IRS penalty- Settle or proceed to litigation?

[Anonymous]

OP: Have you revealed the amount of the gift in this thread ?

[Anonymous]

Anonymous wrote:

Anonymous wrote:Is it the 3250 to disclose a gift from a foreign person? Has there been any case law on this? If you go to litigation, is there a chance the IRS tax counsel will settle for less? Plus you will have your attorney’s fees. Is there a way your attorney can push back at Appeals? I can’t imagine that the Appeals Officer wants to have this go to litigation but who knows.

OP here. (I should say that at every response.. I can't figure out how to do multi quotes)

Yes, this is an FBAR and 3520 situation.

My Tax Attorney says that if we go to litigation, I first have to pay the $40k, but since litigation will force the IRS to have actual attorneys to review the case (rather than just CPAs), there's a 70% chance that I can get the full $40k back. If that happens, then I pay my Tax Attorney $9k for a success fee.

So it's a gamble. I have to front $40k to litigate. I can lose the entire $40k, or I can get everything back and pay $9k to the Tax Attorney.

The Tax Attorney can negotiate at Appeals. That's why I am crowd-sourcing advice here on how/what to negotiate.

So it's going to end up costing you $20K (pay now; no hassle) or $18,300 (70% chance of $0 with attorney cost of $9K; 30% chance of losing with associated cost of $40K). Net probable difference of $1.7K. Adjust the probability of scenario 2 as you deem appropriate and decide.

[Anonymous]

OP: I remain concerned that your attorney told you that you had to pay the assessment before challenging in court (not true for Tax Court, but true for Court of Claims or for Federal District Court) and remain concerned that no one told you how the assessment was calculated.

You wrote that both your tax attorney & your CPA made mistakes in handling this matter.

Appears that the penalty is 5% of the amount of the gift per month up to a maximum penalty of 25% of the amount of the gift. So if the gift amount was $160,000, then you would be penalized $40,000 if you filed late by 5 or more months. Is this your understanding OP ?

None reporting of gifts from foreigners raise money laundering concerns.

OP: In part, due to your silence, I suspect that the reduced penalty of $20,000 is a good deal. Unlikely that you will receive much sympathy for lack of funds/inability to pay since you received a gift of over $100,000 from a foreigner.

This seems to be a very simple tax matter.

[Anonymous]

OP here. Sorry I was silent for a bit... had to fix dinner, feed the family, clean the kitchen and pack lunches for tomorrow.

Re: The amount of the gift was $137k.. which would have been a non-taxable event had I just filed it on time. Should have been simple. Sigh!

Re: I remain concerned that your attorney told you that you had to pay the assessment before challenging in court (not true for Tax Court, but true for Court of Claims or for Federal District Court) and remain concerned that no one told you how the assessment was calculated.

I didn't jot it down in my notes but I seem to recall "court of claims" being mentioned.
I was told how it was assessed: penalty is the greater of $10,000 or 35% of the gross value received. $36,825 is the penalty. The remainder is the interest.

I really appreciate the thoughts put in this thread.

I wanted to think about how I am perceived by the IRS and the Office of Appeals.
The Office of Appeals Officer really zeroed in on me during the discussion and asked me a bunch of questions, after my Tax Attorney said that I will not be speaking and that in fact, their clients don't usually even attend hearings. I've been keeping my timeline/documentation because I've had to do so much of it between the letters written by the CPA and when I hired this Tax Attorney- but I didn't have any of my notes in front of me during the 15-minute teleconference. I got a really bad vibe after that call.

[Anonymous]

Anonymous wrote:

Broadly, speaking, a second opinion might be in order since you wrote that your advisors had both made mistakes in this matter. I wonder if the way that they proceeded somehow locked you out of proceeding in Tax Court.

OP here. Just quoting what a PP mentioned.

I have been wondering about this myself!
The CPA and the Tax Attorney are from different firms. Their websites state years of experience with international matters. These professionals charge $500+ an hour. I found both of them through my Financial Advisor (who doesn't personally know them but has had clients who have used their firms).

The Tax Attorney was so confident that this was such a straightforward case. He did mention the IRS bureaucracy and how even he has no idea who actually makes decisions on these cases. That's why he said that if we went to litigation, it will first force the Office of Independent Appeals to provide a justification for their decision, and then the Tax Attorney can build his case around it. But we won't know that justification unless we go through litigation.

[Anonymous]

I’ll chime in again hi it’s me hi again it’s me ….ahhhhhhh rich people problems. Own your shit you just got dropped over 150K, pay your due. Rich people sneaking.

[Anonymous]

Anonymous wrote:OP, I was in a very similar situation several years ago and decided to litigate. The IRS frequently lacks sufficient grounds and evidence for pursuing these sorts of cases. Moreover, there are countless precedent cases of this type that have been argued in favor of the defendants. Mine was dismissed and I was further awarded all legal fees and punitive damages to the tune of $5M. Absolutely you should push back on this! Will recommend my attorney, if you’re interested.

OP here.

Are you able to just post a website link here? (not really sure how I can get that info from you).

I just saw this on the IRS website:

However, at its discretion, Appeals may reconsider its prior decision if evidence becomes available that indicates further consideration is warranted.
Taxpayers may also pay the penalty previously upheld by Appeals and file a claim for refund. The claim for refund may be transferred to Appeals, if denied at the campus level.

I don't think my Tax Attorney provided the timeline showing my diligence to the Independent Office of Appeals. I remember the Tax Attorney saying that the timeline would be helpful for them "in case we have to go to the next stage." During the Appeals discussion, the Officer wanted to know the exact moment I realized I missed the deadline. I had that in my timeline but I am not sure if my documentation was provided.

I really appreciate the discussion here, you all. This thread is really motivating me to do more research. The more I dig in, the more I see that my case can be handled so much better- but it's one of those "how do you know when your doctor is good" kind of thing.

My Tax Attorney filed a form 843, and said that my CPA should have filed this first rather than writing a letter.
But now that I researched the form 843, it doesn't even look right to me.

I'm trying to read this article and thinking about clicking on the "let's chat" to get a 2nd opinion.. but it's late and I have to get to bed!

https://sftaxcounsel.com/bringing-the-3520-penalty-fight-to-the-irs-contesting-a-3520-penalty-in-tax-court/

[Anonymous]

Anonymous wrote:
OP here. Sorry I was silent for a bit... had to fix dinner, feed the family, clean the kitchen and pack lunches for tomorrow.

Re: The amount of the gift was $137k.. which would have been a non-taxable event had I just filed it on time. Should have been simple. Sigh!

Re: I remain concerned that your attorney told you that you had to pay the assessment before challenging in court (not true for Tax Court, but true for Court of Claims or for Federal District Court) and remain concerned that no one told you how the assessment was calculated.

I didn't jot it down in my notes but I seem to recall "court of claims" being mentioned.
I was told how it was assessed: penalty is the greater of $10,000 or 35% of the gross value received. $36,825 is the penalty. The remainder is the interest.

I really appreciate the thoughts put in this thread.

I wanted to think about how I am perceived by the IRS and the Office of Appeals.
The Office of Appeals Officer really zeroed in on me during the discussion and asked me a bunch of questions, after my Tax Attorney said that I will not be speaking and that in fact, their clients don't usually even attend hearings. I've been keeping my timeline/documentation because I've had to do so much of it between the letters written by the CPA and when I hired this Tax Attorney- but I didn't have any of my notes in front of me during the 15-minute teleconference. I got a really bad vibe after that call.

OP. I hope you end up making the right choice. Remember that the money already spent is sunk cost so don't factor that into your decision making process.

Can you expand on the gift? Was it gift to you from family abroad or family here that owned assets abroad? Asking because, we are about to get some money this year as gift from parents (in another country) and wondering if there are any gotchas. We file our own taxes normally. Thanks!

[Anonymous]

OP here.

On the 3520 form, it is category #4:
You are a U.S. person who, during the current tax year, received either:
More than $100,000 from a nonresident alien individual or a foreign estate (including foreign persons related to that nonresident alien individual or foreign estate) that you treated as gifts or bequests;


It was a gift from a sibling (who is not a US citizen and does not live in the US) from proceeds of land that he sold.
I went to 2 different CPAs prior to deciding to use the 3520 to make sure that it can be reported that way.
I have another sibling who received the same but submitted the form on the correct deadline.

The question that the 2 CPAs asked me was: did you receive money or did you receive land? I received money. If I received land, then the 3520 would not have been the right form to use.

[Anonymous]

I would pay the 20k. Sorry op. I think when you take into consideration lawyers fees, it’s easier to pay.

(not at the IRS), from what I’ve seen they likely would settle. I’m often frustrated that my own agency won’t fight, but they won’t. But you likely will still owe fees and your own lawyer fees.

[Anonymous]

Anonymous wrote:OP here.

On the 3520 form, it is category #4:
You are a U.S. person who, during the current tax year, received either:
More than $100,000 from a nonresident alien individual or a foreign estate (including foreign persons related to that nonresident alien individual or foreign estate) that you treated as gifts or bequests;


It was a gift from a sibling (who is not a US citizen and does not live in the US) from proceeds of land that he sold.
I went to 2 different CPAs prior to deciding to use the 3520 to make sure that it can be reported that way.
I have another sibling who received the same but submitted the form on the correct deadline.

The question that the 2 CPAs asked me was: did you receive money or did you receive land? I received money. If I received land, then the 3520 would not have been the right form to use.

That sucks. It's family money that was taxed in another country and you rightfully don't owe any taxes in the US. Hope it works out for you.

[Anonymous]

Anonymous wrote:
OP here. Sorry I was silent for a bit... had to fix dinner, feed the family, clean the kitchen and pack lunches for tomorrow.

Re: The amount of the gift was $137k.. which would have been a non-taxable event had I just filed it on time. Should have been simple. Sigh!

Re: I remain concerned that your attorney told you that you had to pay the assessment before challenging in court (not true for Tax Court, but true for Court of Claims or for Federal District Court) and remain concerned that no one told you how the assessment was calculated.

I didn't jot it down in my notes but I seem to recall "court of claims" being mentioned.
I was told how it was assessed: penalty is the greater of $10,000 or 35% of the gross value received. $36,825 is the penalty. The remainder is the interest.

I really appreciate the thoughts put in this thread.

I wanted to think about how I am perceived by the IRS and the Office of Appeals.
The Office of Appeals Officer really zeroed in on me during the discussion and asked me a bunch of questions, after my Tax Attorney said that I will not be speaking and that in fact, their clients don't usually even attend hearings. I've been keeping my timeline/documentation because I've had to do so much of it between the letters written by the CPA and when I hired this Tax Attorney- but I didn't have any of my notes in front of me during the 15-minute teleconference. I got a really bad vibe after that call.

If this was a gift, then the assessment may not fall under the "$10,000 or 35% of the gross value received". Ask about GIFTS from foreigners: late filing assessment formula may be 5% per month of the gross amount of the gift up to a maximum of 25%.

If the amount of your gift was $147,300, the penalty would be $36,825 which is 25% of $147,300.

The formula that you were given 35% of $137,000 would result in a penalty of $47,950 without adding in any interest.

Therefore, my best guess is that you were assessed at 25% of $137,000 which equals $34,250. Then interest was added to the penalty amount in order to arrive at $40,000.

The penalty formula is straightforward. There is no issue as to whether or not you missed the filing date.

The penalty of $20,000 is almost 15% of the amount of the gift ($137,000). Based on the facts shared, the $20,000 figure seems reasonable.

Was this a GIFT ? An inheritance ? Or a distribution from a FOREIGN TRUST ?

[Anonymous]

OP: I am NOT offering legal advice.

In general, the typical abatement standards do not apply in a situation in which one fails to timely file a 3520 tax form. An argument can be made under a "reasonable cause" standard if seeking to be excused from the penalty. What constitutes "reasonable cause" for failure to timely file a 3520 is unclear. If the recipient was mentally incapacitated during the normal reporting period (maybe in a coma due to a car accident or incapacitated due to a health matter such as a stroke ?).

Ask your tax attorney about the "reasonable cause" standard and whether or not there is a reasonable basis for raising this claim.

Still perplexed by advice which you have received thus far. However, I am not qualified to give any legal advice in this manner and nothing that I have written is intended to be legal advice--just points that I would ask a qualified, experienced tax attorney.

[Anonymous]

Anonymous wrote:

Anonymous wrote:OP, I was in a very similar situation several years ago and decided to litigate. The IRS frequently lacks sufficient grounds and evidence for pursuing these sorts of cases. Moreover, there are countless precedent cases of this type that have been argued in favor of the defendants. Mine was dismissed and I was further awarded all legal fees and punitive damages to the tune of $5M. Absolutely you should push back on this! Will recommend my attorney, if you’re interested.

OP here.

Are you able to just post a website link here? (not really sure how I can get that info from you).

I just saw this on the IRS website:

However, at its discretion, Appeals may reconsider its prior decision if evidence becomes available that indicates further consideration is warranted.
Taxpayers may also pay the penalty previously upheld by Appeals and file a claim for refund. The claim for refund may be transferred to Appeals, if denied at the campus level.

I don't think my Tax Attorney provided the timeline showing my diligence to the Independent Office of Appeals. I remember the Tax Attorney saying that the timeline would be helpful for them "in case we have to go to the next stage." During the Appeals discussion, the Officer wanted to know the exact moment I realized I missed the deadline. I had that in my timeline but I am not sure if my documentation was provided.

I really appreciate the discussion here, you all. This thread is really motivating me to do more research. The more I dig in, the more I see that my case can be handled so much better- but it's one of those "how do you know when your doctor is good" kind of thing.

My Tax Attorney filed a form 843, and said that my CPA should have filed this first rather than writing a letter.
But now that I researched the form 843, it doesn't even look right to me.

I'm trying to read this article and thinking about clicking on the "let's chat" to get a 2nd opinion.. but it's late and I have to get to bed!

https://sftaxcounsel.com/bringing-the-3520-penalty-fight-to-the-irs-contesting-a-3520-penalty-in-tax-court/

I read most of the sftaxcounsel.com blog referenced above. As I suspected, either your CPA or your tax attorney reacted too quickly in sending a protest letter to the IRS which killed your right to challenge the assessed penalty in Tax Court. If my reading is correct, then your choice is to pay the $40,000 and challenge in Court of Claims or in Federal District Court or to pay the reduced amount of $20,000.

[Anonymous]

OP here.  Thank you so much for continuing to provide your thoughts. I want to discuss this all with my Tax Attorney but at $600/hour, I need to be very specific with my questions. 

To answer/discuss some questions: 

1) Was this a GIFT? An inheritance? Or a distribution from a FOREIGN TRUST?  

This was NOT a distribution from a foreign trust. This was an inheritance, given as a gift of money. 

2) In general, the typical abatement standards do not apply in a situation in which one fails to timely file a 3520 tax form. An argument can be made under a "reasonable cause" standard if seeking to be excused from the penalty. What constitutes "reasonable cause" for failure to timely file a 3520 is unclear.

My Tax Attorney was confident that the abatement applies to a 3520, although further research showed that the IRS considers this a gray area- that's why my attorney wants to argue it in court and also present the "honest mistake theory."  This is my very first ever tax filing mistake.  My job requires continuous evaluation and financial disclosures. I will not make it as a money launderer. 

3) I read most of the sftaxcounsel.com blog referenced above. As I suspected, either your CPA or your tax attorney reacted too quickly in sending a protest letter to the IRS which killed your right to challenge the assessed penalty in Tax Court. If my reading is correct, then your choice is to pay the $40,000 and challenge in Court of Claims or in Federal District Court or to pay the reduced amount of $20,000.

Answer- - No need to say "not giving legal advice here"... because I find it so crazy that even after I hired a CPA and a Tax Attorney that the process I went through doesn't seem completely correct.  Yes, those are my 2 choices right now- 40k or 20k.

4) It's family money that was taxed in another country and you rightfully don't owe any taxes in the US. Hope it works out for you.

Yes, it has already been taxed in another country... and it's just so sad to even get to that point of getting cash- there was so much drama that occurred 5 generations above me. Plus my sibling got scammed by a land developer. Just can't make this stuff up. 

And now to collect what I need to ask my Tax Attorney: 

1) Ask about GIFTS from foreigners: late filing assessment formula may be 5% per month of the gross amount of the gift up to a maximum of 25%. (that 35% was literally pasted from the email I got from my Attorney when I asked for the calculation)

2) Did we already miss all opportunities for Tax Court where I don't have to pay up front?  

3) What room for negotiation do we have with the Office of Appeals? As I noted from the IRS website: 

However, at its discretion, Appeals may reconsider its prior decision if evidence becomes available that indicates further consideration is warranted.

Would further reconsideration include... I hired professionals who didn't process my case in the best way possible?  Can you provide them with my timeline documentation, along with the documentation from my CPA. Can we review the process of what I went through to see if things were done correctly?

Anything else I should be asking?