Kostelanetz LLP Partner Megan L. Brackney is calling for an end to IRS foreign gift penalties, arguing that the current law is inefficient and punitive to lower- and middle-income taxpayers with foreign relatives.
In an op-ed for Bloomberg Tax, Ms. Brackney addresses concerns raised by the Taxpayer Advocate Service and taxpayers regarding the efficiency and administrative burden of the foreign gift penalty. It is a common misconception that the law (Section 6039F) primarily affects wealthy individuals who divide their time among different countries. However, even taxpayers with modest incomes who receive gifts or bequests from relatives in foreign countries can be affected.
International tax compliance is complex to navigate, and lower and middle-income taxpayers are less likely to seek an international tax law expert regarding concerns with modest inheritances. But under current law, they are inadvertently trapped in a web that the Taxpayer Advocate Service described as “draconian and inefficient.”
The IRS foreign gift penalty is charged when taxpayers file information returns late if they received gifts and inheritances from foreign estates. The IRS can assess a 5% penalty for every month that the information return is late, up to 25% of the gift’s value– even if there are no taxes owed. As estate laws greatly vary by the decedent’s last country of residence, American taxpayers frequently lack sufficient information to file Form 3520 in a timely manner. The subsequent penalties disproportionately impact people who cannot afford to pay substantial tax bills for assets they may not be able to access yet, and quickly-accumulating tax controversy attorney fees.
Ms. Brackney proposes ending this penalty because of the undue stress and administrative burden on taxpayers and tax professionals, and the ineffective tax administration arising from constant appeals from taxpayers making a good faith effort to comply. You can read the full Bloomberg Tax article here.
Partner Megan L. Brackney is an experienced tax attorney, Chair-Elect of the American Bar Association Section of Taxation, and an adjunct professor at New York University School of Law. Megan is also former Assistant U.S. Attorney for the Southern District of New York and a frequent speaker and contributor at local and national conferences on taxation, ethics in tax practice, penalties, and tax controversy.
