Imagine receiving a large gift from your mother by putting the family home in your name or transferring cash to your account. What would you do when you realize the Internal Revenue Service (IRS) wanted 25% of your family home’s value because you neglected to tell it about what was done?
This was the reality for one taxpayer. Back around 2010 and 2011, Krzysztof Wrzesinski received a large gift of $830,000 from his non-resident alien mother, who had won the Polish lottery. Wrzesinski asked his U.S. tax accountant whether he needed to disclose this gift to the IRS. He was told nothing needed to be disclosed. Taking the advice of his accountant, Wrzesinski went on with his life, unaware of the error he had just committed.
Years later he discovered there is, in fact, something to file – a Form 3520. This would have allowed him to report this foreign gift to the IRS. But, given he was not a tax professional himself, he believed this was a non-taxable event based on the erroneous answer from his U.S. accountant. He late-filed Form 3520 pursuant to the IRS Delinquent International Information Report Submission Procedures asserting reasonable cause for no penalty.
The IRS, surprisingly, disagreed and assessed large penalties on the value of the gift. Wrzesinski appealed this assessment and the IRS Office of Appeals, again surprisingly, only knocked the penalty down 80%.
Wrzesinski continued fighting the penalty in court. In September 2022, he filed his complaint with the Eastern District of Pennsylvania, which meant the Department of Justice (DOJ) needed to respond to answer the taxpayer’s claims of reasonable cause and government error.
That response never came, but on March 7, 2023, the court released a status report in lieu of the answer, which stated the United States had informed Wrzesinski’s counsel by letter in February 2023 that the United States conceded the matter and directed the IRS to schedule an overpayment for tax years 2010 and 2011.
Importantly, the DOJ did not file a formal brief with the court that they were conceding, only a court filing mentioning the DOJ sent a letter to the taxpayer conceding made its way into the court record.
The IRS Office of Appeals, despite being presented with the clear facts of the case, still did not find reasonable cause for the taxpayer. Appeals’ reluctance demonstrates the overall IRS position regarding these types of forms and penalties: the IRS feels there are no risks, or very few, of litigation when it comes to international information reporting forms. Unless you have such clear and obvious facts as Wrzesinski did in this case, your chances of convincing the IRS of your reasonable cause are quite low.
The only viable path to avoid penalties is to avoid the need for IRS Appeals. That means knowing your filing obligations and timely compliance with them. The best way to do that is to speak to the professionals and advisors at Moore Doeren Mayhew. Contact us today to discuss your situation.
