Wednesday, August 29, 2012

AICPA Complains to IRS About Form 3520 Administration Issues (8/29/12)

I received an email from the AICPA today with a letter to  IRS Commissioner Shulman complaining about IRS administration of Form 3520 filings.  The contents of the email, with links, are:

Erroneous IRS Letters to Taxpayers Filing Foreign Trust Form Is Widespread Problem, AICPA Tells IRS

The American Institute of CPAs alerted the Internal Revenue Service yesterday that erroneous letters from the Service to taxpayers filing a foreign trust form is a “widespread problem affecting numerous taxpayers.”  The AICPA urged the IRS to investigate to determine the source of the processing problem so it could stop sending out the erroneous letters and to consider issuing an announcement that such erroneous letters do not require a response.

“The letters are inconveniencing taxpayers and causing them to incur unnecessary professional fees when practitioners must respond to the IRS explaining why the IRS letters are incorrect and request an abatement of the penalties,” the AICPA said in its Aug. 28, 2012 letter to the IRS.

The letters with erroneous conclusions are being received by taxpayers who filed Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, for 2010 and earlier years.

The AICPA letter described six specific errors the IRS letters claim taxpayers have made, including filing Form 3520 late when it was filed on time.

A copy of the AICPA’s letter is attached.  [JAT Note: See link above.]

If you would like to speak to someone about the AICPA letter, please contact Shirley Twillman at 202.434.9220 or


The letter to Commissioner Shulman identifies the following concerns:

1. With respect to  Form 3520, Part II (U.S. Owner of a Foreign Trust),  line 23, the letters instruct the taxpayer to  “Enter the gross value of the portion of the foreign trust that you are treated as owning.”  While it is  the case that line 23 was not completed in these instances, line 23 is required to be completed by the U.S. owner of a foreign grantor trust.  The taxpayers receiving these letters are not reporting under Part II as they are not the U.S. owners of a foreign trust.  The IRS letters request that  the taxpayer furnish the line 23 information to avoid a penalty under Internal Revenue Code section 6677 despite the fact that line 23 is not required to be completed.  In the case of a U.S. taxpayer filing Form 3520 but who is not required to complete Part II, such letters are incorrect and should not have been issued.  These Forms 3520 were correctly filed and are not missing required information.  Penalties are therefore not warranted.

2. With respect to Form 3520, Part I, Line 13, the letters indicate that this line was checked “Yes” and request  that  the taxpayer complete the transfer information on Schedule B.  However, Form 3520  was  completed correctly  and filed timely, and Part I, Line 13 was correctly checked “No.”  These IRS letters require a response under threat of penalty.

3. With respect to Form 3520, Page 1, Lines 2a through 2g, the letters request that the taxpayer provide information regarding the name, employer identification number, and location of the foreign trust when the submitted Form 3520 already includes such information as required on Form 3520, Page 1, Lines 2a through 2g.

4. Some of the letters state that Forms 3520 were filed late when the forms were filed timely.

5. Some of the letters request that an explanation be provided as to why a Form 3520 was filed under FAQs 17 and 18  of the 2011 Offshore Voluntary Disclosure Initiative (“OVDI”)  when an explanation was already attached to the Form 3520 when filed.

6. Several of the letters state that Forms 3520 were filed late and requested an explanation for the late filing to avoid penalties, when such forms were submitted on time pursuant to and in full compliance with the 2011 OVDI with a detailed reasonable cause explanation statement attached as required under FAQs 17 and 18 of the 2011 OVDI.  We suggest that the group at the IRS that issues such letters completely review the attachments to the Form 3520 and if necessary check with the group at the IRS that is in charge of the OVDI program before issuing letters to taxpayers regarding this and the item 5 matter.

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