IRS Considers Relief in Proposed Foreign Trust Reporting Regulations

In August, the IRS held a public hearing on proposed regulations REG-124850-08, 89 Fed. Reg. 39440, which aim to clarify and ease information reporting requirements under Sections 6048 and Section 6039F for foreign trusts and large foreign gifts. The proposed updates address several critical sections of the tax code, including foreign trust income under Section 679, large foreign gifts under Section 6039F, and the penalties associated with missed or incomplete reporting under Section 6677.

Key Stakeholder Recommendations

During the hearing, tax professionals and advocacy groups provided feedback, emphasizing the need for exemptions and penalty relief to simplify compliance. Here are the main points raised:

1. Exemptions for Foreign Pension Trusts: Stakeholders suggested that the final regulations should include broader exemptions for reporting foreign pension trusts, especially for those in countries with U.S. tax treaties. The rationale is that when tax treaties provide tax deferrals or exemptions, requiring additional reporting may impose unnecessary burdens on taxpayers without improving compliance.
2. Higher Threshold for Reporting Foreign Gifts: Recommendations included increasing the current $100,000 reporting threshold for foreign gifts—unchanged since 1997—to at least $1 million. Additionally, some proposed an exemption for gifts and bequests between spouses where one spouse is a U.S. citizen.
3. Penalty Relief for First-Time Filing Violations: The hearing highlighted that the penalties for missing Form 3520 filings, which can reach up to 25% of the unreported amount, are often disproportionate. Stakeholders urged the IRS to consider automatic penalty abatement for first-time offenses and waivers without intent to avoid tax and to postpone further penalties until appeals are resolved.
4. Exemption for Foreign Pension Plans in Treaty Countries: Another noted suggestion was to entirely exempt foreign pension plans from Form 3520 reporting where these accounts are tax-favored in the taxpayer’s country of residence. Stakeholders argued that these accounts often resemble U.S. retirement accounts and do not present additional tax evasion risks.

Looking Ahead

The IRS’s proposed regulations aim to balance compliance needs with practical reporting standards, especially for those dealing with foreign trusts and gifts. As the IRS reviews public comments, taxpayers may see more flexibility and clarity in the final regulations, potentially easing the compliance burden on those navigating the complexities of international tax laws.

McGuire Sponsel will continue to monitor and provide updates on these potential changes, which could bring much-needed relief to U.S. persons engaged with foreign trusts and accounts. Contact our Global Business Services team with questions on foreign trust reporting regulations or any other international tax issue.