June 15, 2022
IRS retires LB&I compliance campaign for Form 3520/3520-A and recalibrates position to assert only one penalty for failure to timely report foreign trust ownership
On its website, the IRS has announced that it has retired its Form 3520/3520A compliance campaign. In welcome relief for taxpayers, the IRS also indicates in updated IRM procedures that it will assert only one penalty — rather than the two that may be assessed under IRC Section 6677(b) — against US citizens and resident individuals who own foreign grantor trusts and fail to timely and accurately report their ownership, as required by IRC Section 6048(b), on both the Form 3520-A, Annual Information Return of Foreign Trust with U.S. Owner, and Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, Part II.
US citizens and resident individuals who are settlors/grantors or beneficiaries of foreign trusts may be required to file Form 3520-A and/or Form 3520 to report (1) ownership of the trust, (2) transfers of property to the trust, or (3) distributions from the trust. Two separate penalties equal to 5% of the trust's value (with a minimum penalty of $10,000) may apply for failure to report foreign trust ownership information on Form 3520-A and Form 3520, Part II. Separate penalties of up to 35% of a contribution to a foreign trust or 35% of a distribution from that trust (both with a minimum penalty of $10,000) may apply for failure to report the trust contribution or distribution on Form 3520.
LB&I compliance campaign
Since May 21, 2018, when the IRS announced a Large Business and International (LB&I) compliance campaign focusing on noncompliance with the filing of Form 3520-A and Form 3520, IRS scrutiny of the forms has been significant. While the official campaign has been retired, the IRS will continue asserting penalties for late, incomplete or inaccurate Forms 3520-A and Forms 3520 as provided in its penalty assessment procedures.
Updated IRM procedures
The IRM instructs IRS employees on when to assess penalties related to the Form 3520-A and Form 3520, as well as when penalties should not be assessed, indirectly giving taxpayers some relief. Notably, IRM Section 188.8.131.52.4 provides that the IRS will pursue only one penalty, rather than two penalties as authorized under IRC Section 6677(b), for a US citizen or resident individual's failure to timely and accurately report ownership of a foreign grantor trust on the Form 3520-A and Form 3520. Specifically, IRM Section 184.108.40.206.4 explains that the IRS will pursue penalties for failure to report ownership of a foreign grantor trust on the Form 3520-A but will not pursue penalties for failure to report such ownership on the Form 3520.
The IRS's retirement of its official Form 3520-A/3520 LB&I compliance campaign should not be interpreted as the end of the agency's enforcement of these filings. Forms 3520 and 3520-A are filed at a separate IRS location from a taxpayer's return, so it is relatively simple for the IRS to assert penalties on late, incomplete or inaccurate forms. Taxpayers should therefore remain vigilant in ensuring that they timely comply with these filing requirements to avoid the imposition of significant penalties.
The IRS's approach in pursuing only one of two possible penalties for a US citizen or resident individual's failure to timely report ownership of a foreign grantor trust is a welcome development and reduces double penalty exposure.