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Changes Needed for Foreign Trust Reporting, Florida Bar Argues

FEB. 13, 2023

Changes Needed for Foreign Trust Reporting, Florida Bar Argues

DATED FEB. 13, 2023

February 13, 2023

Douglas O'Donnell
Acting Commissioner
Internal Revenue Service
1111 Constitution Avenue NW
Washington, DC 20224

RE: Response to request for public comments on Forms 3520 and 3520-A OMB Number: 1545-0159

Dear Acting Commissioner O'Donnell:

I am pleased to submit The Florida Bar Tax Section's comments in response to the Internal Revenue Service's request concerning Forms 3520 and 3520-A (the “Relevant Forms”). Specifically, we are commenting on ways to enhance the quality, utility, and clarity of the information to be collected.

Principal authors for the comments were Christopher Callahan, Dan Price, Shawn Wolf, Abraham Smith, Adam Smith, Rahul Ranadive, Matthew Slootsky, Alfredo Tamayo, and Joseph Schimmel. These comments solely reflect the views of The Florida Bar Tax Section and not those of The Florida Bar.

Although the members of The Florida Bar Tax Section and others who participated in preparing these comments may have clients who would be affected by the recommendations set forth herein, no such member has been engaged by a client to make a government submission with respect to, or otherwise to influence the development or outcome of, the specific subject matter of these comments.

Contact Person:

Christopher Callahan
Fox Rothschild LLP
One Biscayne Tower
2 South Biscayne Bld.
Suite 2750
Miami, FL 33131
Telephone: (305) 442-6553
Fax: (305) 442-6541

As always, we will be pleased to provide additional commentary as requested. If you have any questions regarding our comments, please do not hesitate to contact us.


Mark R. Brown, Chair of The Florida Bar Tax Section
The Florida Bar
Tallahassee, FL

Andres Garcia, Internal Revenue Service
Peter Blessing, Associate Chief Counsel (International), Internal Revenue Service
Daniel McCall, Deputy Associate Chief Counsel International (Technical), Internal Revenue Service
Richard Owens, Branch Chief, Associate Chief Counsel International (Branch 1), Internal Revenue Service
Tax Analysts

These Comments are submitted in response to the Notice and Request for Comments published by the Internal Revenue Service in the Federal Register on December 16, 2022, relating to IRS Forms 3520 and 3520-A.1 We have decided to focus our comments on the IRS's request for comments on ways to enhance the quality, utility, and clarity of the information to be collected. In particular, we recommend that the IRS (1) create a separate form that is narrowly tailored to the reporting of the receipt of foreign gifts and inheritances, (2) improve its form instructions and guidance to better alert and instruct tax practitioners and taxpayers on the reporting requirements for foreign gifts, foreign inheritances, and foreign pensions, and (3) improve the penalty assessment and abatement processes relating to the relevant forms.

Move Part IV of Form 3520 to a Separate Form

The current Form 3520 has dual uses — to report transactions with foreign trusts and the receipt of certain foreign gifts. Parts I through III (nearly 5 of the 6 pages) of the current Form 3520 relate only to transactions with foreign trusts. Those parts of the form are more complex and generally irrelevant when the filer is a U.S. person who merely seeks to report a large foreign gift or inheritance. In contrast, Part IV of the current Form 3520, which is less than one page, simply asks the filer to identify the donor and provide the date, description, and fair market value of the gift or inheritance. The dual nature of the form and complexity of Parts I through IV can cause confusion and inefficiencies. Accordingly, we recommend that the IRS create a separate form for reporting large foreign gifts and inheritances.

Improve the Clarity of the Form 3520 Filing Threshold on Instructions

Moreover, we recommend that the IRS enhance its efforts to educate and instruct taxpayers and tax professionals on the reporting requirements for large foreign gifts and inheritances. For example, the current Form 1040 itself does not mention foreign gifts. The only mention of the reporting requirement for foreign gifts and inheritances is buried on page 87 of the 2022 Form 1040 instructions for Schedule 1, Line 8z. That portion of the Form 1040 instructions contains a single, short bullet point that mentions foreign gift and inheritance reporting and Form 3520. However, the instructions actually make a misleading reference to the reporting threshold.2 In particular, the current Form 1040 instructions state “[I]f you received a gift or bequest from a foreign person (including amounts from foreign corporations and foreign partnerships that you treated as gifts) totaling more than $17,339, you may have to report information about it on Form 3520, Part IV.” In fact, under IRS Notice 97-34, a U.S. person need only report foreign gifts or inheritances from an alien individual if the value of the aggregate foreign gifts or inheritances received during any taxable year exceeds $100,000. Furthermore, the Form 3520 instructions do not provide a reporting threshold and instead instruct the taxpayer to find such threshold in Revenue Procedure 2021-45. Providing more clarity in the instructions would reduce the time it takes for a taxpayer to comply with the law and improves the likelihood that the taxpayer will be aware of the filing threshold amount. We recommend the instructions to both Forms 1040 and 3520 provide the correct reporting threshold as well as reference Notice 97-34.

For these reasons, we recommend that the IRS create a separate form with instructions for reporting large foreign gifts and inheritances and issue additional guidance to alert and educate the taxpayers and tax practitioners on the foreign gift reporting requirements. The Form 1040 instructions should more clearly disclose the filing requirement and include the correct reporting threshold for foreign gifts and inheritances, with appropriate cross-references.

Add a Checkbox to Form 1040 Relating to Foreign Gifts and Inheritances

We also recommend adding a checkbox to Form 1040 to ask whether the taxpayer received any gifts and inheritances from sources outside of the U.S. during the taxable year. If the answer is yes, the Form 1040 should direct the taxpayer to the appropriate form (currently, Form 3520) and form instructions. For example, Schedule B, Part III of the current Form 1040 contains a question regarding foreign bank accounts and directs taxpayers to the FinCEN Form 114. This addition to the Form 1040 will unambiguously alert the preparer and taxpayer to the foreign gifts and inheritances reporting requirement and enhance voluntary compliance.

Clarify the Current Penalty Assessment Environment

Further, we recommend that the IRS make clear to the public and tax professionals that the IRS is currently assessing maximum penalties for late and amended Forms 3520 relating to reporting foreign gifts and inheritances. The IRS's lack of communication regarding this practice of assessing systemic penalties at maximum rates all the while advertising the Delinquent International Information Return Procedures3 is non-transparent. We request more transparency from the IRS about its penalty procedures and campus practices

Extend First Time Abatement Program to Include Forms 3520 and 3520-A

In addition, we recommend the extension of the IRS's First Time Abatement policy4 (“FTA”) to include the Relevant Forms so that taxpayers who fail to timely file these forms may avoid penalty without showing reasonable cause. FTA should apply not only to the first tax year in question, but all tax years filed by the taxpayer during an initial reporting period. For example, if a taxpayer was not aware of the filing obligation, hires new counsel and learns of the obligation, and then files the Relevant Forms for the prior 3, 6 or any amount of prior years in order to come into compliance, the taxpayer should be exempt from penalty for all of the years in question under FTA. This will reduce the chilling effect on compliance and reporting as taxpayers will not be fearful of penalties being assessed for multiple years when trying to come into compliance for the first time.

Compliance Disincentives are Negatively Impacting Taxpayers and Others

In addition to extending FTA, we also believe additional steps are required to combat the chilling effect on compliance currently permeating this area of tax reporting (i.e., the Relevant Forms). Put simply, the Ogden Campus's policy of assessing maximum penalties for late and amended Forms 3520 and 3520-A without regard to the underlying facts, including reasonable cause, has a substantial chilling effect on taxpayers and the tax professionals assisting them. In short, application of the Form 3520 and 3520-A penalties without considering the facts of the situation relevant to reasonable cause does not promote voluntary compliance but, instead, breeds fear in taxpayers and creates a potential disincentive for voluntary compliance in situations that penalties should not be imposed. In this regard, the significant uncertainty with respect to which penalties may be abated, if at all, is also creating a strong disincentive for tax professionals to handle compliance matters relating to Forms 3520 and 3520-A.

The purpose of penalties is not to create fear of reporting to the government what Congress has determined to be valuable information. Instead, penalties are meant to be a punishment in appropriate situations and where it will help rehabilitate a taxpayer toward future voluntary compliance. In this regard, the automatic application of penalties to all situations does not meet this goal and, in fact, the current system has the opposite effect.

Actions to Remove Compliance Disincentives

As a remedy, we recommend that the IRS create a safe harbor for late filing the Relevant Forms (perhaps similar to the safe harbor created by IRS Notice 2022-36) until such time as the IRS is able to formulate a new approach to reviewing and assessing late filing penalties. In that regard, we recommend the IRS consider the following in revising its approach to reviewing and assessing late filing penalties:

1. Treasury should expand the discussion of what constitutes reasonable cause in the Internal Revenue Manual (as well as through the issuance of IRS Notices, Revenue Procedures, Treasury Regulations, etc.). This expansion should be extensive and go through numerous fact pattern examples. To achieve the best results, we recommend the government partner with its stakeholders to build out the new guidance. The Tax Section of The Florida Bar offers to collaborate with the government in this manner, and we look forward to working with the government to achieve the goals discussed.

2. To the extent that assessed penalties are considered to be revenue, such that that the abatement of a penalty is seen as lost revenue, the government should reconsider this position. In any event, the Independent Office of Appeals should not be subject to direction relating to penalty abatements as a result of any such policies.

3. First Time Abate should be available for the Relevant Forms.

Clarity Regarding Foreign Pension Reporting

Finally, we recommend the IRS provide more clarity as to when foreign pensions, foreign retirement accounts, and even certain foreign social insurance programs similar to U.S. social security or other government functions are reportable on the Relevant Forms. We praise the IRS for the administrative relief from reporting under Rev. Proc. 2020-17. However, we recommend making the relief available to more taxpayers by reducing the total number of requirements to qualify for relief as well as increasing the minimum thresholds described in Rev. Proc. 2020-17 § 5.03(4) to an annual limit of $300,000 or less and a lifetime limit of $5,000,000 or less.


1Proposed Collection; Comment Request for Forms 3520 and 3520-A, 87 Fed. Reg. 77,167 (Dec. 16, 2022).

2Compare Notice 97-34, 1997-1 CB 422 with 2022 Form 1040 instructions (available at


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