Treasury Issues Proposed Foreign Trust and Gift Regulations

Proposed Foreign Gift and Trust Regulations 

The reporting of foreign trusts and large gifts and inheritances is a very complex aspect of international tax law. That is in part because many aspects of foreign trust laws have not been properly updated to coincide with COLA (Cost of Living Adjustments) — and enforcement protocols in general. Further complicating the reporting of foreign trusts is that the definition of a trust can be very broad. For example, a foreign pension plan is oftentimes designed as a trust so that taxpayers who have a typical 401K-equivalent in a foreign country find themselves at the mercy of the Internal Revenue Service and trying to wade through Forms 3520 and 3520-A — even though the foreign financial institution that houses the foreign pension does not provide taxpayers with this type of information. And, if it turns out that the foreign pension plan is a grantor trust, it becomes infinitely more complicated. Let’s look at five (5) important aspects of the new proposed foreign trust and gift regulations.

The Treasury Issues Proposed Regulations for Foreign Trusts and Gifts

$100,000 Gift to Adjust for COLA

• • • “Under proposed §1.6039F-1(c)(2)(i)(A), a U.S. person is not required to report foreign gifts from foreign individuals or foreign estates if, during the U.S. person’s taxable year, the aggregate amount of foreign gifts received, directly or indirectly, from any one individual or estate (the transferor) does not exceed $100,000, as modified by cost of living adjustments under proposed §1.6039F-1(c)(2)(v). For purposes of determining whether the $100,000 reporting threshold is met, all foreign gifts (including covered gifts and bequests) from the transferor and from any foreign persons related to the transferor are aggregated. See proposed §1.6039F-1(c)(2)(i)(B).”

Additional Information About the Transferor

• • • “Specific identifying information about the transferor is not currently required to be provided on Form 3520. The Treasury Department and the IRS are of the view that the additional identifying information would assist the IRS in its determination of whether these amounts are properly treated as foreign gifts, and the burden imposed on the U.S. person should be minimal because the U.S. person would need to know the transferor’s identity in order to know whether the transferor is foreign and in order to apply the aggregation rule.”

Dual-Status Definition of a U.S. Person

• • • “Proposed §1.679-1(c)(2) amends the current definition of U.S. person for purposes of §§1.679-1 through 1.679-6 to remove the explicit statement that a nonresident alien individual who elects under section 6013(g) to be treated as a resident of the United States is a U.S. person for purposes of section 679 without intending a substantive change from the existing regulation regarding the treatment of persons who make an election under section 6013(g).

    • Additionally, a U.S. person for purposes of section 679 will include a nonresident alien individual who elects under section 6013(h) to be treated as a resident of the United States. An election under either section 6013(g) or (h) is effective for all purposes of chapter 1 of the Code, including section 679, and thus, no specific reference to either rule should be required. Under the definition of U.S. person in the proposed regulations, however, a dual resident taxpayer (within the meaning of §301.7701(b)-7(a)(1)) is not treated as a U.S. person with respect to any taxable year (or portion of a taxable year) for which such person computes U.S. tax liability as a nonresident alien pursuant to §301.7701(b)-7.

    • The Treasury Department and the IRS are of the view that it is not necessary to treat a dual resident taxpayer who has elected to compute such person’s income tax liability as a nonresident alien as a U.S. person for purposes of §§1.679-1 through 1.679-6 in order to carry out the purposes of section 679. However, see §1.679-5 for rules that may apply if a dual resident taxpayer who has been computing U.S. tax liability as a nonresident alien begins to compute tax liability as a U.S. resident.”

Migration of Foreign Trust to Domestic is a Distribution

• • • “Proposed §1.6048-4(b)(4) provides that a distribution includes the migration of a foreign trust to a domestic trust. In such a case, the income and corpus of the foreign trust is treated as distributed to the domestic trust on the date the foreign trust becomes a domestic trust. See §301.7701-7 for the rules that apply to determine whether a trust is a foreign trust or domestic trust.”

Limited U.S. Agent Status to Avoid Harsh Tax Consequences

• • • Accumulation distributions and U.S. Agents: Proposed §1.6048-4(e) provides that, if a U.S. person fails to provide adequate records to the IRS for purposes of determining the income tax consequences of a distribution from a foreign trust (within the meaning of proposed §1.6048-4(b)) other than a loan or use of trust property that is not treated as a section 643(i) distribution under proposed §1.643(i)-1, then the entire distribution is treated as an accumulation distribution includible in the U.S. person’s income. However, if the trustee of the foreign trust authorizes a U.S. person to act as the trust’s limited agent under the rules prescribed in proposed §1.6048-3(e), then the IRS can summons and examine trust records through the U.S. agent and thus may determine the tax consequences of the distribution under the general rules provided in proposed §1.6048-4(d)(1) rather than treating the entire distribution as an accumulation distribution.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.