Taxpayer Wins! Foreign Gift Not Reported: DOJ Concedes he had “Reasonable Cause”

We have had a taxpayer win in the foreign information reporting arena! I provide a summary of the case of Mr. Krzysztof Wrzesinski below.  For readers who wish more, the taxpayer’s complaint is here.

Background of the Wrzesinski Case

Mr. Wrzesinski (“Taxpayer” or “T”) was a native of Poland who immigrated to the United States at the age of 19 and was working as a police officer in Philadelphia, PA.   In 2010, T’s mother, a nonresident alien individual living in Poland, won the Polish lottery. She made a gift to her son of $830,000 by 4 transfers during 2010 and 2011 from her bank account in Poland to her son’s US bank account.  T specifically asked his tax advisor in the United States, about the cash gifts on 2 separate occasions (once prior to the funds transfer, and again when the accountant was preparing his 2010 tax return). The advisor was an accountant and an enrolled agent. The advisor stated that there was no need to include the gift on his US tax returns and that there was no other US legal requirement to be complied with in connection with the mother’s gift.

Several years later, T wished to gift some money to his godson in Poland and undertook an internet search with the term “foreign gifts”. T was shocked to read various articles setting out the legal requirement to file Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts to report large gifts from foreign individuals.  T sought tax advice from a tax attorney who assisted to file the late Forms 3520 using the “Delinquent International Information Return Submission Procedures” (DISP). Under the DISP taxpayers can achieve compliance without imposition of penalties, provided they can demonstrate “reasonable cause” for the untimely filing.  Sounds simple, right?  As T discovered – not so simple!

Hit with Penalties Despite “Reasonable Cause” Statements

The Statements of Reasonable Cause submitted by T in the DISP certified that he had been assured by his US tax advisor that there was no need to include the gifts on his US tax returns or other US legal requirement in connection with the gifts. The Statement explained that the erroneous advice had been provided in response to a specific request which related the pertinent facts, and that T had relied on the advice of his tax advisor, based on his apparent knowledge of and experience working with federal tax law, in concluding that he was not required to report the gift from his mother to the US government.

Despite this, T received Form CP15 Notices of Penalty Charge under 26 U.S.C. § 6039F assessing penalties of $87,500.00 and $120,000.00 for tax years 2010 and 2011, respectively, for “Failure to File Form 3520 to Report Receipt of Certain Foreign Gifts.”  These penalties amounted to 25 percent of the value of the gifts made in each of those years.  The Notices stated that ignorance of the tax laws was not a basis for penalty abatement under the “reasonable cause” standard and that ordinary business care and prudence require that taxpayers be aware of their tax obligations and file or deposit accordingly.

Delinquent International Information Return Submission Procedure

My earlier blog post on the perils of using the DISP is here.   As the Internal Revenue Service (IRS) has made clear, using the DISP does not guarantee that the reasonable cause statement will be reviewed, processed or even considered. Reporting penalties are often assessed automatically and if assessed, the taxpayer will be in the position of having to present the reasonable cause position to the IRS.  This typically involves assistance from a tax professional and that is costly.  No one knows how long the process may take as there is no guarantee the taxpayer will be heard in a timely manner, especially given current IRS backlogs.   Meanwhile, when a taxpayer is waiting on the IRS’ determination on the issue of reasonable cause, the IRS may still collect the penalty. That appears to be what happened to the Taxpayer who was forced to hire an attorney to make a claim in the district court for a refund of the penalties paid.

Department of Justice Conceded

On March 7, 2023, the Department of Justice, Tax Division filed a “Status Report” (in lieu of an answer to the complaint) indicating that it had conceded the matter, and that the IRS would be refunding the penalties in several weeks. In my view it was instrumental to the Taxpayer’s “win” that the Taxpayer had sought professional tax advice. He had specifically asked the advisor about any legal or tax requirements with respect to the foreign gifts and had given the advisor all of the facts in an accurate manner. Unfortunately, the advisor was not experienced enough when it came to US international tax issues.  Many tax advisors are not, so taxpayers must be extra diligent.  Reliance on professional advice will not necessarily help and cannot always help establish reasonable cause – the taxpayer must demonstrate he has chosen the right professional. So, using the inexpensive online return preparer might not be in the taxpayer’s best interests.  The  Wrzesinski case may indicate some leeway when it comes to the more unique and complicated foreign tax issues, but suffice to say that “reasonable cause” is not easy to establish. My blog post here gives you the scoop.

What about Mr. Wrzesinski’s Mother?

The T’s mother was lucky the IRS did not try to assess US gift tax on her cash transfers to her son’s US bank account.  Such wire transfers can arguably constitute a transfer of tangible property within the US, causing gift tax exposure to the NRA donor of the gift.  Careful tax pro’s exercise far more caution when it comes to significant cash transfers by NRA’s to ensure the transfer is treated as occurring offshore the US and thus avoiding the risk of possible gift tax.

Need Help?

Do you need information about US gift and estate tax issues for US and non-US persons?  Receiving foreign gifts or inheritances?  My tax blog posts address these issues in a clear manner (here , here and here).  Get the right tax advisor. When it comes to international tax issues there is no substitute for an experienced professional.  If he or she lacks the US international/foreign tax experience you may need, you may be setting yourself up for legal headaches.  Reliance on the tax advice may not be considered “reasonable,” leading to plenty of penalties.

Posted April 13, 2023

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