US taxpayers wrongly accused of misfiling foreign trust reports

6 September 2012

The US Internal Revenue Service (IRS) is wrongly threatening taxpayers with penalties for alleged errors in their Form 3520 foreign trust declarations, according to the American Institute of Certified Public Accountants (AICPA).

US persons who have dealings with foreign trusts must complete a Form 3520 every year. The AICPA says IRS staff dealing with 3520s for the year 2010 are writing to taxpayers who have filed these forms demanding various types of extra information that is not relevant.

For example, some taxpayers are being told they must disclose the gross value of the foreign trust, even though they are not the trust’s US owner. Moreover, the IRS is warning them that they will be charged a penalty if they do not. Other taxpayers are being asked to explain why they are filing the form under the 2011 Offshore Voluntary Disclosure Initiative (OVDI), when they had already supplied this information on the original form.

In other letters the IRS alleges that 3520s filed on time were actually filed late – which also brings a penalty unless the taxpayer can provide a reasonable excuse. The penalties for non-compliance range from a minimum of USD10,000 to 35 per cent of the value of the trust.

The problem is causing numerous taxpayers to incur extra costs by getting their professional advisors to deal with the demands, says the AICPA’s Patricia Thompson in a letter to IRS Chief Doug Shulman. Not only are US residents affected but also US persons living in Canada.

In her letter, Thompson asks Shulman to investigate the IRS’s actions and get the incorrect letters stopped. The AICPA also wants Shulman to make a public statement announcing that the letters do not require a response, thus saving taxpayers ‘considerable time and expense in having their tax preparers respond to these incorrect letters’.





AICPA (Letter to Shulman, PDF)






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