IRS Sending Incorrect Letters to Taxpayers Filing Form 3520

Do you have clients who filed Form 3520 in 2010 or earlier? If so, pay attention to this news from the American Institute of CPAs (AICPA).

Form 3520 is the Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. According to the AICPA, the IRS has been sending incorrect letters to taxpayers regarding how they have filled out these foreign trust forms.

“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 penalties,” the AICPA stated in a recent letter sent to IRS Commissioner Douglas H. Shulman.

The IRS has sent letters claiming taxpayers filed Form 3520 late when it was filed on time, according to the AICPA. In other instances, the IRS has requested explanations as to why the form was filed when the explanation was already attached.  There are also examples where the IRS claimed taxpayers checked “yes” on lines of Form 3520 when “no” was actually checked.

In all these cases taxpayers must respond promptly under threat of penalty. Of course, they must first contact their paid tax return preparers to work out the problems and this is when they are “being inconvenienced and incurring unnecessary professional fees,” as the AICPA letter explained.

What will happen now?

The AICPA is urging the IRS to investigate internally to find the source of its systemic problem processing Form 3520. It is also asking the IRS to consider issuing an announcement that such erroneous letters do not require a response.