Skip to Main Content
 

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

October 8, 2019, Tax Notes

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.

. . .

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).

________________________________________________

About Caplin & Drysdale
Having celebrated our 50th Anniversary in 2014, Caplin & Drysdale continues to be a leading provider of legal services to corporations, individuals, and nonprofits throughout the United States and around the world. We are also privileged to serve as legal advisors to accounting firms, financial institutions, law firms, and other professional services organizations.

The firm's reputation over the years has earned us the trust and respect of clients, industry peers, and government agencies. Moreover, clients rely on our broad knowledge of the law and our keen insights into their business concerns and personal interests. Our lawyers' strong tactical and problem-solving skills -- combined with substantial experience handling a variety of complex, high stakes, matters in a boutique environment -- make us one the nation's most distinctive law firms.

With offices in New York City and Washington, D.C., Caplin & Drysdale's core practice areas include:
For more information, please visit us at www.caplindrysdale.com.
Washington, DC Office:
One Thomas Circle NW
Suite 1100
Washington, DC 20005
202.862.5000
New York, NY Office:
600 Lexington Avenue
21st Floor
New York, NY 10022
212.379.6000

___________________________

Disclaimer
This communication does not provide legal advice, nor does it create an attorney-client relationship with you or any other reader. If you require legal guidance in any specific situation, you should engage a qualified lawyer for that purpose. Prior results do not guarantee a similar outcome.

Attorney Advertising
It is possible that under the laws, rules, or regulations of certain jurisdictions, this may be construed as an advertisement or solicitation.
© 2019 Caplin & Drysdale, Chartered
All Rights Reserved.

Related Professionals

Related Practice Area(s)