The IRS has completed its four-year foreign trust campaign. The campaign, launched on May 21, 2018, was one of six campaigns initiated by the Large Business and International (LB & I) units of the IRS.

The crackdown on late foreign trust reporting to the IRS was unrelenting and brutal. No warning was given prior to taxpayers being issued a severe penalty under Section for failure to file either Form 3520 or 3520-a, or both. No leniency was issued, and no reasonable cause statement would remit the penalty. The IRS has been held to have deliberately understaffed the department dealing with the assessment of requests for abatement using the reasonable cause provisions contained in Code Section 6677.

Section 6677 states clearly that no penalty will be imposed for failure to file if there is reasonable cause and not wilful neglect.

Reasonable cause is an area that the IRS has not willingly spelled out the definition of and therefore remains a grey area.

Penalties were assessed automatically. Penalties were also removed by various methods in an inconsistent manner by the IRS in shambolic administration of the campaign.

Taxpayers with solid filing history were penalized for filing either Form 3520 or 3520-a even a day late. IRS staff who required managerial approval to automatically issue a penalty under the Internal Revenue Manual bypassed that requirement.

The campaign affected US citizens with foreign trusts worldwide.

US citizens in New Zealand were hit particularly hard due to the following micro and macro-economic factors.

  1. Widespread use of discretionary family trusts. The family trust quintessentially is a part of wealth management, estate planning and a legacy from days gone by when NZ tax benefits came attached.

The popularity of the family trust is noticeably more than in neighbouring country Australia.

  1. New Zealand’s fiscal year ends March 31 for the majority of individuals, businesses, and trusts.
  1. New Zealand’s financial reporting framework allows up to nine months to prepare financial statements and the Tax Administration Act provides that income tax returns are due no later than 12 months from the end of the fiscal year. The financial community therefore works within those time frames. It was common practice that the financial statements for trusts weren’t available within the timeframe for filing Form 3520-a.

The campaign targeted the 2016-2018 tax years.