Rather than the issue of remedies which is the main focus of the ILM, I will quote the discussion in the ILM of the events that give rise to the Section 6677 penalty, because the discussion is quite succinct and therefore may be helpful to readers. Here are the pertinent portions:
1. Section 6048
Section 6048 contains three distinct and separate reporting obligations. First, under section 6048(a), a responsible party must inform the Service of each occasion upon which a U.S. person creates a foreign trust, transfers money or property to a foreign trust, or when a citizen or resident of the United States dies if the decedent owned a portion of a foreign trust. Second, under section 6048(b), a U.S. person treated as owning a foreign trust under the grantor trust rules (sections 671 through 679) must report information with respect to that trust and also must ensure that the trust itself reports information to the Service and to each U.S. person treated as owning, or receiving a distribution from, the trust. Lastly, under section 6048(c), any U.S. person who receives a distribution from a foreign trust during the taxable year must report information about that distribution to the Service.
Any U.S. person or responsible party who is required to report information under section 6048(a) or (c) or who is required to report information under section 6048(b) because he is treated as the owner of a foreign trust under the grantor trust rules, must file a Form 3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts) by the due date (including extensions) for his U.S. tax return. Under section 6048(b), the U.S. owner of a foreign trust is required to file a Form 3520 for each taxable year even if there is no transaction with the foreign trust during the year. A separate Form 3520 is required with respect to each foreign trust for which the person is required to report information.
Any foreign trust with a U.S. owner is required to file a Form 3520-A (Annual Information Return of Foreign Trust with a U.S. Owner) by the 15th day of the 3rd month after the end of the trust's tax year. The foreign trust also is required to give copies of the Foreign Grantor Trust Owner Statement (page 3 of Form 3520-A) and Foreign Grantor Trust Beneficiary Statement (page 4 of Form 3520-A) to the U.S. owners and U.S. beneficiaries by the same date. Form 3520 instructs a U.S. owner of a foreign trust who has not received a Foreign Grantor Trust Owner Statement from the foreign trust to complete a substitute Form 3520-A to the best of his ability and attach it to his Form 3520.
2. Section 6677
The amount of the section 6677 penalty for a failure to file a correct and complete Form 3520 will depend upon which subsection of section 6048 is violated. Where a U.S. person or responsible party fails to report a transaction with a foreign trust under subsection (a) or (c), the person will owe an initial penalty equal to the greater of $10,000 or 35 percent of the "gross reportable amount." [FN 1: Prior to 2010, the initial penalty was 35% of the gross reportable amount.] "Gross reportable amount" for these purposes means the gross value of the property involved in the event reportable under section 6048(a), or the gross amount of the distributions in the case of a failure relating to section 6048(c). I.R.C. § 6677(c)(1), (3). For example, if a U.S. person files a Form 3520, but fails to report a transaction with the foreign trust valued at $30,000, the U.S. person will owe a penalty (absent showing of reasonable cause) equal to $10,500 (35% of $30,000).
If a U.S. person fails to file a Form 3520 when required by section 6048(b) [FN 2: n2 A U.S. person treated as the owner of a foreign trust who fails to file Form 3520 when required under section 6048(b) will be subject to a penalty for such failure only with respect to tax years beginning after March 18, 2010] or a foreign trust that is treated as owned by a U.S. person fails to file Form 3520-A and that U.S. person does not file a substitute Form 3520-A, the U.S. person will owe an initial penalty under section 6677(b) equal to the greater of $10,000 or 5 percent of the "gross reportable amount." [FN 3: Prior to 2010, the initial penalty was 5% of the gross reportable amount for failure to file Form 3520-A.] Here, "gross reportable amount" means the value of the foreign trust's assets at the close of the year treated as owned by the U.S. person. I.R.C. § 6677(c)(2). For example, if a foreign trust with a U.S. owner and assets of $250,000 fails to file a complete and correct Form 3520-A and the U.S. owner fails to file a substitute Form 3520-A, the U.S. owner will owe an initial penalty (absent showing of reasonable cause) equal to $12,500 (5% of $250,000).
In all cases, an additional $10,000 penalty is imposed for each 30-day period during which the failure to file an information return continues (beginning 90 days after notification of the failure). The total amount of the penalties cannot exceed the gross reportable amount.
Section 6677(d) provides that no penalty will be imposed by section 6677 on any failure that is shown to be due to reasonable cause and not due to willful neglect. The fact that a foreign jurisdiction would impose a civil or criminal penalty on the taxpayer (or any other person) for disclosing the required information does not constitute reasonable cause.Note: For readers having access to Tax Analysts publications, the Tax Analysts Electronic Citation number is 2011 TNT 243-31 and the Document number is 2011-26482. I will try to find some other publicly available source on the internet and post it when I do.