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January 18, 2010 - Phil Hodgen

Foreign trust penalty letters revised by IRS

Tax Notes Today had an article on Friday, January 15, 2010 about revisions to the notice letters that the IRS uses for foreign trust penalties. (Sorry, Tax Notes Today is locked behind a paywall on Lexis but it the cite is 2010 TNT 10-11 if you’re a subscriber).

This memo is dated December 7, 2009 but just became visible. It appears to be part of the IRS’s ongoing “let’s clean up our notices” program.

Good news/bad news, as usual. The good news is that they’ve simplified their systems. There are now four letters used in this situation, compared to eight before. The bad news is that the IRS has cast its eyes on the foreign trust arena so there is more attention here.

The Tax Notes Today article did not have copies of the various letters attached.

The moral of this story is that the IRS loves penalties, and for those of us practicing in the international tax arena, bigger penalties than average exist. This is just one indication that the gardener is, umm, weeding the garden and expects to harvest some crops. πŸ™‚

The memo follows after the jump.

December 7, 2009

Control Number: SBSE-20-0709-016
Expiration Date: July 31, 2010
Impacted IRM: 20.1.9

MEMORANDUM FOR DISTRIBUTION

FROM:
Christopher Wagner
Commissioner, Small Business/Self-Employed Division

Heather C. Maloy
Commissioner, Large and Mid-Size Business Division

IRC section 6677 — Penalty for Failure to File Information With Respect to Certain Foreign Trusts

The purpose of this memorandum is to introduce four redesigned letters to be used, effective immediately, for making a determination of the penalties provided under IRC section 6677, Failure to File Information With Respect to Certain Foreign Trusts. This memorandum serves as interim guidance. IRMs 20.1.9.13 and 20.1.9.14 will be updated to include these letters and provide information on penalty assessment and computation.

IRC section 6677 provides that persons, who transact with, or own, certain foreign trusts, and who fail to file complete and accurate Forms 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and/or Forms 3520-A, Annual Return of Foreign Trust With a U.S. Owner, may be assessed penalties for such failures unless it is shown that such failure was due to reasonable cause and not to willful neglect.

The four redesigned letters (revised 04-2008), are now available through the Publishing Product Catalog and are as follows:

  • Letter 3804 — Notice Required by IRC 6677
  • Letter 3943 — Closing Acceptance for IRC 6677
  • Letter 3944 — Closing Letter for IRC 6677
  • Letter 3946 — Closing Letter for IRC 6677-Reasonable Cause Rejected

A cross-functional team, led by the Office of Notice Improvement, developed these letters. The team was charged with consolidating the eight letters previously used and to create clearer letters for the IRS to use and the taxpayer to understand.

The four letters above replace the following eight letters:

  • Letter 3742 (10-2003), Notice under IRC 6677 regarding failure to file Form 3520
  • Letter 3743 (10-2003), Propose Penalty for Form 3520
  • Letter 3799 (11-2003), Inform Taxpayer of Intent to Assert Penalties under IRC 6677 for Form 3520A
  • Letter 3804 (11-2003), Notice Required by IRC 6677
  • Letter 3943 (1-2005), Closing Acceptance for IRC 6677
  • Letter 3944 (1-2005), Closing Letter for IRC 6677
  • Letter 3945 (1-2005), Advisory about IRC 6677 Penalties and LCCI Offering
  • Letter 3946 (1-2005), Closing Letter for IRC 6677-Reasonable Cause Rejected

All copies of the eight letters shown above, including those with any prior revision date, will be destroyed.

By reducing the number of letters previously used to administer the penalties provided under IRC section 6677, and by incorporating taxpayer-specific (fill-in) information into the redesigned letters, taxpayers and the IRS both benefit. Attached is a Guide to Redesigned Letters Application that explains the new fill-in features of these letters.

For the taxpayer, the redesigned format of the letters coupled with filled in information specific to them, will provide the taxpayer with an easy to follow, complete, and comprehensive summary of their failing to comply with IRC section 6677 and the respective penalties for such failure. For the IRS, fewer letters equate to lower costs and less confusion in selecting and sending the appropriate letter to the taxpayer.

If you have any questions, please contact Susan Deidrich, Senior Program Manager Servicewide Penalty Program, or a member of your staff may contact Kent Rinehart, Senior Program Analyst, Servicewide Penalties.

Attachment:

Guide to Redesigned Letters Application

Cc:
www.irs.gov

Tax and Trusts