Foreign Gift Trap: The Fuentes Case and the 25% Penalty and dealing with both the IRS and the DOJ

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Good morning, this is John Richardson speaking with you from Toronto, Canada.
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Today is Friday, September the 18th, 2026,
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and the world moves on, and so does the outrageousness of the Internal Revenue
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Code and the way that it is administered in certain circumstances.
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And who better to discuss and dissect this with me today then-tax lawyer Virginia Latoura-Jeker.
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And today we are going to begin by revisiting a topic that we have talked about
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in the past, but it's such an important topic that I feel like we are playing
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the role of evangelists, educating the world about this.
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And so we're actually going to begin talking about this requirement that if a U.S.
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Person receives a gift of over $100,000 from a non-U.S.
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Person individually, or I think $20,000 if it's a corporation or something like
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that, then there is a reporting requirement subject to massive penalties.
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And with that, Virginia, what is it that brings us together today?
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Okay, so we've had a very interesting case come up with a tax penalty case.
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And it shows the harshness, of course, of this foreign gift reporting rule that
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if you miss out, you have a 25% penalty on the value of the gift.
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If you miss out on that filing requirement and you can't prove you have reasonable cause for missing out.
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But worse than that, this case,
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to my mind, shows us when the IRS and Department of Justice kind of collide,
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and have a total breakdown with the poor taxpayers stuck in the middle.
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So this case was just decided September 4th, so not too long ago, two weeks ago.
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And it's the Antonio Cesar Fuentes case.
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And what what happened to this poor gentleman was that he was he was a u.s citizen
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but he was living his entire life in mexico he.
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And over several years his father who was a non-us citizen provided him with,
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financial support every month,
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and they came out to be over you know the hundred thousand dollar filing requirement
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to say you've gotten gifts from a foreign person.
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So even though the gift transfers were not taxable to Mr.
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Fuentes, they did trigger this little-known reporting rule that,
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as you and I have been aware, is one of the most punitive features of the international
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tax compliance regime that we have.
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You know, Virginia, if we shouldn't pause here and just read this section of
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the code in, you know, just to give the reality. It's 6093F.
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I can read it. Do you have it in front of you? You can read it.
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I can read it. Somebody should read it.
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Sure. Okay. So essentially what 6039F of the Internal Revenue Code says is if
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the value of the aggregate foreign gifts received by a United States person,
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exceeds a certain amount, which is the $100,000.
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Then they have to report that according to how this IRS prescribes.
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And then it says, penalty for failure to file the information.
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If a United States person fails to furnish the information within the time prescribed.
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The tax consequences of the receipt of that gift shall be determined by the secretary,
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and the United States person shall pay an amount equal to yada yada not to exceed
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25 percent of the amount of the gift in the aggregate so.
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What that essentially means is that the IRS can re-characterize this and say
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maybe it's not a gift maybe it's hidden compensation of some sort and it's fully taxable.
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And if they determine that it was a gift and you didn't file the special form,
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then you can be hit with a 25% penalty based on the value of the gift.
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And that's exactly what happened to poor Mr. Fuentes.
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The IRS hit him with a $90,000 penalty for one of the tax years and he filed
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a refund claim, but the IRS denied the claim.
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And then he submitted an amended claim for a refund, which the IRS didn't respond.
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So then he filed a lawsuit in federal court stating the failure to timely file
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this form about the father's gifts was due to reasonable cause.
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And he was seeking a refund of the $90,000 penalty.
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Virginia, where was the court that he filed this in initially?
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Where was the court located?
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It was in Texas, wasn't it? I thought it was.
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Yes, that's correct. It was Texas. Not Washington, D.C., right?
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No. It was not Washington, D.C.?
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It was Texas. Okay. So then what happened, and you and I know,
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by the way, it's not easy to get reasonable cause, to get the IRS to agree that
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you have reasonable cause.
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But in any event, what happened was suddenly he was given a refund of his $90,000 loan.
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And he was so happy and he thought well this is the end of the issue and the
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IRS also abated the other year's penalties so I guess they accepted his reasonable cause argument,
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and paid attention to it sometimes they don't pay attention to it initially
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because there's an automatic assessment of this this penalty amount and maybe
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they get to the reasonable cause thing later if you bring it to their attention.
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That should have changed under the IRS procedure, but maybe when all of this
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was going on, that had not yet been effective in the IRS procedure,
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that they read the statement first before they determine if a penalty should be paid.
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So unfortunately, because Mr. Fuentes had filed that lawsuit claiming the refund,
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what happened was another code section kicked in.
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It's code section, if anyone wants to look it up.
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7122A, paragraph A. And what that means is once the taxpayer initiates any kind
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of litigation over a tax liability, you,
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Only the attorney general who acts through the Department of Justice has the
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authority to compromise or settle or change that liability.
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So the IRS essentially lost jurisdiction the minute Mr. Fuentes filed his refund claim in court.
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And the IRS could not, therefore, abate the penalty or adjust his account.
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They couldn't issue the refund unless the Department of Justice authorized it.
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So this hadn't happened, of course.
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Let's just pause for a second. I think this is important, and it introduces a procedure in sex.
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I don't believe we've ever talked about in a podcast, right?
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So Section 7122, this is a procedural thing, right?
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It says, Correct. The secretary may compromise any civil or criminal case arising
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under the internal revenue laws prior to reference to the Department of Justice for prosecution.
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Prior, right? Mm-hmm. The devil case is being there that once it's sent over
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there, as you point out, the IRS lost jurisdiction.
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Now, I'm inferring from your description that the refunds were made after the
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referral to the Department of Justice. Is that correct?
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Yes. Yes. Must have been, right? But now, remember, there wasn't a referral
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to the Department of Justice, as we're thinking, like the IRS said. You just put a lawsuit.
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I'm sorry? The taxpayer brought a lawsuit essentially against the government for the refund, right?
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That's right. And that's when the IRS lost jurisdiction. God.
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Who could have known? Yeah. Incredible. Who could have known?
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Who could have known? And by the way, Mr. Fuentes was represented,
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I mean, he was having his tax returns done by,
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an attorney who was also a tax
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specialist and was working with him on this entire matter, I'm assuming.
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And so, yeah, who could have known?
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I'm sure, you know, Mr. Fuentes, when he filed the lawsuit in Texas.
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He had the assistance of an attorney.
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I don't know that, you know, all of the raps of the teachers were.
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I mean, he doesn't even live in the United States, right?
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Exactly. He lives in Mexico.
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So, what we have here, you know, I'm reminded again of that TV show that I used
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to watch when I was growing up with Twilight Zone, right?
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You know, here we have this case of this absolutely unforeseeable law, right?
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Because, I mean, you know, gifts are not taxable.
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If you receive a gift, they're not taxable to a person receiving them.
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And, but yet there's this reporting requirement, right? That if it's somehow
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a foreign gift, right? That's right.
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You know, and, and why do they put the requirement on the person receiving it?
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Precisely because it's a foreign gift, right?
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You know, they don't have an exception over the foreigner. But one thing that's
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interesting here is it's this culture of report everything, right?
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Everything has to be reported. I mean, you know, if this were a U.S.
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Person making the gift, there'd be a form 709 filed, right?
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That's correct. Yeah. That's correct. They would have to file a gift tax return
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even if they didn't have to pay gift tax because they can use their lifetime
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exemption amount, use some of that in making the gift.
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They still have to report it so that there can be kind of this accounting mechanism
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to say, well, I made a taxable gift, but I'm using part of my lifetime exemption amount.
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And therefore I don't have to pay you a gift tax, but you just kind of deduct
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it from my lifetime exemption amount.
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Yeah, in other words, I think it's important to understand here and be interested
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in your view of this, but in explaining the U.S.
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Gift tax, right, would it be fair to say that there's a presumption of any gift
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being subject to a tax and then there are just a bunch of exclusions?
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You know, if it's below whatever it is, $17,000 a year or below your lifetime exclusion, et cetera.
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Isn't that right? I think that's a good way to look at it.
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That anytime you make a gift, yes, you have issues.
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Even if you're a foreign person, right? And I mean, if you're making a transfer
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of money to someone you love in the United States and you're sending it from your,
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foreign bank account into the U.S., argue that the transfer took place in America and that
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cash is treated as, you know, a tangible item, then you as the foreigner are subject to a gift tax.
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If that comes down that way, I mean, you just don't know. But people are so unaware.
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Of all of these crazy rules, then why shouldn't they be? I mean,
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we don't go about our lives thinking, oh, if I make a gift, I may have to think about X, Y, and Z.
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But I mean, if you were to educate Americans in a simple way,
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I mean, let's say that you were preparing the U.S. citizenship test.
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Don't you think a good question would be true or false? Any gift made by a U.S.
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Citizen is subject to a gift tax, is potentially subject to a gift tax? Yeah, great question.
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No answer, of course, yes.
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So, you know, really what we're talking about here is this reporting obligation. It's on Form 3520.
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You know, it's really a way to, you know, impose a continuing reporting obligation
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on the existence of the gift, sometimes on the donor, sometimes on the donee,
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depending on the nationality of the donor, right?
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Yeah. Yeah. So, I mean, that's the first part. We've got this total insanity, right?
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You know, and then this outrageous penalty, right?
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You know, for the failure. It really is a severe penalty for an informational
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form. I mean, it's not, there's no loss to the government in terms of tax dollars.
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This is just an informational form to say, I got a gift from my foreign father
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or mother or friend or whatever that exceeds this amount.
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I mean, one could do it as simply sort of a fundraising mechanism,
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right? You know, for the government, would you think? Well, this is,
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I think, how this form and the penalty have been viewed.
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Because, as you know, in earlier, not too long ago, it was an automatic assessment of this penalty.
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People at the IRS were not reading reasonable cause statements.
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Now, the then commissioner at the time said that this was going to change.
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I'm not sure if it's truly changed. I don't know. I haven't.
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You know, seen that in action. But I hope it's changed.
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I hope they're reading the reasonable cause statements because if they're not
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and the penalty is assessed, then the poor taxpayer has to go and fight to try and get the money back.
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Very high cost. Very high cost. Plus, you know, I mean, I think a,
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I mean, no disrespect to any of the judges hearing these cases,
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but I think a continual thing that we're seeing as cases heard by judges with
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a very limited knowledge.
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Of the tax code in that. Would you agree with that?
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I think, especially in the foreign area, John, it's so complicated for practitioners.
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People who've been studying this area of law and working in it for years and
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years still come up with, oh my goodness, what does this mean?
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What is this law saying? What are these regulations? How do we interpret them?
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It's very, very difficult. It's such a complicated area, and,
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you know, judges are not geared toward understanding that area.
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Well, there's no time to understand it. The problem is that the expertise in
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this, as you know from being one of the experts, is something that's acquired over years and years.
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And it's a tremendous amount of, you know, let's call it muscle memory or whatever.
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I mean, I think it's almost impossible for somebody without some kind of background
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in this to, you know, just read these sections and know what to do with them,
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or do you think that's correct?
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Do you think that's correct? That's absolutely correct, yes.
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All right, you know, we've got the tax issue itself, or the reporting issue,
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but then all of a sudden, you know, we get into this huge procedural mess, and you know, we've got.
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I didn't read this case very carefully, but I thought that one element of it
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was that because he was a U.S. citizen abroad, the proper forum was in the District
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of Columbia to bring this law. That's right.
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That's right. Out of Texas. Have I got that right?
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That's correct. Whenever the
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taxpayer is residing abroad, the forum is automatically Washington, D.C.
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So there was some aspect of this case. Wasn't there about having to transfer
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this thing from Texas to the District of Columbia?
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Yes, I think because that's why the Department of Justice is now suing to get,
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the money back, the refund that was paid to the taxpayer, the $90,000,
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and to assess penalties for the other years that the gift reporting forms were not filed.
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Oh, my God. So they're not just trying to get the 90 grand.
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I understand they're also hitting him for the other years.
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Okay. Virginia, could I ask you to summarize the sheer magnitude of what they're
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trying to get from this guy at this point now?
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I don't know the dollar number. Well, just structurally. They're trying to get
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penalties for every year, right?
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Yes, and we have four years at issue here.
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And they're trying to get a refund of what the IRS returned to him. Is that correct? Yes.
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The IRS gave him back the penalty, the 25% penalty for the 2010 year, and that was $90,000.
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So do you think a possible lesson here is that contrary to popular wisdom,
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the IRS is not, in fact, the most egregious arm of the U.S. government?
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Well, I think what bothers me the most is that I felt like,
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the IRS is the party that read his reasonable cause statement and determined,
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And, okay, he really did meet the standards for reasonable cause.
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Let's give him back the $90,000 penalty and let's drop the other penalty years
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that we assess the penalty.
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So I felt like that agency is the one that probably has the most knowledge about the case.
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Now, I don't know how much knowledge the Department of Justice would really
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have at this point. I just don't know. I don't understand why they're acting at cross purposes.
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And they're spending taxpayers' money doing it, right? Yes. You know, that's interesting.
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So it's a structural failure, you know, in this tax administration.
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It's administrative fragmentation of some sort that shouldn't be happening.
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By the way, was this a case of the taxpayer realizing the omission and coming
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forward voluntarily to try to correct this?
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No, the IRS had told him to file these forms. I don't know how they found out
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about the gifts from his father, maybe because he was getting monthly amounts
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into a bank account, and that triggered something.
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But they should file the forms, and so he filed the forms, right?
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Yes, that's correct. Surprise! Yeah.
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You never told me about that. Yeah, yeah, yeah. The chances are he didn't even
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know about the penalties when he filed the forms. Probably didn't.
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But, you know, here's, it's a real eye-opener,
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for everyone that, you know, when a case moves to the Department of Justice,
00:20:14.184 --> 00:20:18.239
which can be automatic when the taxpayer sues to get a refund, And,
00:20:19.131 --> 00:20:27.367
then everyone has to be aware that they understand IRS administrative authority is now finished.
00:20:28.434 --> 00:20:30.934
Would this be an argument? I mean, let's say that, you know,
00:20:30.934 --> 00:20:35.190
you've discovered that you didn't know the law, you haven't filed the forms.
00:20:36.049 --> 00:20:43.244
You know, no matter how I look at this case, right, it seems to me that it wouldn't
00:20:43.244 --> 00:20:48.124
be a big step for somebody to say, oh, my God, I'm not going to get involved in this.
00:20:48.124 --> 00:20:52.563
No way am I going to risk filing anything as a consequence. Mm-hmm.
00:20:53.360 --> 00:20:56.104
You know, I mean, I just do not, I guess what I'm saying is,
00:20:56.104 --> 00:21:01.723
I do not see how this serves the interests of the taxpayer, the government,
00:21:02.357 --> 00:21:05.817
the perception of the fairness of administration, of justice.
00:21:06.345 --> 00:21:10.391
I just don't see how this serves any interest at all. Maybe,
00:21:10.536 --> 00:21:13.467
can you find one? What interest does it serve?
00:21:14.165 --> 00:21:19.828
I mean, at this point, at this point, they haven't even actually extracted anything from it, right? No.
00:21:22.119 --> 00:21:25.222
Well, I don't know what to say about that, John.
00:21:26.644 --> 00:21:34.896
It's chaos. Maybe this is something that Taxpayer Advocate Service can start to push for.
00:21:36.014 --> 00:21:41.384
Maybe they need to require stronger internal controls so that there's no automated
00:21:41.384 --> 00:21:45.974
actions after a Department of Justice referral. I mean, this shouldn't have
00:21:45.974 --> 00:21:47.475
happened. This shouldn't have happened.
00:21:48.420 --> 00:21:51.014
You know, shouldn't have happened. It's a horrible thing. But,
00:21:51.014 --> 00:21:56.894
I mean, I would bet my last dollar that this man is really, really regretting, you know.
00:21:57.294 --> 00:21:59.310
Yes. Seeking a refund, right? Yeah.
00:22:00.536 --> 00:22:05.419
Really? Of course. Oh, well. So I, but people should know, right?
00:22:06.083 --> 00:22:10.686
John, people should, this could be the consequence.
00:22:11.678 --> 00:22:16.326
That's exactly right. I mean, there's the complexity of this stuff for anybody
00:22:16.326 --> 00:22:20.859
with non-US connections, whether Americans are abroad or not,
00:22:21.715 --> 00:22:25.886
the complexity is so, is so significant, right?
00:22:25.886 --> 00:22:28.398
It's so vast that.
00:22:30.909 --> 00:22:34.426
Now, understanding this stuff I mean, I don't know what you could do to get
00:22:34.426 --> 00:22:38.780
people to anticipate These completely unanticipated laws, right?
00:22:39.469 --> 00:22:46.672
There's nothing but a penalty trap The other thing I find amazing about this stuff is that You know,
00:22:47.319 --> 00:22:54.403
so these gifts I mean, it's one, you know, these gifts are Usually,
00:22:54.995 --> 00:22:58.966
but not always is usually coming from non-U.S.
00:22:58.966 --> 00:23:03.136
Resources, right? Non-U.S. money. It's stuff that never had anything to do with
00:23:03.136 --> 00:23:05.235
the U.S. taxes in the beginning, right?
00:23:05.948 --> 00:23:09.274
I mean, maybe the government's going to ask, well, you know,
00:23:09.390 --> 00:23:13.256
you want to inject this dirty money, this non-U.S. money into our economy?
00:23:13.256 --> 00:23:14.760
We're entitled to a cut of it.
00:23:15.353 --> 00:23:21.192
I mean, it is so indefensible, you know? It's so indefensible.
00:23:22.130 --> 00:23:25.153
But anyway, you're going to write about this, I assume, fairly soon, right?
00:23:26.003 --> 00:23:31.376
Yes, yes. I'm going to prepare an article that will be, you know, up on Forbes soon.
00:23:31.789 --> 00:23:38.976
Maybe next week I'll get that up and then later it'll be on my tax blog so people can read all about it.
00:23:39.716 --> 00:23:43.716
You know, the case just came down to me. People find the Forbes and I guess
00:23:43.716 --> 00:23:46.932
they just Google Virginia Latoura Deaker for Forbes.
00:23:47.553 --> 00:23:50.176
Yes, they'll find me there. They're going to find the tax blog.
00:23:51.156 --> 00:24:00.912
Blog is www.us-tax.org and we have,
00:24:01.354 --> 00:24:06.386
you know categories for all the different areas of international tax that the
00:24:06.386 --> 00:24:08.912
individual would probably be interested in,
00:24:09.370 --> 00:24:14.526
you know do you have foreign corporations do you have gifts do you have expatriation
00:24:14.526 --> 00:24:18.850
issues dual nationality check Check out the categories because,
00:24:19.535 --> 00:24:20.864
the blog posts are,
00:24:21.916 --> 00:24:27.374
under each category heading that the person might have an interest in.
00:24:28.191 --> 00:24:33.746
Well, I can say that it's a fantastic blog. You know, to borrow a tagline from
00:24:33.746 --> 00:24:37.996
American Express, no American abroad should leave home without it.
00:24:39.056 --> 00:24:42.356
Oh, thank you, John. Absolutely. It's great work.
00:24:42.983 --> 00:24:50.046
Okay, well, I thank you for this conversation and for your efforts and talents
00:24:50.046 --> 00:24:53.302
at simplifying some very, very complex things.
00:24:54.108 --> 00:25:01.527
And I look forward to further simplification and education for the masses in your Forbes article.
00:25:02.570 --> 00:25:06.995
Thank you, John. I'll send you an advance notice when it's coming up.
00:25:07.407 --> 00:25:09.381
Wonderful. Appreciate that.
00:25:10.008 --> 00:25:14.226
Okay. Thank you so much. until next time. I mean, you know, and there will be
00:25:14.226 --> 00:25:20.479
many more times because there is no end to the U.S. tax problems out there.
00:25:22.943 --> 00:25:25.312
Thanks very much. Thank you, John.