How to file a delinquent form 3520?

According to this IRS page: https://www.irs.gov/individuals/interna ... procedures ,

should file the delinquent information returns with a statement of all facts establishing reasonable cause for the failure to file.

and it says further,

As part of the reasonable cause statement, taxpayers must also certify that any entity for which the information returns are being filed was not engaged in tax evasion. If a reasonable cause statement is not attached to each delinquent information return filed, penalties may be assessed in accordance with existing procedures.

The first part is easy, it is just a missing return, it is not engaged in tax evasion. It is a simple matter that a foreign relative (nonresident) sent a US resident more than $100,000 to buy a house.

My questions are:

- What establishes a reasonable clause, Does "I forget" or "I do not know" do?

- Does a mere statement, regardless it establishes a reasonable clause or not, avoid the penalty? It does not logically follow, but the second sentence seems to indicate that no penalties will be assessed as long as a reasonable cause statement is attached, it did not say that it has to establish a reasonable clause.

- How does it work in practice?

Suppose the money received as a loan in 2018, then no form 3520 need to be filed for 2018? If in 2019 it was decided that the "loan" does not need to be paid back, it became a gift in 2019 or 2018, and one needs file form 3520 for 2019 or 2018?

As a comparison, the delinquent foreign bank account report (FBAR) form 114 has "I forget" / "I do not know" in the list for reasons not filed before.

My first thought on the loan front is that it would have to be properly document with interest accrued/paid before forgiven.

As for the reasonable cause statement, it needs to be more than I forgot. Did taxpayer engage a professional who did not file? Did taxpayer not know about requirement and has now engaged a professional to correct as quickly as possible. Point out there was no unreported income, taxpayer has filed timely in the past, etc. etc.
HOWEVER, I've had this with clients in the past and sent the letter with the 3520 and no problem. This year the IRS has started issuing penalties like crazy. I'm working with an international tax attorney for one client to appeal the penalty. She said there's been a huge increase in automatic penalties (even with reasonable cause statements) and they have gone to the commissioner to address it. He's aware but has not presented a solution yet. We are still hopeful to the penalty waived but you should prepare your client for the possibility.

I agree with jdctax comment: the IRS has substantially increased their automated $10K penalty letter in the past 18 months.

Filing a "reasonable cause" statement with the late 3520-series won't stop receiving that letter. It seems as-if (not confirmed) the IRS front-line processors disregard anything that doesn't have an OMB number on it...

So you end-up filing late, getting the letter, and then asking for forgiveness by re-sending your reasonable cause statement.

My first thought on the loan front is that it would have to be properly document with interest accrued/paid before forgiven.

As for the reasonable cause statement, it needs to be more than I forgot. Did taxpayer engage a professional who did not file? Did taxpayer not know about requirement and has now engaged a professional to correct as quickly as possible. Point out there was no unreported income, taxpayer has filed timely in the past, etc. etc.

Is that considered a reasonable cause?

I think IRS should be more lenient for such harmless omission. Just like if one does not owe tax, then it does not matter if he files late. Now the taxpayer has a touch choice: to file and get IRS automatic penalty and not to file but the three year statue of limitation never expires. Is that correct that if the taxpayer files and don't hear anything from IRS for three years, the statue of limitation runs out?

My first thought on the loan front is that it would have to be properly document with interest accrued/paid before forgiven.

jdctax: If this is a loan, then there would be of no need to file form 3520 or anything, this is right? I do agree with you in that it would have to be properly document with interest accrued/paid. Thanks.

If a loan do we get into 1042-S filing for the interest on the loan?

If a loan do we get into 1042-S filing for the interest on the loan?

No. 1042-S is "Foreign Person’s U.S. Source Income Subject to Withholding" done by a US bank or a US employer (usually universities for foreign students). In this case, the loan was provided by a foreign person.

Guya is absolutely right puravidapt: the US person is paying interest to a foreign person. This creates a potential 1042-S reporting requirement. The source of the interest income is US (see § 861. Income from sources within the United States).
Form 1042-S has a wide range of application - not just the 2 limited examples you mentioned.

And if the interest payment wasn't made you have an issue of imputed income at the AFR rate...

Guya is absolutely right puravidapt: the US person is paying interest to a foreign person.

I agree, I was confused with who pays whom. Thanks!

Synchros and jdctax, I am aware of the increased penalties on late 3520-As, but are you saying that 3520 penalties are being assessed on a delinquent international informational return submission?

In the past 9 months I saw 3 automated $10,000 letters. All three were for tiny savings accounts qualifying as foreign grantor trusts (based on the setup in the home jurisdiction). There was no unreported income in all instances but the information return was filed late (and no 7004 extension was filed back in March). I say "information return" in the sense that the filings were reporting ownership of foreign trusts under the rules of sections Internal Revenue Code 671 through 679.

Thanks, 7004 is for the 3520-A, I agree that is certainly an issue.