So Don’t Die and Expect the Penalties to Vanish

And you thought dyeing wipes out all IRS exactions.

Not so fast.

Check out a recent IRS Chief Counsel Advice, which observes that just because a taxpayer/filer failed to file his annual foreign trust information reports, his untimely demise does not wipe out the onerous penalties for failure to file.

The conclusion is that the estate is liable for the penalties, even though it was not the responsible person who was required to file in the first instance!

We’re talking, here, about IRS Forms 3520 and 3520A, the annual information returns required when folks are dealing with a foreign trust which they have created.  And the penalties are nasty – particularly bad, these days, as the government keeps wringing it hands over terrorist issues, and concerns about income and assets lodged in foreign countries, which the Revenooers are just darned sure are going unreported, year after year.

In this instance, a bloke established a foreign grantor trust from which he would receive yearly distributions.  But when he died, IRS notified his executor that no Forms 3520/3520A had been filed.  The Executor eventually filed the forms, though obviously a bit tardy.  The first thought which crossed IRS’ mind, of course, was who they could chase for the penalties.

And the executor was the target, of course.

But that chap claimed he should be exonerated, because he was not actually the “responsible person” obligated to file the forms in the first place.

Au contraire, claimed IRS – the estate stepped into the decedent’s shoes, in their view, and thus became obligated for the penalties.

Being the kindly organization that they are, however, IRS offered that in a situation such as this, a “reasonable cause” exception to the imposition of penalties might apply – such as a case in which the facts showed that the existence of the foreign trust or foreign financial accounts was only discovered by the executor shortly after the decedent’s death, and the requisite forms were promptly filed.

Gee, thanks.

And speaking of who did or didn’t file, those of you with California businesses just might want to be on notice that FTB may be calling on you soon – if you have not filed your 2010 state income tax return.  If contacted, get on the ball, and file within 30 days, or be able to explain just why you think you weren’t obligated to file in the first place!

CONSULT YOUR TAX ADVISOR –  This article contains information about various tax matter.  You should consult your CPA regarding the implications of your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village, and Reno.  He may be reached at 831-7288, welcomes comments at, and invites readers to consider his other commentary at

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