Wednesday, May 8, 2024

Treasury Issues Foreign Trust Reporting Rules

According to Law360The U.S. Treasury Department proposed regulations on May 8, 2024 that provide guidance on the requirements for individuals to report their transactions with foreign trusts to the Internal Revenue Service, including the receipt of large gifts.

The proposed rules cover several disclosure provisions regarding interactions with foreign trusts, including reporting obligations under Internal Revenue Code Section 6048 and penalties under IRC Section 6677 for the failure to comply with those requirements. In addition, the guidance addresses IRC Section 6039F, which requires individuals to report the receipt of large foreign gifts, in part by proposing an anti-avoidance rule.

In general, the proposed regulations for Section 6039F incorporate guidance that Treasury provided in a 1997 notice. The rules also provide new guidance to address subsequent statutory developments and to target certain abuses the IRS has flagged, according to the preamble.

This additional guidance includes an anti-avoidance rule that allows the IRS to recharacterize purported loans and other transfers from foreign trusts as gifts if the agency determines the transfer "is in substance" a gift, Treasury said in the preamble. The department noted the IRS has become aware of U.S. individuals who are seeking to circumvent Section 6039F by claiming that the amounts they receive from overseas aren't gifts but that the transfers are otherwise not taxable, Treasury said.

"These amounts, however, objectively have all the indicia of being a gift," Treasury said. "Under the existing principles of federal tax law, the IRS therefore will recharacterize these amounts as foreign gifts that should have been reported under Section 6039F."

According to the preamble, Congress enacted many of the reporting requirements in response to abusive tax schemes involving foreign trusts that reemerged in the mid-to-late-1990s after previously peaking in the 1980s. These schemes generally involved U.S. individuals using foreign trusts to transfer large amounts of assets offshore, where it was difficult for the IRS to identify ownership and related tax payments on the income from such trusts, Treasury said.

The proposed guidance generally implements rules that were first outlined in a notice and revenue procedures for Section 6048, which provides reporting rules regarding a U.S. person's interactions with a foreign trust, including creating and owning the trust, along with transferring and receiving assets.

Under Section 6677, failures to comply with the reporting requirements under Section 6048 can amount to a civil penalty equal to 35% of the trust's gross reportable amount. The statute also allows the IRS to impose an additional penalty of $10,000 every 30 days that somebody fails to comply with reporting obligations within 90 days of notification from the agency.

The proposed guidance includes three separate civil penalties under Section 6677 that correspond to each reporting requirement that Treasury proposed under Section 6048. Failure to comply with one proposed Section 6048 rule, which involves requirements for reporting information about U.S. owners of foreign trusts, initially imposes a penalty amounting to the greater of $10,000 or 5%, rather than 35%, according to Treasury.

The proposed rules also cover IRC Section 643(i), which includes reporting rules for U.S. individuals that receive loans from foreign trusts and use foreign trust property.

The Section 643(i) guidance generally incorporates a previous notice, with certain modifications to provide procedural rules, such as how to determine a loan's yield to maturity, according to Treasury. In addition, the guidance includes anti-abuse rules, such as requiring payments and information to be timely reported, Treasury said.

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1 comment:

  1. Three sections of the proposed foreign trust reporting regulations:

    Tax-Favored Foreign Retirement Trusts

    The guidance, issued May 7, includes a proposed rule that would exempt certain tax-favored foreign retirement trusts from IRC Section 6048 , which outlines reporting rules regarding a U.S. person's interactions with a foreign trust, including transferring and receiving assets.

    In general, a tax-favored foreign retirement trust is created to operate "exclusively or almost exclusively" to provide pension or retirement benefits, according to Treasury. Under the proposed rules, these trusts would qualify for the Section 6048 exemption if they meet certain requirements, including an annual contribution limit of $75,000 and a lifetime limit of $1 million, adjusted for inflation.

    Large Foreign Gifts

    Under the proposed Section 6039F anti-avoidance rule, the Internal Revenue Service could recharacterize purported loans and other transfers from foreign trusts as gifts if the agency determines the transfer "is in substance" a gift, Treasury said in the guidance's preamble. Under Section 6039F, undisclosed large gifts from foreign individuals could result in penalties of up to 25% of the gift.

    The 60-Day Rule

    The guidance includes a proposed anti-avoidance rule under IRC Section 679 , which allows the IRS to request additional information about a foreign trust and its potential beneficiaries. If a U.S. individual who resides in the country doesn't provide such information within 60 days of the agency's request, the trust will be presumed to have a U.S. beneficiary, according to the guidance.