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Dianne Mehany Comments on Foreign Gift and Trust Reporting Penalties in Tax Notes
Caplin & Drysdale

Dianne Mehany Comments on Foreign Gift and Trust Reporting Penalties in Tax Notes

Date: 10/8/2019

The IRS has been accused of taking an aggressive approach under a provision imposing penalties for failure to file information on foreign gifts.

. . .

“Some of us would believe that this provision has been slightly weaponized,” Dianne Mehany of Caplin & Drysdale said. “We all live in a climate right now where foreign touches are seen as having a nefarious purpose. . . . It is up to [practitioners] to combat that presumption.”

Mehany spoke at the American Bar Association Section of Taxation meeting in San Francisco on October 5.

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Mehany said she has seen the IRS assess up to 20 years of penalties for the nonfiling of Form 3520-A and Form 3520. She also relayed allegations related to undistributed net income (UNI) and distributable net income (DNI) rules for non-grantor trusts, posing them in a hypothetical involving the receipt of $10, where only $2 may be from current income, but all $10 is viewed as an accumulated distribution.

“With the UNI/DNI rules it's . . . ’Oh, it’s $10. It’s taxed, and there’s a supposed interest charge.’ It's much like the [passive foreign investment company] rules that are now going to apply. There’s been some allegations [of cases where] 100 percent is subject to this DNI/UNI. You’re getting $10, and then you are telling your client, ‘Actually you got 10 cents, and the IRS is getting $9.90,’” Mehany said, cautioning practitioners to keep adequate records about the type of trust, distribution, and reporting that is required.

Although abatement procedures exist under IRM 21.8.2.19.2 for Form 3520 penalties if reasonable cause is met, Colasanto argued that it is difficult for taxpayers to rid themselves of the penalties.

Mehany added that taxpayers can benefit from accountants providing signed affidavits to avoid the penalties. But she said she has witnessed cases in which an accountant took full responsibility, but the IRS viewed the accountant as unqualified because they were not an international expert and therefore facts were insufficient to establish reasonable cause.

“That is ridiculous,” Mehany said. “We’ve even seen responses where [the IRS says,] ‘Oh, you were trying to shop for a cheaper accountant.’ OK, I try and shop for cheaper everything. . . . Cheaper does not necessarily mean that you don’t have reasonable cause.”

For the full article, please visit Tax Notes’ website (subscription required).

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