-2011)
IRC 6038C(d) – Noncompliance Penalty for Certain Foreign-owned Corporations Engaged in U.S. Business

  1. IRC 6038C(d) requires that a foreign related party authorize the reporting corporation to act as its limited agent for summons purposes and requires that the reporting corporation maintain and produce records regarding transactions with the foreign related party.

20.1.9.9.1  (04-22-2011)
Reporting and Filing Requirements

  1. The requirement is the same as that of IRC 6038A(d). See IRM 20.1.9.5. Foreign corporations subject to IRC 6038C(d) must maintain any records that were in existence on or after March 20, 1990.

20.1.9.9.2  (04-22-2011)
Penalty Letters, Notice Letters and Notices

  1. Reserved

20.1.9.9.3  (04-22-2011)
Penalty Assertion

  1. A penalty is asserted when the examiner determines that a foreign related party, upon request, fails to authorize the reporting corporation as its agent for IRS summons purposes pursuant to the requirements set forth in Treas. Reg. 1.6038A-5.

  2. The noncompliance penalty follows deficiency procedures and is reflected in the notice of deficiency.

20.1.9.9.4  (04-22-2011)
Penalty Computation

  1. The noncompliance penalty adjustment permits the Service, in its sole discretion, to deny deductions and adjust cost of goods sold with respect to the related party transaction(s) based upon information available to the Service. See IRC 6038A(e)(3).

20.1.9.9.5  (04-22-2011)
Reasonable Cause

  1. There is no reasonable cause exception for this penalty.

20.1.9.10  (04-22-2011)
IRC 6039F(c) – Large Gifts From Foreign Persons

  1. IRC 6039F provides reporting requirements for U.S. persons who receive large gifts from foreign persons.

20.1.9.10.1  (03-21-2013)
Reporting and Filing Requirements

  1. U.S. persons who receive gifts from a foreign individual or foreign estate during the taxable year that in the aggregate exceed $100,000 must file Form 3520, Annual Return to Report Transactions With Foreign Trust and Receipt of Certain Foreign Gifts, and fill out Part IV of Form 3520. These gifts are reportable under IRC 6039F(a).

  2. The threshold for gifts received from a foreign corporation or a foreign partnership was statutorily $10,000, but the amount is adjusted each year for inflation. For example, for 2011, the threshold for a filing requirement was raised to $14,375. The instructions for Form 3520 for any year will have the applicable dollar threshold for the filing requirement for that year. Failure to report gifts above the applicable dollar threshold for the relevant year is subject to penalties under IRC 6039F. Gifts from foreign trusts are reportable as distributions from a foreign trust under IRC 6048(c) and failure to report such distributions on Part III of the Form 3520 gifts is subject to penalties under IRC 6677.

    Note:

    Form 3520 has four different parts that relate to different requirements for filing a Form 3520. The obligation to file a Form 3520 to report the receipt of a large gift from a foreign person by a U.S. person is reportable on Part IV of the Form.

  3. Form 3520 is required to be filed separately from the U.S. person’s income tax return with the Ogden Campus. The due date for filing is the same as the due date for filing a U.S. person’s income tax return, including extensions. In the case of a Form 3520 filed with respect to a U.S. decedent, Form 3520 is due on the date that Form 706, United States Estate (and Generation-Skipping) Tax Return, is due, including extensions, or would be due if the estate were required to file a return. A Form 3520 is filed once a year for all reportable gifts within the year with respect to each U.S. person. See Notice 97-34 and the Form 3520 instructions for more specific information.

  4. Filing Verification—Form 3520 is processed to Business Master File as MFT 68 under the TIN of the U.S. person who is responsible for filing the return. Because an individual can have a reporting requirement for more than one foreign trust and for foreign gifts, the filing is further identified with a plan number. The steps for filing verification are as follows:

    1. Begin research with a BMFOLI.

    2. BRTVU is also available and includes all lines on the return including the foreign trust information that the Form 3520 provides.

    3. If the U.S. person is an individual, the TIN will be the SSN + "V" (or "W" if an invalid SSN).

    4. If there is no record of this TIN, no returns have been filed.

  5. Secured Returns—When an examiner secures a delinquent Form 3520, determine if it provides all of the required information and is accurate. If the Form 3520 is incomplete or inaccurate, the examiner must inform the taxpayer that the return is not considered filed until it is complete and accurate. For a complete and accurate Form 3520, perform the following actions:

    1. Date stamp each Form 3520 with the date received.

    2. Write in red across the top of the return – "Process as Original."

    3. Complete Form 13133, Expedite Processing Cycle, and check the delinquent return box as well as the appropriate BMF or IMF box for "Do NOT Assess Failure to File Penalty."

    4. Attach completed Form 13133 to the delinquent return.

    5. The original delinquent Form 3520 (with Form 13133 attached) must be sent to:

      Internal Revenue Service
      1973 North Rulon White Blvd.
      Mail Stop 4091
      Ogden, UT 84404

20.1.9.10.2  (03-21-2013)
Penalty Letters, Notice Letters and Notices

  1. Computer Paragraph (CP) Notices—Once a penalty is identified by the campus or a penalty case is closed by the field and the Form 8278 is processed, a CP notice is generated and sent to the taxpayer as follows:

    1. IMF—A CP 15, Notice of Penalty Charge, for penalties assessed on MFT 55 with Penalty Reference Number (PRN) 668 is generated and sent to the taxpayer. A sample of a CP 15 notice (for a different penalty) is shown at Exhibit 20.1.9-15, Sample CP 15 Notice.

    2. BMF—A CP 215, Notice of Penalty Charge, for penalties assessed on MFT 13 with PRN 668 is generated and sent to the taxpayer. A sample of a CP 215 notice (for a different penalty) is shown at Exhibit 20.1.9-16, Sample CP 215 Notice.

20.1.9.10.3  (04-22-2011)
Penalty Assertion

  1. The penalty is asserted on Form 8278 using PRN 668 when the examiner determines that:

    1. A U.S. person received a reportable gift from a foreign person,

    2. Has failed to timely file Form 3520, and

    3. Has not shown that failure to file was due to reasonable cause.

  2. Penalty Tax Adjustment—IRC 6039F(c)(1)(A) states that the Secretary will determine the tax consequence of the receipt of such gift if the information is not filed timely. This adjustment is subject to deficiency procedures.

20.1.9.10.4  (03-21-2013)
Penalty Computation

  1. The penalty for failure to report a large gift from a foreign person on a timely, complete and accurate Form 3520 is 5 percent of the amount of such foreign gift for each month for which the failure continues after the due date of the reporting U.S. person’s income tax return (not to exceed 25% of such amount in the aggregate).

20.1.9.10.5  (03-21-2013)
Reasonable Cause

  1. Before reasonable cause is considered, the examiner must ensure that the taxpayer did not receive similar gifts in any other open year (not on extension).

  2. IRC 6039F(c)(2) provides that no penalty shall apply for failure to furnish the required information if the U.S. person shows that the failure is due to reasonable cause and not to willful neglect.

20.1.9.11  (03-21-2013)
IRC 6039G – Expatriation Reporting Requirements

  1. IRC 6039G (originally designated as IRC 6039F) was added by the Health Insurance Portability and Accountability Act in 1996, P.L. 104-191).

  2. The American Jobs Creation Act of 2004 (AJCA), P.L. 108-357, made significant amendments to IRC 6039G for individuals who expatriated after June 3, 2004 and before June 17, 2008. Individuals who abandoned their United States citizenship or lost their U.S. long-term resident status were required to file Form 8854, Initial and Annual Expatriation Information Statement, otherwise these individuals are still taxed as U.S. persons until they file the Form 8854.

  3. The Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act) made additional amendments to IRC 6039G to reflect the enactment of IRC 877A (see below) which applies to individuals who abandon their U.S. citizenship or lose their long-term resident status on or after June 17, 2008.

20.1.9.11.1  (03-21-2013)
Reporting and Filing Requirements

  1. Pre-AJCA—For individuals who expatriated prior to June 4, 2004, a Form 8854 was due on the date of expatriation (for U.S. citizens) or the due date of the individual’s U.S. income tax return (for long-term residents). There was no annual requirement to file a Form 8854 after the initial form was filed.

  2. Post-AJCA—For individuals who expatriated after June 3, 2004, and before June 17, 2008, there was no due date for the initial Form 8854. But their expatriation will not be recognized for tax purposes until a complete initial Form 8854 is filed with the IRS. If the expatriate was subject to the alternate expatriation tax regime (under IRC 877) on the date of expatriation, an annual Form 8854 is then required for each of 10 tax years after the date of expatriation.

  3. IRC 877A—This section generally provides that all property of a "covered expatriate" (defined below) is treated as sold on the day before the individual's expatriation date. Gain or loss from the deemed sale must be taken into account at that time (subject to an exclusion amount that is indexed for inflation annually.

    Note:

    Exclusions for calendar years 2010, 2011 and 2012 are $627,000, $636,000 and $651,000 respectively.

  4. The following information is required on the initial and annual statements by the individual who expatriates:

    1. Taxpayer’s TIN;

    2. Mailing address of such individual’s principal foreign residence;

    3. Foreign country in which the individual resides;

    4. Foreign country of which the individual is a citizen;

    5. Information detailing the income, assets, and liabilities of such individual;

    6. Number of days the individual was physically present in the U.S. during the taxable year; and

    7. Such other information the Secretary shall prescribe.

  5. Post-HEART Act U.S. citizens and long-term residents who expatriate on or after June 17, 2008 must file Form 8854 by the due date of the income tax return (including extensions) for the year that includes their expatriation date. Under certain circumstances, such expatriates must file Form 8854 for subsequent years. For more information, see section 8C of Notice 2009-85 and the instructions to Form 8854.

  6. Form W-8CE—"Covered expatriates" who had an interest in a deferred compensation plan, a specified tax-deferred account (which includes an IRA), or a non-grantor trust on the day before their date of expatriation must file a Form W-8CE with each payer of these interests. The purpose of the Form W-8CE is to notify each payer that the individual is a "covered expatriate" and is subject to special rules with regard to these interests. Form W-8CE is filed with each payer on the earlier of (a) the day before the first distribution on or after the expatriation date, or (b) 30 days after the expatriation date for each item of deferred compensation, specified tax deferred account or interest in a non-grantor trust.

  7. "Covered Expatriate" —An individual is a "covered expatriate" if the individual is either a former citizen or former long-term resident and:

    1. The individual's average annual net income tax for the five years ending before the date of expatriation or termination of residency is more than a specified amount that is adjust for inflation ($139,000 for 2008; $145,000 for 2009 and 2010, $147,000 for 2011),

    2. The individual's net worth is $2 million or more on the date of expatriation, or

    3. The individual fails to certify on Form 8854 that he or she has complied with all U.S. federal tax obligations for the five years preceding the date of the individual's expatriation.

  8. Former Long-Term Resident—A former long-term-resident is any individual who was a lawful permanent resident of the United States for all or any part of 8 of the last 15 years preceding the date of expatriation.

  9. Treatment of Deferred Compensation Plans, Specified Tax-Deferred Accounts and Non-Grantor Trusts—The "mark-to-market" rules (see IRC 475) do not apply to a covered expatriate’s interest in a deferred compensation plan, a specified tax-deferred account nor a non-grantor trust.

  10. Deferral of "Mark-to-Market" Tax—Covered expatriates may elect to defer the payment of all or part of the amount of the "mark-to-market" tax to which they are subject. This election is not available for tax due with respect to a covered expatriate's interest in a deferred compensation plan, a specified tax-deferred account, or a non-grantor trust in which the covered expatriate held an interest on the day before expatriation.

20.1.9.11.2  (03-21-2013)
Penalty Letters, Notice Letters and Notices

  1. Form 8854—Correspondex letter (C-Letter) 2401C, Failure to File Annual Form 8854 Notification Letter, can be systemically generated for such failure. A sample of the letter, containing approved notice language, can be found through the Correspondex Letters web page at http://serp.enterprise.irs.gov/databases/forms-ltrs-pubs.dr/crxltrs.dr/crx_letters.toc.htm.

  2. Computer Paragraph (CP) Notices—Once a penalty is identified by the campus or a penalty case is closed by the field and the Form 8278 is processed, an IMFCP 15, Notice of Penalty Charge, for penalties assessed on MFT 55 with Penalty Reference Number (PRN) 671 is generated and sent to the taxpayer. A sample of a CP 15 notice (for a different penalty) is shown at Exhibit 20.1.9-15, Sample CP 15 Notice.

20.1.9.11.3  (03-21-2013)
Penalty Assertion

  1. The penalty is asserted on Form 8278 using PRN 671 when the examiner determines that the required Form 8854 is not filed or the individual failed to include all required information on the statement or included incorrect information. The penalty is applied as follows:

    1. Pre-AJCA—For individuals who expatriated prior to June 4, 2004, if the individual has failed to file a complete, accurate and timely initial Form 8854, the penalty for failure to file the initial Form 8854 is asserted.

    2. Post-AJCA—For individuals who expatriate after June 3, 2004 but before June 17, 2008, the penalty applies for failure to file a required annual Form 8854.

      Note:

      Since there is no due date for the initial Form 8854, there is no penalty associated with such form.

    3. Post-HEART Act—For individuals who expatriate after June 16, 2008, if the individual has failed to file a complete, accurate and timely initial Form 8854, the penalty for failure to file the initial Form 8854 is asserted.

      Note:

      Certain expatriates may only be required to file an initial Form 8854 and have no continued obligation to file Form 8854 annually.

20.1.9.11.4  (03-21-2013)
Penalty Computation

  1. The penalty computation under IRC 6039G depends on the date an individual expatriates as follows:

    1. Pre-AJCA—For individuals who expatriated prior to June 4, 2004, if the individual failed to file a complete, accurate and timely initial Form 8854, the penalty is the greater of 5% of the tax required to be paid under IRC 877 or $1,000 for each taxable year that the 8854 was not filed.

    2. Post-AJCA—For individuals who expatriated after June 3, 2004, and before June 17, 2008, the penalty for failure to file an annual 8854 is $10,000 per required annual form.

    3. Post-HEART Act—For individuals who expatriate after June 16, 2008, the penalty for each failure to file a required Form 8854 is $10,000.

20.1.9.11.5  (03-21-2013)
Reasonable Cause

  1. No reasonable cause should be considered until the taxpayer has filed the required information for all open years (not on extension).

  2. The penalty, whether Pre-AJCA, Post-AJCA, or Post-HEART, will not be asserted if the failure to provide the required statement and information was due to reasonable cause and not to willful neglect.

20.1.9.12  (03-21-2013)
IRC 6652(f) – Foreign Persons Holding U.S. Real Property Investments

  1. IRC 6652(f) states that it provides a penalty for failure to meet reporting requirements under IRC 6039C.

20.1.9.12.1  (03-21-2013)
Reporting and Filing Requirements

  1. IRC 6039C states that, to the extent provided in the regulations, any foreign person holding a direct investment in U.S. real property interests for a calendar year to file a return. The requirement is met by providing information such as name and address, a description of all U.S. real property interests, etc.

    Caution:

    Until such time that regulations under IRC 6039C are issued, these provisions are not operative. Note that there are other reporting requirements (See IRC 897 and IRC 1445) under the Foreign Investment in Real Property Tax Act (FIRPTA) that must still be satisfied.

20.1.9.12.2  (04-22-2011)
Penalty Letters, Notice Letters and Notices

  1. Computer Paragraph (CP) Notices—Once a penalty is identified by the campus or a penalty case is closed by the field and the Form 8278 is processed, a CP notice is generated and sent to the taxpayer as follows:

    1. IMF—A CP 15, Notice of Penalty Charge, for penalties assessed on MFT 55 with Penalty Reference Number (PRN) 604 is generated and sent to the taxpayer. A sample of a CP 15 notice (for a different penalty) is shown at Exhibit 20.1.9-15, Sample CP 15 Notice.

    2. BMF—A CP 215, Notice of Penalty Charge, for penalties assessed on MFT 13 with PRN 604 is generated and sent to the taxpayer. A sample of a CP 215 notice (for a different penalty) is shown at Exhibit 20.1.9-16, Sample CP 215 Notice.

20.1.9.12.3  (03-21-2013)
Penalty Assertion

  1. The penalty is asserted on Form 8278 using PRN 604. It will apply when it has been established that the foreign person has failed to meet the above requirements.

    Caution:

    Until such time that regulations under IRC 6039C are issued, these provisions are not operative. Note that there are other reporting requirements (See IRC 897 and IRC 1445) under the Foreign Investment in Real Property Tax Act (FIRPTA) that must still be satisfied.

20.1.9.12.4  (04-22-2011)
Penalty Computation

  1. IRC 6652(f)(2) provides that the amount of penalty with respect to any failure shall be $25 for each day during which such failure continues.

  2. IRC 6652(f)(3) limits the amount of the penalty determined to the lesser of:

    1. $25,000, or

    2. 5 percent of the aggregate of the fair market value of the United States real property interests owned by such person at any time during such year.

20.1.9.12.5  (03-21-2013)
Reasonable Cause

  1. No reasonable cause should be considered until the taxpayer has filed the required information for all open years (not on extension).

  2. IRC 6652(f)(1) provides that no penalty shall apply if it is shown that such failure is due to reasonable cause and not to willful neglect.

20.1.9.13  (03-21-2013)
IRC 6677(a)—Foreign Trust Information Return—Form 3520

  1. IRC 6677 provides that U.S. persons, who have an IRC 6048 filing obligation because they engaged in certain transactions with a foreign trust or are treated as owning a foreign trust, who fail to file a complete and accurate Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, or Form 3520-A, Annual Return of Foreign Trust With a U.S. Owner, may be assessed penalties for such failures unless it is shown that such failure was due to reasonable cause and not to willful neglect. Notice 97-34 provides additional guidance on the filing requirements and penalties. See also IRM 20.1.9.14 for Form 3520-A.

20.1.9.13.1  (03-21-2013)
Reporting and Filing Requirements

  1. Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, is required to be filed by a U.S. person to:

    1. Report the creation of a foreign trust by a U.S. person during the tax year,

    2. Report certain transfers of money or other property to a foreign trust by a U.S. person,

    3. Identify U.S. persons who are treated as owners of a foreign trust during all or part of the tax years,

    4. Provide information about distributions received by a U.S. person from a foreign trust,

    5. Report the receipt of a loan from a foreign trust during the tax year,

    6. Report the receipt of uncompensated use of trust property from a foreign trust (applicable only after March 18, 2010), or

    7. Provide information about certain gifts or bequests received from foreign persons (penalties related to the failure to report the receipt of such gifts or bequests from foreign persons are imposed under IRC 6039F).

  2. Form 3520must be timely, complete and accurate to be considered filed. IRC 6048 authorizes the Secretary to prescribe the information required to be reported. Notice 97-34 and the instructions for Form 3520 describe the information required to be reported.

  3. U.S. Owners: Creation or Transfer—IRC 6048(a) generally provides that any U.S. person who creates a foreign trust and directly or indirectly transfers money or other property to a foreign trust (including a transfer by reason of death) must report such transfer. This reporting is done on Part I of Form 3520. Generally, a U.S. person who transfers property to a foreign trust is considered the owner of that portion of the foreign trust unless there is no possibility now or in the future of the trust having a U.S. beneficiary. IRC 679 and the regulations thereunder more specifically describe individuals who are considered owners of foreign trusts and describe exceptions to the general rule. Other things to consider are as follows:

    1. U.S. persons who make transfers to Canadian Registered Retirement Savings Plans (RRSPs) or Registered Retirement Income Funds (RRIFs) are not required to report such transfers on Form 3520. See Notice 2003-75 and the instructions to Form 8891, U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans.

    2. Generally, foreign trusts described in IRC 402(b), IRC 404(a)(4), IRC 404A, or IRC 501(c)(3) are not reportable under these requirements. See IRC 6048(a)(3)(B)(ii) and Notice 97-34.

    3. Transfers involving fair market value sales are also not reportable. See IRC 6048(a)(3)(B)(i), Notice 97-34, and IRC 679 and the regulations thereunder for additional information.

  4. IRC 6048(b) provides that if at any time during the taxable year a U.S. person is treated as the owner of any portion of a foreign trust under the grantor trust rules (IRC 671 through IRC 679), such person must submit certain information and must ensure that the trust files certain information. The U.S. person must report ownership of the trust for the current tax year on Part II of Form 3520 and, if available, must attach a copy of the owner's statement (from Form 3520-A) to Form 3520. Even if the U.S. owner is not required to complete and file the other parts of Form 3520 in a particular year, the U.S. owner must nevertheless complete and file Part II of Form 3520. In addition, the U.S. owner must ensure that the foreign trust files Form 3520-A annually. If the foreign trust fails to file Form 3520-A, the U.S. owner must complete and attach a substitute Form 3520-A to his or her Form 3520. See IRM 20.1.9.14.

  5. Distributions: U.S. Beneficiaries—IRC 6048(c) generally requires a U.S. person who receives a distribution or is treated as receiving a distribution, directly or indirectly, from a foreign trust, to report on Form 3520 the name of the trust, the aggregate amount of distributions received from the trust during the taxable year and such other information as the Secretary may prescribe. Refer to Notice 97-34 and the instructions to Form 3520 for more information. Some examples of reportable and nonreportable distributions are as follows:

    Description Reportable
    Distributions to the grantor or owner of the foreign trust. Yes
    Distributions from non-grantor foreign trusts must be reported. Yes
    Non-arm's length loans from a foreign trust or the uncompensated use of trust property. Yes
    Indirect distributions. For example, distributions by use of a credit card, where the charges on that credit card are paid or otherwise satisfied by a foreign trust or guaranteed or secured by the assets of a foreign trust for the year in which the charge occurs. Yes
    Distributions reported as taxable compensation on the income tax return of the recipient. No
    Distributions from Canadian Registered Retirement Savings Plans (RRSPs) or Registered Retirement Income Funds (RRIFs). See Notice 2003-75 and the instructions to Form 8891. No

  6. Form 3520 is required to be filed separately from the U.S. person’s income tax return and must not be attached to the related income tax return. In addition:

    1. Form 3520 is filed once a year with respect to each U.S. person and each foreign trust. A separate Form 3520 is required for each foreign trust.

    2. Form 3520, filed by a U.S. owner, is required to have a copy of the owner’s statement from Form 3520-A attached to the Form 3520.

    3. Form 3520 is required to be filed by the due date of the income tax return of a U.S. person, including extensions.

    4. A separate Form 3520 must be filed by each U.S. person. However, married individuals who file married filing joint may file one Form 3520.

  7. Filing Verification—Form 3520 is on the Business Master File as MFT 68 under the TIN of the U.S. person who is responsible for filing the return. Because an individual can have a reporting requirement for more than one foreign trust, the filing is further identified with a plan number.

    1. Begin research with a BMFOLI. BRTVU is also available and includes all lines on the return including the foreign trust information that the Form 3520 provides.

    2. If the U.S. person is an individual, the TIN will be the SSN + "V" (or "W" if an invalid SSN).

    3. If there is "no record" of this TIN, then no returns have been filed.

  8. Secured returns—When an examiner secures a delinquent Form 3520, determine whether it provides all of the required information and is accurate. If the Form 3520 is incomplete or inaccurate, the examiner must inform the taxpayer that the return is not considered filed until it is complete and accurate. For a complete and accurate Form 3520, perform the following actions:

    1. Date stamp each Form 3520 with the date received.

    2. Write in red across the top of the return – "Process as Original."

    3. Complete Form 13133, Expedite Processing Cycle, and check the delinquent return box as well as the appropriate BMF or IMF box for "Do NOT Assess Failure to File Penalty."

    4. Attach completed Form 13133 to the delinquent return.

    5. The original delinquent Form 3520 (with Form 13133 attached) must be sent to:

      Internal Revenue Service
      1973 North Rulon White Blvd.
      Mail Stop 4091
      Ogden, UT 84404

20.1.9.13.2  (04-22-2011)
Penalty Letters, Notice Letters and Notices

  1. Letter 3804—This is an opening notice letter required to be mailed to a taxpayer under the provisions of IRC 6677(a). This letter is five pages.

  2. Letter 3943—This is the closing acceptance letter to be utilized after a taxpayer responds and the examiner determines that no penalties will be asserted.

  3. Letter 3944—This is the closing no response letter to be utilized when a taxpayer either fails to respond to notice letter (Letter 3804) or when a taxpayer does not provide a statement of reasonable cause for failing to file such returns.

  4. Letter 3946—This is the closing reasonable cause rejected letter to be utilized after a taxpayer responds and the examiner determines that penalties will be asserted.

  5. Computer Paragraph (CP) Notices—Once a penalty is identified by the campus or a penalty case is closed by the field and the Form 8278 is processed, a CP notice is generated and sent to the taxpayer as follows:

    1. IMF—A CP 15, Notice of Penalty Charge, for penalties assessed on MFT 55 with Penalty Reference Number (PRN) 659 is generated and sent to the taxpayer. A sample of a CP 15 notice (for a different penalty) is shown at Exhibit 20.1.9-15, Sample CP 15 Notice.

    2. BMF—A CP 215, Notice of Penalty Charge, for penalties assessed on MFT 13 with PRN 659 is generated and sent to the taxpayer. A sample of a CP 215 notice (for a different penalty) is shown at Exhibit 20.1.9-16, Sample CP 215 Notice.

20.1.9.13.3  (04-22-2011)
Penalty Assertion

  1. An initial penalty is asserted by field examiners on Form 8278 using PRN 659 when the examiner determines that Form 3520 returns were required to be filed and were not timely filed or were not complete and accurate, and that the failure was not due to reasonable cause.

  2. Penalties may be asserted by the campus for a late-filed Form 3520. Refer to IRM 21.8.2.20, Information Reporting Under IRC 6048. For additional information:

    1. For IMF, refer to IRM 21.8.1.24, Form 3520 and Form 3520-A.

    2. For BMF, refer to IRM 21.8.2.20, Information Reporting Under IRC 6048.

20.1.9.13.4  (03-21-2013)
Penalty Computation

  1. Gross Reportable Amount—The gross reportable amount is defined in IRC 6677(c) as:

    1. Contributions to the foreign trust: The gross value of the property involved in the event (determined as of the date of the event) in the case of a failure relating to IRC 6048(a).

    2. Distributions from the foreign trust: The gross amount of the distributions in the case of a failure relating to IRC 6048(c).

    3. Inaccurate reporting: The penalty applies only to the extent that the transaction is not reported or is reported inaccurately. Thus, if a U.S. person transfers property worth $1,000,000 to a foreign trust, but reports only $400,000 of that amount, penalties may be imposed only on the unreported $600,000. See Notice 97-34.

    4. Also, if the return is not filed and the Service assesses a penalty based on available information, additional assessments can be made if additional information is received.

  2. Initial Penalty—Prior to 2010 under IRC 6677, the initial penalty for failure to timely file a complete and accurate Form 3520 was calculated based on the respective percentages below of the gross reportable amount. There was no minimum penalty. Beginning with 2010, a minimum threshold was added and the initial penalty is equal to the greater of $10,000 or the following:

    1. 35 percent of the gross reportable amount of any property transferred to a foreign trust for failure by a U.S. transferor to report the creation of, or transfer to, a foreign trust; or

    2. 35 percent of the gross reportable amount of the distributions received from a foreign trust for failure by a U.S. person to report receipt of the distribution; or

    3. 5 percent of the gross reportable amount of the portion of the trust's assets treated as owned by a U.S. person for failure by the U.S. person to report the U.S. owner information (this penalty is imposed under IRC 6677(b) and is discussed further in IRM 20.1.9.14).

    Note:

    In the case of a U.S. person treated as the owner of a foreign trust, penalties are assessed in the case of a failure to report such ownership pursuant to IRC 6048(b) on a Form 3520-A rather than on the Form 3520.

  3. Continuation Penalty—If any failure continues more than 90 days after the day on which the notice of such failure was mailed to the taxpayer (90-day period), additional penalties will apply. The continuation penalty is $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of the 90-day period. These additional penalties are also asserted on Form 8278 using PRN 702.

    Note:

    Prior to January 2013, PRN 619 was used for this continuation penalty.

  4. The maximum penalty (both initial penalty and continuation penalty) for each failure to file Form 3520 is the gross reportable amount each year.

  5. Example When Gross Reportable Amount CAN be Determined—When the Service has evidence that the taxpayer formed a foreign trust and has specifics on the gross reportable amount, a notice letter can be issued, and if the taxpayer does not respond, the continuation penalty can be assessed. For example, IRS has information that a taxpayer created a foreign trust and transferred $1,000,000 (cash or property) to the foreign trust in the same year and has not filed Form 3520. The taxpayer was issued a notice letter and had not filed the return after 35 days following the expiration of the 90-day period:

    1. Initial assessment after 125 days from the date of the notice letter:

      1. PRN 659 for $350,000 (35% of $1,000,000)
      2. PRN 702 for $20,000
      3. Total assessment: $370,000.

    2. If noncompliance continues, additional assessments can be made every 30 days until a complete and accurate Form 3520 is received by the Service, or the penalty equals the gross reportable amount ($1,000,000 for this example):

      1. PRN 659 for $0.00 (zero).
      2. PRN 702 for $10,000 for each 30-day period.

    3. If additional information is received that changes the Service's knowledge of the gross reportable amount, additional assessments can be made or the original assessments can be adjusted.

  6. Example When Gross Reportable Amount CANNOT be Determined—When the Service has evidence that the taxpayer formed a foreign trust but does not have specifics on the gross reportable amount, a notice letter can be issued, and if the taxpayer does not respond, the initial penalty can be assessed. For example, IRS has information that a taxpayer created a foreign trust and has not filed Form 3520. The taxpayer was issued a notice letter and did not respond:

    1. Initial penalty assessment after no response to the notice letter will be made on Form 8278 with PRN 659 for $10,000 (the "greater of" threshold amount).

    2. If noncompliance continues, but the gross reportable amount continues to be undetermined, additional assessments (continuation penalties) can be made.

    3. If additional information is received that changes the Service's knowledge of the gross reportable amount, additional assessments can be made or the original assessments can be adjusted.

      Note:

      At such time when the gross reportable amount with respect to any failure can be determined, the aggregate penalties imposed under this subsection, with respect to such failure, shall be reduced so not to exceed the gross reportable amount.

  7. Non-Compliance Tax Adjustment—IRC 6048(c)(2) provides that any distribution from a foreign trust, whether from income or corpus, to a U.S. beneficiary will be treated as an accumulation distribution includible in the gross income of that U.S. beneficiary if adequate records are not provided to the Secretary to determine the proper treatment of the distribution. The interest charge under IRC 668 shall apply to the distribution treated as an accumulation distribution. In determining the interest amount under IRC 668, the applicable number of years will be equal to one half of the number of years that the trust has been in existence. This adjustment is subject to deficiency procedures.

20.1.9.13.5  (03-21-2013)
Reasonable Cause

  1. No reasonable cause should be considered until the taxpayer has filed the complete and accurate information required for all open years (not on extension).

  2. IRC 6677 provides specific exclusions with respect to the initial penalty for reasonable cause and Notice 97-34 provides additional information:

    1. A taxpayer will not have reasonable cause merely because a foreign country would impose a civil or criminal penalty on the taxpayer (or other person) for disclosing the required information. See IRC 6677(d).

    2. Refusal on the part of a foreign trustee to provide information for any other reason, including difficulty in producing the required information or provisions in the trust instrument that prevent the disclosure of required information, will not be considered reasonable cause.

  3. The fact that the trustee did not provide the taxpayer with a copy of the owner’s statement of Form 3520-A is not reasonable cause. The taxpayer owner is also the person responsible for ensuring that the Form 3520-A is filed and that he or she receives a copy of the owner’s statement.

20.1.9.14  (04-22-2011)
IRC 6677(a) and (b)—Foreign Trusts With U.S. Owners—Form 3520-A

  1. The penalties for failure to file Form 3520-A are similar to the penalties for failure to file Form 3520 except that IRC 6677(b) changes the amount of the initial penalty to the greater of $10,000 or 5 percent of the gross reportable amount. The gross reportable amount is defined in IRC 6677(c)(2) as the gross value of the portion of the trust's assets at the close of the year treated as owned by the U.S. person.

  2. If a foreign trust fails to file Form 3520-A, the penalties are imposed on the U.S. person who is treated as the owner of the foreign trust. The grantor trust rules are in IRC 671 through 679. The U.S. owner may be able to avoid penalties by attaching a substitute Form 3520-A to a timely filed Form 3520.

20.1.9.14.1  (03-21-2013)
Reporting and Filing Requirements

  1. Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner, is due by the 15th day of the third month after the end of the trust’s tax year. Each U.S. person treated as an owner of a foreign trust under IRC 671 through IRC 679 is responsible for ensuring that the foreign trust files an annual return setting forth a full and complete accounting of all trust activities, trust operations, and other relevant information as the Secretary prescribes. See IRC 6048(b)(1). In addition, the U.S. owner is responsible for ensuring that the trust annually furnishes such information as the Secretary prescribes to U.S. owners and U.S. beneficiaries of the trust. See IRC 6048(b)(1)(B), Treas. Reg. 404.6048-1, and Notice 97-34.

  2. IRC 6048 authorizes the Secretary to prescribe the information required to be reported. The instructions to Form 3520-A include all information required to be provided.

  3. U.S. persons who are treated as owners of Canadian RRSPs or RRIFs do not need to ensure that the RRSP or RRIF files a Form 3520-A and do not need to file a substitute Form 3520-A.

  4. Form 3520-A includes an owner’s statement (Foreign Grantor Trust Owner Statement) for each U.S. person considered to be an owner of a portion of the foreign trust. The owner’s statement is required to be provided to each U.S. owner of the foreign trust.

  5. Form 3520-A includes a beneficiary’s statement (Foreign Grantor Trust Beneficiary Statement) for any distributions made to U.S. persons. The beneficiary’s statement is required to be provided to each U.S. beneficiary.

  6. U.S. Agent—A copy of the authorization of agent must be attached to the Form 3520-A and must be substantially identical to the format shown in the instructions. The U.S. agent has a binding contract with the foreign trust to act as the foreign trust’s limited agent for purposes of applying IRC 7602, IRC 7603, and IRC 7604 with respect to a request by the IRS to examine records, produce testimony, or respond to a summons by the IRS for such records or testimony.

  7. Trusts without U.S. agents must have the following attached to the Form 3520-A to be considered complete:

    1. A summary of the terms of the trust including a summary of any oral or written agreements or understandings that the U.S. owner(s) has with the trustee whether or not legally enforceable.

    2. Copy of any of the following that have not been previously provided:
      1. All trust documents and instruments,
      2. Any amendments to the trust agreement,
      3. All letters of wishes prepared by the settlor,
      4. Memorandum of wishes by trustee summarizing the settlor’s wishes, and
      5. Any other similar documents.

  8. Filing Verification—Form 3520-A is processed to Master File with MFT 42 as a BMF account under the TIN of the foreign trust. There is a separate extension for this return. It will post as a TC 460 with a date.

    IF for the foreign trust... AND... THEN...
    you have a TIN the BMFOLI shows a MFT 42, request BMFOLT and BRTVU (the BRTVU has all lines of the return transcribed).
    you have a TIN and the BMFOLI shows a MFT 42, there is no MFT 42 posting, the return has not been filed.
    you do not have a TIN   research NAME for a TIN. If no TIN located include research in the case file

  9. Secured Returns—When an examiner secures a delinquent Form 3520-A, determine if it provides all of the required information and is accurate. If the Form 3520-A is incomplete or inaccurate, the examiner must inform the taxpayer that the return is not considered filed until it is complete and accurate. For a complete and accurate Form 3520-A, perform the following actions:

    1. Date stamp each Form 3520-A with the date received.

    2. Write in red across the top of the return – "Process as Original."

    3. Complete Form 13133, Expedite Processing Cycle, and check the delinquent return box as well as the appropriate BMF or IMF box for "Do NOT Assess Failure to File Penalty."

    4. Attached completed Form 13133 to the delinquent return.

    5. The original delinquent Form 3520-A (with Form 13133 attached) must be sent to:

      Internal Revenue Service
      1973 North Rulon White Blvd.
      Mail Stop 4091
      Ogden, UT 84404

20.1.9.14.2  (04-22-2011)
Penalty Letters, Notice Letters and Notices

  1. Letter 3804—This is an opening notice letter required to be mailed to a taxpayer under the provisions of IRC 6677(a). This letter is five pages.

  2. Letter 3943—This is the closing acceptance letter to be utilized after a taxpayer responds and the examiner determines that no penalties will be asserted.

  3. Letter 3944—This is the closing no response letter to be utilized when a taxpayer either fails to respond to Letter 3804 or when a taxpayer does not provide a statement of reasonable cause for failing to file such returns.

  4. Letter 3946—This is the closing reasonable cause rejected letter to be utilized after a taxpayer responds and the examiner determines that penalties will be asserted.

  5. Computer Paragraph (CP) Notices—Once a penalty is identified by the campus or a penalty case is closed by the field and the Form 8278 is processed, a CP notice is generated and sent to the taxpayer as follows:

    1. IMF—A CP 15, Notice of Penalty Charge, for penalties assessed on MFT 55 with Penalty Reference Number (PRN) 660 is generated and sent to the taxpayer. A sample of a CP 15 notice (for a different penalty) is shown at Exhibit 20.1.9-15, Sample CP 15 Notice.

    2. BMF—A CP 215, Notice of Penalty Charge, for penalties assessed on MFT 13 with PRN 660 is generated and sent to the taxpayer. A sample of a CP 215 notice (for a different penalty) is shown at Exhibit 20.1.9-16, Sample CP 215 Notice.

20.1.9.14.3  (03-21-2013)
Penalty Assertion

  1. An initial penalty is asserted by field examiners on Form 8278 using PRN 660 when the examiner determines that Form 3520-A returns were required to be filed and were not timely filed or were not complete and accurate, and that the failure was not due to reasonable cause.

  2. Form 3520-A is considered incomplete if:

    1. The U.S. owner or beneficiary is not timely provided with the required statements.

    2. A foreign trust without a U.S. agent does not provide all the required attachments, e.g., summary of the terms of the trust, copies of trust documents or amendments to trust documents, and other required information (See IRM 20.1.9.14.1(7)).

    3. The U.S. agent does not provide information with respect to the trust after a request in writing as required by the terms of the U.S. agent agreement. Reasonable cause does not apply to the penalty in situations relating to a failure to provide information when requested.

    4. Form 3520-A does not contain substantially all of the required information on the return, e.g., amount of contributions and distributions, amount deemed as owned by each U.S. person, and balance sheet and income statement information.

  3. Penalties may be asserted by the campus for a late-filed Form 3520-A. For more information:

    1. For IMF, refer to IRM 21.8.1.24, Form 3520 and Form 3520-A.

    2. For BMF, refer to IRM 21.8.2.20, Information Reporting Under IRC § 6048.

20.1.9.14.4  (03-21-2013)
Penalty Computation

  1. Initial Penalty—Prior to 2010, the initial penalty for failure to timely file a complete and accurate Form 3520-A was 5 percent of the gross reportable amount. There was no minimum penalty. Beginning with 2010, a minimum threshold was added and the initial penalty is the greater of $10,000 or 5 percent of the gross reportable amount at the close of the year treated as owned by the U.S. person. See IRC 6677(b) for the penalty and IRC 6677(c) for the meaning of "gross reportable amount." In addition:

    1. The initial penalty is computed for failure to provide information or inaccurate reporting. The penalty applies only to the extent that the transaction is not reported or is reported inaccurately. Thus, if a U.S. person reports the value of the account as worth $400,000, but the correct value is $1,000,000, penalties may be imposed on the unreported $600,000. See Notice 97-34.

    2. If the return is not filed and the Service assesses a penalty based on available information, adjustments or additional assessments can be made if additional information is received.

  2. Continuation Penalty—If any failure continues more than 90 days after the day on which the notice of such failure was mailed to the taxpayer (90-day period), additional penalties will apply. The continuation penalty is $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of the 90-day period. These additional penalties are also asserted on Form 8278 using PRN 703.

    Note:

    Prior to January 2013, PRN 619 was used for this continuation penalty.

  3. The maximum penalty (both initial penalty and continuation penalty) for failure to file Form 3520-A is the gross value of the portion of the trust owned by the U.S. person.

  4. When the Service has evidence that the taxpayer formed a foreign trust but does not have specifics on the gross reportable amount, a notice letter can be issued and if the taxpayer does not respond within 90 days after the day on which the notice was mailed, the continuation penalty can be assessed.

    Example:

    IRS has information that a taxpayer transferred $100,000 to a foreign trust described in IRC 679 in 2006. Therefore, the taxpayer has a requirement to ensure that the foreign trust files Form 3520-A for 2006 and for each year thereafter. Unless the taxpayer provides evidence to the contrary or causes the foreign trust to file the required Form 3520-A (or files a substitute Form 3520-A on behalf of the foreign trust), the gross value of the assets owned by the U.S. person is considered to be not less than the $100,000 transferred. The IRS issued a notice letter to the taxpayer for 2006 through 2011 and the required returns have not been filed. The taxpayer was issued a notice letter and had not filed the return after 35 days following the expiration of the 90-day period. The penalties are computed as follows:

    1. Initial assessment after 125 days from the date of the notice letter for each year – 2006, 2007, 2008, 2009, 2010, and 2011:

      1. PRN 660 for $10,000 (greater of $10,000 or 5% of $100,000 gross reportable amount)
      2. PRN 703 for $20,000
      3. Total assessment: $30,000 for each of the 6 years or $180,000.

    2. If noncompliance continues, additional assessments in 3-month increments can be made until the assessment amount for each year equals the gross reportable amount for each year – 2006, 2007, 2008, 2009, 2010, and 2011 – or until the required returns are filed or the amount of the total assessment for each year equals $100,000:

      1. PRN 660 for $0.00 (zero)
      2. PRN 703 for $30,000 for each 3-month increment of each year

    3. If additional information is received that changes the gross value owned by the U.S. person, additional assessments can be made or the original assessments can be adjusted.

20.1.9.14.5  (03-21-2013)
Reasonable Cause

  1. No reasonable cause should be considered until the taxpayer has filed the complete and accurate information required for all open years (not on extension).

  2. IRC 6677(d) provides specific exceptions with respect to the initial penalty for reasonable cause and Notice 97-34 provides additional information. In addition:

    1. The U.S. owner is responsible for ensuring that Form 3520-A is filed timely and includes all required information. The failure of the trustee or agent to timely file complete and accurate returns or provide information when requested is not reasonable cause for this penalty.

    2. A taxpayer will not have reasonable cause merely because a foreign country would impose a civil or criminal penalty on the taxpayer (or other person) for disclosing the required information. See IRC 6677(d).

    3. Refusal on the part of a foreign trustee to provide information for any other reason, including difficulty in producing the required information or provisions in the trust instrument that prevent the disclosure of required information, will not be considered reasonable cause.

20.1.9.15  (04-22-2011)
IRC 6679 – Return of U.S. Persons With Respect to Certain Foreign Corporations and Partnerships

  1. IRC 6679 provides a penalty for failure to furnish information and timely file a return required under IRC 6046 or IRC 6046A.


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