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.
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.
Now, IRM Section 126.96.36.199.4 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 188.8.131.52.4 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.
This is in line with Wilson, (CA 2 7/28/2021) 128 AFTR 2d ¶2021-5070, which overruled a district court, when it found that the 35% penalty for failure to report distributions received from a foreign trust applied to an individual who was both the beneficiary and owner of a foreign trust. The district had found that only the 5% penalty applicable to owners of foreign trusts who failed to file annual returns applied.
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