Section 6039F Requirements, Penalties, Procedures & Defenses

IRC 6039F Requirements, Penalties, Procedures & Defenses:

Section 6039F Requirements, Penalties, Procedures & Defenses: Internal Revenue Code Section 6039F represents one of the most egregious types of International Information Reporting Penalties assessed by the Internal Revenue Service. Our International Tax Lawyers represent clients worldwide on matters involving Section 6039F — which refers to Notice of Large Gifts Received from Foreign Persons. US Person Taxpayers who receive a large gift from a Foreign Person is required to report the value of the gift by Filing IRS Form 3520 – which refers to large foreign gifts, inheritances and trust transactions. When a US Person fails to report the Form 3520 timely — and files a late or delinquent Form 3520 in order to satisfy the 6039F reqirement — they may be subject to fines and penalties. On the high-end of the penalty spectrum, a 6039F violation can reach upwards of 25% value of the unreported gift (or inheritance). For example, if a Person receives a $1,000,000 gift from a foreign person — they can hit with a $250,000 penalty. This is despite the fact that there may be no unreported foreign income — since gifts are not usually taxable (exceptions and limitations apply). Our Board-Certified Tax Specialist Team summarizes the basics of Section 6039F Requirements, Penalties, Procedures & Defenses.

26 USC 6039F

• • • (a) In general

      • If the value of the aggregate foreign gifts received by a United States person (other than an organization described in section 501(c) and exempt from tax under section 501(a)) during any taxable year exceeds $10,000, such United States person shall furnish (at such time and in such manner as the Secretary shall prescribe) such information as the Secretary may prescribe regarding each foreign gift received during such year.

    • (b) Foreign gift

      • For purposes of this section, the term “foreign gift” means any amount received from a person other than a United States person which the recipient treats as a gift or bequest. Such term shall not include any qualified transfer (within the meaning of section 2503(e)(2)) or any distribution properly disclosed in a return under section 6048(c).

    • (c) Penalty for failure to file information

      • (1) In general

        • If a United States person fails to furnish the information required by subsection (a) with respect to any foreign gift within the time prescribed therefor (including extensions)— (A)the tax consequences of the receipt of such gift shall be determined by the Secretary, and (B)such United States person shall pay (upon notice and demand by the Secretary and in the same manner as tax) an amount equal to 5 percent of the amount of such foreign gift for each month for which the failure continues (not to exceed 25 percent of such amount in the aggregate).

      • (2) Reasonable cause exception

        • Paragraph (1) shall not apply to any failure to report a foreign gift if the United States person shows that the failure is due to reasonable cause and not due to willful neglect.

    • (d) Cost-of-living adjustment

      • In the case of any taxable year beginning after December 31, 1996, the $10,000 amount under subsection (a) shall be increased by an amount equal to the product of such amount and the cost-of-living adjustment for such taxable year under section 1(f)(3), except that subparagraph (A)(ii) thereof shall be applied by substituting “1995” for “2016”.

    • (e) Regulations

      • The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section. (Added Pub. L. 104–188, title I, § 1905(a), Aug. 20, 1996, 110 Stat. 1913; amended Pub. L. 115–97, title I, § 11002(d)(13), Dec. 22, 2017, 131 Stat. 2062.) U.S. Code Toolbox Law about… Articles from Wex Table of Popular Names Parallel Table of Authorities 

Penalties for 6039F Noncompliance

The penalties for 6039F are adjusted for inflation:

As provided by statute

• • • “(1)In general If a United States person fails to furnish the information required by subsection (a) with respect to any foreign gift within the time prescribed therefor (including extensions)— (A)the tax consequences of the receipt of such gift shall be determined by the Secretary, and (B)such United States person shall pay (upon notice and demand by the Secretary and in the same manner as tax) an amount equal to 5 percent of the amount of such foreign gift for each month for which the failure continues (not to exceed 25 percent of such amount in the aggregate).”

For all intents and purposes, by time the Taxpayer learns of the reporting requirements and goes back to file the late form, usually (but not always) more than 5-months have passed. And, since the penalty is oftentimes calculated electronically, if more than 5-months have passed then it tends to lead to a 25% Penalty.

CP15 Notice and 6039F Penalty Assessment

Before it is time to litigate an IRC 6039F penalty, the IRS CP15 Notice provides an opportunity to dispute the penalty based on reasonable cause and the CP15 Notice gives Taxpayer 30-days to respond. If Taxpayer can prove reasonable cause, the CP15 Notice for IRC 6039F violations may be abated or removed. Here is an example of the Reasonable Cause exception language from the statute:

Reasonable Cause Defenses to 6039F Violations & Amnesty

The primary defense to a 6039F violation penalty is when the Taxpayer can show “reasonable cause and not willful neglect.”

• (2) Reasonable cause exception

  • Paragraph (1) shall not apply to any failure to report a foreign gift if the United States person shows that the failure is due to reasonable cause and not due to willful neglect.

Internal Revenue Manual Reasonable Cause Explained

Since reasonable cause is not definitively “defined” in the code, but is rather based on a totality of the circumstance — it is important to get a baseline understanding of what the IRS looks for when evaluating Taxpayer reasonable cause. One good place to start is the Internal Revenue Manual. While the Internal Revenue Manual is not binding, it does provide good insight into what reasonable cause is:

IRM Reasonable Cause 20.1.1.3.2

• • • Reasonable cause is based on all the facts and circumstances in each situation and allows the IRS to provide relief from a penalty that would otherwise apply. Reasonable cause relief is generally granted when the taxpayer exercised ordinary business care and prudence in determining his or her tax obligations but was nevertheless unable to comply with those obligations.

    • In the interest of equitable treatment of the taxpayer and effective tax administration, the non-assertion or abatement of certain civil penalties based on reasonable cause or other relief provisions provided in this IRM must be made in a consistent manner and should conform with the considerations specified in the IRC, Treasury Regulations (Treas. Regs.), policy statements, and IRM Part 20.1, Penalty Handbook.

    • Reasonable cause relief is not available for all penalties; however, other exceptions may apply.

    • For those penalties where reasonable cause can be considered, any reason which establishes that the taxpayer exercised ordinary business care and prudence, but nevertheless was unable to comply with a prescribed duty within the prescribed time, will be considered.

    • If a reasonable cause provision applies only to a specific IRC section, that reasonable cause provision will be discussed in the IRM 20.1, Penalty Handbook, section relating to that specific IRC section. See IRM 20.1.1.1.2, Authority, and Exhibit 20.1.1-1, Penalty Relief Application Chart.

    • When considering the information provided in the following subsections, remember that an acceptable explanation is not limited to those given in IRM 20.1. Penalty relief may be warranted based on an “other acceptable explanation,” provided the taxpayer exercised ordinary business care and prudence but was nevertheless unable to comply within the prescribed time. See IRM 20.1.1.3.2.2, Ordinary Business Care and Prudence.

    • The wording used to describe reasonable cause provisions varies. Some IRC penalty sections also require evidence that the taxpayer acted in good faith or that the taxpayer’s failure to comply with the law was not due to willful neglect. See specific IRM 20.1, Penalty Handbook, sections for the rules that apply to a specific IRC penalty section. See IRM 20.1.1.1.2, Authority.

    • Taxpayers have reasonable cause when their conduct justifies the non-assertion or abatement of a penalty. Each case must be judged individually based on the facts and circumstances at hand. Consider the following in conjunction with specific criteria identified in the remainder of this subsection:

      • What happened and when did it happen?
      • During the period of time the taxpayer was non-compliant, what facts and circumstances prevented the taxpayer from filing a return, paying a tax, and/or otherwise complying with the law?
      • How did the facts and circumstances result in the taxpayer not complying?
      • How did the taxpayer handle the remainder of his or her affairs during this time?
      • Once the facts and circumstances changed, what attempt did the taxpayer make to comply?

    • Reasonable cause does not exist if, after the facts and circumstances that explain the taxpayer’s noncompliant behavior cease to exist, the taxpayer fails to comply with the tax obligation within a reasonable period of time.

Protesting a 6039F Penalty

If a 6309F Penalty has been issued, the first step is usually to submit a protest letter to the IRS. The concept of Reasonable Cause and Not Willful Neglect involves the idea that a U.S. Person who is in violation of 6039F should not be required to pay penalties for their non-compliance if they can show reasonable cause.  Therefore, if the account holder can prove to the Internal Revenue Service that they have reasonable cause, then the IRS may avoid, mitigate or abate (eliminate) penalties. Taxpayers have an opportunity to show reasonable cause through a well-written and highly persuasive reasonable cause statement.  There are several factors to be aware of, including the type of gift, number of gifts, total unreported values, country or origin and its relation to the account holder — along with many other considerations.

Appealing a 6039F Penalty

If the IRC 6039F protest letter is rejected, Taxpayer can submit a supplemental response to their initial protest letter that was sent to the IRS — if they have “additional information” to present to the IRS Office of Appeals. Sometimes, before going to Appeals, the IRS will request additional information and the letter will first go back to the IRS and not the Office of Appeals — which can impact the overall strategy Taxpayer seeks to pursue. If not, the IRS Office of Appeals will consider the request, and may schedule a conference with Appeals — or not — depending on the specifics of the presentation and officer assigned to the matter.

Collection Due Process Hearing

After receiving a Notice of Federal Tax Lien or Intent to Levy, the Taxpayer may have the opportunity to pursue a Collection Due Process Hearing. The benefits of a Collection Due Process hearing is that it permits the Taxpayer to essentially get two bites of the apple — and it opens the door to go to Tax Court on multiple different arguments. But, the Taxpayer usually has to wait until they receive a Notice of Federal Tax Lien or Intent to Levy before they can pursue a CDP — which can be very unsettling for Taxpayers.

Tax Court

Most of the time, Tax Court cases involving IRC 6039F penalties involves a significant amount of time and resources on behalf of the Taxpayer. Taxpayers should keep in mind that the Attorney’s Fees for an experienced Litigation Attorney are usually very high — and billed hourly — which may not be feasible for many Taxpayers. Moreover, since 6039F penalties are not considered tax liabilities, but rather reporting penalties — in general courts have not been as inclined to provide the Taxpayers with much deference.

Federal Court

Another option for the Taxpayer is to pay the penalty upfront and then seek a refund from the IRS. If the refund request is denied — then the Taxpayer can sue in District Court. The idea behind having to pay upfront is the Flora Rule — which requires a Taxpayer to pay the debt at the IRS before moving forward in pursuing a federal claim. It is important to note that IRC 6039F penalties are not the result of tax liability — but rather the result of a reporting penalty. Therefore, the Taxpayer may want to take the position that similar to a recent ruling in an FBAR case, prepayment is not required up-front.

IRC 6039F (Pre-Penalty) Amnesty Programs

The Offshore Amnesty Programs are programs developed by the Internal Revenue Service to assist Taxpayers who are already out of compliance for non-reporting, but have not been assessed a penalty yet.

Some of the more common programs, include:

• • • Voluntary Disclosure Program (VDP or “New” OVDP)

    • Streamlined Domestic Offshore Procedures

    • Streamlined Foreign Offshore Procedures

    • Delinquency Procedures

    • Reasonable Cause (pre-or-post penalty)

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