Relief Sought in Final Foreign Trust Information Reporting Regs

The IRS should include certain reporting exemptions and penalty abatement carve-outs in final regs covering information reporting of transactions with foreign trusts and receipt of large foreign gifts, loans and property uses, and foreign trusts with multiple U.S. beneficiaries, stakeholders told the IRS.

On August 21, the IRS held a public rulemaking hearing with in-person and telephonic speakers on proposed regs issued in May that update rules and consolidate previous guidance on foreign trust and gift provisions under Code Sec. 643(i), Code Sec. 679, Code Sec. 6039F, Code Sec. 6048, and Code Sec. 6677.

Among the proposed changes are amendments to guidelines set forth in Notice 97-34 that implement the HIRE Act (P.L. 111-147) and subsequent letter rulings (Rev Proc 2014-55 and Rev Proc 2020-17). The regs also tweak select definitions under Treasury regulations: 1) U.S. person (Reg §1.679-1(c)(2)), 2) obligation (Reg §1.679-1(c)(6)), and 3) qualified obligation (Reg §1.679-4(d)).

In total, the IRS received over 1,500 comments during the comment period. At Wednesday’s hearing, several speakers requested the final regs ease up on some reporting requirements and penalty assessments through clear exceptions or exemptions.

Henry Alden, managing member of Everest International Group, spoke on behalf of the American Institute of Certified Public Accountants (AICPA) task force on penalties relating to Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Alden, who chairs the task force, says it serves to spare “rank and file taxpayers” from the “complex and costly” reporting requirements under Sections 6048 and 6039F.

He recommended that final regs expand exceptions for Section 6048 foreign pension trust information reporting, building on those already established in the 2020 revenue ruling and proposed regs. The reporting exception for tax-favored foreign retirement trusts should include pension plans in certain countries the U.S. has a tax treaty with.

“We believe that where a tax treaty provides a tax exemption or tax deferral for a particular item, a similar reporting exemption should be allowed under 6048,” said Alden.

Additionally, Alden said the requirement that a foreign retirement plan may only permit contributions to be made with respect to earned income “severely limits” the number of plans that will qualify for the Section 6048 reporting exception and it “would fall harshly on numerous” participants.

Also representing the AICPA was Karen Brodsky, a Deloitte tax partner who previously chaired the Form 3520 penalty task force but still serves as a member. Brodsky suggested the filing threshold for U.S. persons to report gifts from non-U.S. persons be increased from $100,000 as it was set in 1997 to at least $1 million.

“We also request an exception to Form 3520 reporting for gifts and bequests between spouses, especially where the recipient is a U.S. citizen,” she added.

Kevin Matz of the American College of Trust and Estate Counsel noted the monthly penalty for failing to file Form 3520 if the current threshold is exceeded equals 5% of the unreported amount and can increase to as much as 25%. Matz suggested that IRS adopt a “more lenient” approach to these penalties that would include automatic abatement for first-time offenses.

He also said penalties should be waived in cases “where there’s no evidence of tax avoidance, in cases where the taxpayers a history of tax compliance, where there’s no unreported income, and also when the taxpayer received erroneous advice from a tax professional.” Finally, taxpayers should have the opportunity to establish reasonable cause before the penalty is assessed. Accrual of additional penalties should be postponed until the taxpayer’s appeal is resolved, said Matz.

John Richardson of Stop Extraterritorial American Taxation urged the IRS to take the position that foreign pension plans and accounts “tax-favored under the laws of the country where somebody lives in” are “completely exempt” from Form 3520 and Section 6048 application.

While there may be “technical differences” between pension plans and accounts in the U.S. and other countries, “there is no functional difference,” Richardson argued, “and there’s certainly no risk of tax evasion either way.”

For more on Form 3520 reporting requirements under Section 6048, see Checkpoint’s Federal Tax Coordinator ¶ S-3644.