New Proposal: Reporting Assets Through Foreign Trusts and Gifts
Earlier this year, the IRS proposed new guidelines for transactional reporting for foreign trusts and gifts reflected on Forms 3520 and 3520-A.
Though less controversial than the new rules for donor-advised funds or the crackdown on the wealthy’s tax avoidance methods, clients may soon be required to adhere to new guidelines.
The Proposal
On May 8, 2024, the Treasury Department and IRS proposed new rules about how U.S. citizens should report transactions with foreign trusts and large gifts from foreign sources reported on Forms 3520 and 3520-A. Some people have pointed out issues with how the IRS handles penalties related to these forms. In response, the IRS has created a group to review the penalty process, aiming to make it easier and encourage more people to comply voluntarily.
The proposal, based on the 1996 Small Business Job Protection Act, aimed to stop tax avoidance schemes in which foreign trusts were used to move assets offshore. The IRS had trouble determining if U.S. individuals were involved with these trusts and if they were adequately reporting and paying taxes on their income. The new regulations aim to address these issues.
Before this proposal, taxpayers had to rely on less formal guidance related to foreign trusts and foreign gifts (e.g., Notice 97-34, Revenue Procedures 2014-55, and 2020-17.
How am I impacted?
If passed, it means the IRS and Treasury want the wealthy to report more rather than less about trusts, which is aligned with how other countries report the information by making it public or semi-public. Compared to its foreign counterparts, the U.S. places more emphasis on privacy, including asset protection and personal safety.
The proposal would also change how the IRS defines "U.S. persons" and certain types of loans called "qualified obligations." It also:
Addresses how some people use indirect loans from foreign trusts to get around the rules;
Expands the transactions that need to be reported, like indirect transfers and payments from trusts;
Provides more explicit guidelines on exceptions to these rules and;
Outlines new rules for properly accepting foreign gifts and ensuring the IRS is notified correctly, ensuring compliance with tax regulations.
We will keep you up-to-date on these developments. In the meantime, please disclose to us any foreign assets you may have when it comes time for tax planning. It's better to be safe than sorry.