Megan L. Brackney was quoted in a recent Tax Notes article entitled “Second Circuit Hands Government Win on Foreign Trust Penalties,” published on July 29, 2021. Brackney analyzes the District Court’s decision that trust beneficiary reporting penalties can also apply to the owner of a foreign trust.
The article notes:
Megan L. Brackney of Kostelanetz & Fink LLP said she was initially pleased with the lower court’s decision because it constrained the IRS from stacking Form 3520 and Form 3520-A penalties. But she added that she had also been troubled by the district court decision.
“It seemed odd that Congress would have intended for a U.S. taxpayer who formed a foreign trust and received distributions from it [to] essentially be given a pass on the failure to report the distributions, while a U.S. taxpayer who had no role in the formation of the trust but failed to report a distribution would have a penalty of 35 percent of the distribution,” Brackney told Tax Notes. “In that respect, I think that the Second Circuit reached the correct result.”
Still, Brackney said she hopes the IRS will exercise caution on future penalties and that it won’t see the appellate decision as permission to “blast taxpayers with as many penalties as possible every time there is noncompliance.”
“Even if the code permits the IRS to impose penalties, the IRS should exercise its discretion to reach reasonable outcomes that take into account the taxpayer’s specific conduct, the tax loss to the government — if any (as often, there is none, and the failure to report foreign trust activity is merely a technical violation), and the taxpayer’s overall record of compliance, as opposed to the IRS’s current practice of thoughtlessly and reflexively imposing the maximum amount of all possible penalties in every situation,” Brackney said.
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