Recent IRS announcements aimed at providing taxpayer relief in response to COVID-19 could create a late-filing penalty trap for Form 3520 filers

Overview:

Generally, a U.S. person’s Form 3520 is due on the 15th day of the 4th month following the end of such person’s tax year for income tax purposes, which, for individuals, is April 15 (note, exceptions exist for U.S. persons living/working outside of the U.S. and Puerto Rico, and U.S. persons in the armed forces on duty outside of the U.S. and Puerto Rico). If a U.S. person is granted an extension of time to file a federal income tax return, the due date for filing Form 3520 is the 15th day of the 10th month (October 15) following the end of the U.S. person’s tax year.

In response to COVID-19, the Department of the Treasury and the Internal Revenue Service (IRS) announced Notice 2020-18, which automatically postpones the April 15, 2020 deadline to file Federal income tax returns and make Federal income tax payments to July 15, 2020. The filing of an extension with IRS (Form 4868 for individuals) is not necessary to postpone filing and paying to July 15, 2020, rather the postponement is automatic.  Moreover, the postponement applies to the deadline to file extensions (Form 4868 for individuals), also moving said deadline from April 15, 2020 to July 15, 2020. Importantly, Notice 2020-18 does not extend the deadline to file Federal information returns.

Click here to read McMahon & Tivnan, PC’s analysis of IRS Notice 2020-18

Due to the postponement of the Federal income tax filing deadline, taxpayers may opt to delay the filing of their Federal income tax returns until July 15, 2020. Taxpayers who normally file an extension may choose to forego filing an extension completely and file their return by July 15, 2020. In such an instance, a taxpayer with a Form 3520 filing obligation should ensure their Form 3520 is timely filed by April 15, 2020, as the IRS postponement does not apply to Federal information returns, and no extension would have been filed to extend the time to file Form 3520. Forms 3520 filed past their due date are subject to late-filing penalty.

Additionally, due to the postponement of the Federal income tax filing deadline, individual taxpayers may opt to file an extension with IRS (Form 4868) after April 15, 2020 (general deadline for filing Form 3520), but on or before July 15, 2020.  While some uncertainty exists with respect to how IRS will address this issue, risk exists that IRS could assess late-filing penalty with respect to any Forms 3520 that are filed after April 15, 2020, in reliance upon an extension of time to file an income tax return filed after April 15, 2020 (i.e., filed after the Form 3520 deadline).

Taxpayers with questions about their U.S. tax filing deadlines in light of recent provisions issued by IRS should discuss their individual circumstances with an experienced tax professional.

Key Takeaways:

  • Generally, Form 3520 is due on April 15, 2020 for U.S. persons who are individual taxpayers. The deadline for Form 3520 can be extended by filing an income tax extension with IRS.
  • IRS has postponed the deadline to file Federal income tax returns and pay Federal income tax to July 15, 2020. This postponement does not apply to Federal information returns.
  • Taxpayers with a Form 3520 filing requirement, who choose to forego filing an extension for their Federal income tax filing in light of the IRS postponement, should ensure they timely file Form 3520 by April 15, 2020 to avoid late-filing penalty.
  • Risk exists that late-filing penalty could be assessed by IRS on individuals who file Form 3520 after the general filing deadline of April 15, 2020, relying on an application of extension of time to file their Federal income tax return, which was filed after April 15, 2020 (i.e., the Form 3520 filing deadline).
  • Taxpayers with questions about their U.S. tax filing deadlines in light of recent provisions issued by IRS should discuss their individual circumstances with an experienced tax professional.

The information provided in the above does not, and is not intended to, constitute legal advice; instead, all information and content provided in the above is for general informational purposes only. Readers of this material should contact an experienced tax attorney to obtain advice with respect to any particular legal matter.

McMahon & Tivnan, PC is responsible for this content. McMahon & Tivnan, PC represents individuals, estates and businesses with federal and state tax controversies, including audits, appeals, litigation and foreign transaction reporting.  Collectively, McMahon & Tivnan, PC’s Boston-based tax attorneys have more than 100 years of experience investigating and defending IRS and state tax matters.