On August 24, 2022, the IRS issued Notice 2022-36, 2021-15 I.R.B. 986, (the "Notice"), which grants significant penalty relief for taxpayers who failed to file certain tax or information returns for tax years 2019 and 2020. However taxpayers must file their missing returns on or before September 30, 2022, in order to obtain the penalty relief.

This Notice presents a rare opportunity to taxpayers who have not filed the requisite returns to avoid onerous penalties. The Notice covers penalties for the failure to file income tax returns and partnership and S-corporation returns. Moreover, in notable part, the Notice grants relief from penalties for failure to file certain international information returns, including Forms 5471 and 3520, as described in greater detail below. The Notice does not provide relief for delinquent FBARs.

In general, penalties for failure to file Forms 5471 or 3520 do not apply if the taxpayer failed to file the return due to reasonable cause and not willful neglect. Whether a taxpayer's circumstances constitute reasonable cause is determined by the IRS. Under the Notice, the IRS will not penalize a taxpayer if the taxpayer fails to timely file these returns, even if the taxpayer did not have reasonable cause.

Form 5471

Any U.S. taxpayer, including citizen or green card holder, who holds at least 10% in a foreign corporation must file a Form 5471. IRC section 6038. The taxpayer uses the Form 5471 to fulfill various annual information requirements, such as the accumulated earnings and profits of the foreign corporation and certain transactions between the shareholder and the corporation. See Treasury Regulations section 1.6038-2(f)(11). There is a $10,000 penalty for each year for which the taxpayer fails to timely file this Form. Id.

Form 3520

U.S. Taxpayers must file Form 3520 to report a variety of transactions involving foreign trusts. First, if a U.S. taxpayer creates a foreign trust or transfers property to a foreign trust, the taxpayer must file a Form 3250 to report the transaction. IRC section 6048(a). Second, any U.S. taxpayer who is treated as the owner of any part of a foreign trust must annually file a Form 3520. IRC section 6048(b). Third, the death of such taxpayer must be reported on the Form 3520 by the executor of the U.S. taxpayer's estate. IRC section 6048(a)(3)(iii). Fourth, any taxpayer who receives (directly or indirectly) any distribution from a foreign trust must file the Form 3520. IRC section 6048(c). A distribution may be payment of cash, transfer of property, or the use of a property held by the trust. A commonly overlooked example is the use of a residence held by a foreign trust.

A failure to timely file this form to report any of these transactions results in a penalty of $10,000 or 35% of the value of the property transferred to, owned by, or distributed from the foreign trust, whichever is greater. IRC section 6677.

Additionally, any U.S. taxpayer who receives large gifts or bequests (more than $100,000 in the aggregate in a given year) from foreign persons must file a Form 3520 to report the gifts or bequests. IRC section 6039F. A failure to timely file this Form results in a penalty of 5% of the foreign gift for each month the Form is late, not to exceed 25%. Id.

Form 3520-A

Finally, foreign trusts are required to report certain information annually on the Form 3520-A. IRC section 6048. Each failure to file results in a penalty of either $10,000 or 5% of the gross value of the portion of the foreign trust that is owned by a U.S. owner, whichever is greater. IRC section 6677.

Conclusion

The IRS currently has a number of programs to help taxpayers come into compliance to address their delinquent information return reporting obligations. The most prominent of these programs is the Streamlined Filing Compliance Procedures. However, under the streamlined program, most domestic U.S. taxpayers are subject to certain penalties. The Notice provides welcome relief for taxpayers seeking to come into compliance and avoid penalties.

Taxpayers with questions about Notice 2022-36 or foreign reporting more generally should contact Bianca Ko or the Hanson Bridgett Tax Group.