The U.S. Treasury Department and IRS released proposed regulations (REG-124850-08) to guide the reporting of transactions with foreign trusts, large foreign gifts, and loans and property use from foreign trusts. These regulations also amend rules for foreign trusts with U.S. beneficiaries and provide special rules for dual resident and dual status taxpayers in the U.S.

These regulations apply to transactions and gifts for tax years starting after the final regulations are published. However, taxpayers can rely on these proposed regulations for tax years ending after May 8, 2024, if they consistently apply them in their entirety until the final regulations take effect.

Form 3520 is used to report certain transactions with foreign trusts and large gifts or bequests from foreign persons. Noncompliance with Form 3520 can result in significant penalties.  For failing to report a foreign trust or gift, the penalty is the greater of $10,000 or 35% of the gross reportable amount of the trust or gift.

The proposed regulations provide special rules for a “dual resident taxpayer” (a foreign national considered a resident of both the U.S. and a treaty country under each country's internal laws). A dual resident taxpayer, who computes U.S. income tax liability as a nonresident alien and complies with specific filing requirements, is exempt from the Form 3520 filing requirement for any covered gifts received during the period they are treated as a nonresident alien. This exemption ensures that these taxpayers do not need to report such gifts on Form 3520 while they are considered nonresidents.

The Treasury Department and the IRS have issued an announcement, under IR-2024-12 dated January 16, 2024, stating that businesses are not required to report the receipt of digital assets in the same way they report cash transactions over $10,000. This directive follows the Infrastructure Investment and Jobs Act, which expanded the definition of cash in section 6050I of the Code to include digital assets. However, the implementation of this provision awaits the issuance of specific regulations by the Treasury and IRS.

The current rules for reporting cash receipts over $10,000 on Form 8300 remain unaffected by this announcement. The upcoming regulations will detail the procedures for reporting digital asset transactions and will provide opportunities for public comment and participation in a public hearing.

In the meantime, transactions involving digital assets are exempt from the reporting requirements applicable to cash transactions of similar amounts. This transitional guidance will remain until the necessary regulations are published.

For U.S. citizens, Green Card holders, and those considered U.S. persons for tax purposes, understanding and complying with international tax requirements is essential. These obligations primarily revolve around the Foreign Account Tax Compliance Act (FATCA), the Foreign Bank and Financial Accounts Report (FBAR), and IRS Form 5471. These regulations are designed to combat tax evasion and ensure transparency of international financial transactions and holdings.

FBAR (FinCEN Form 114)

U.S. persons must file an FBAR if they have a financial interest in or signature authority over one or more foreign financial accounts, with an aggregate value exceeding $10,000 at any time during the calendar year. Failure to file an FBAR can result in hefty penalties: up to $12,921 for non-willful violations and the greater of $129,210 or 50% of the account balance at the time of the violation for willful violations.

FATCA (Form 8938)

U.S. taxpayers with specified foreign financial assets that exceed certain thresholds must report these assets on Form 8938, filed with their annual tax returns. Penalties for failing to file Form 8938 start at $10,000 and can go up to $50,000 for continued failure after IRS notification. Additionally, understatement of tax attributable to non-disclosed assets can result in a 40% penalty on the understatement.

Form 5471

U.S. shareholders, officers, or directors of certain foreign corporations are required to file Form 5471 to report their connection to the foreign corporation and its activities. The initial penalty for failing to file Form 5471 is $10,000 for each annual accounting period of each foreign corporation that is not reported. Additional penalties of $10,000 may apply for each 30-day period of continuing noncompliance (after the IRS notifies the taxpayer of the failure to report), up to a maximum of $50,000 per return.

Treaty-Based Relief for Nonresidents

Individuals who are dual residents of the U.S. and another country may claim treaty benefits to be treated as a nonresident alien of the U.S. for tax purposes. This election can significantly affect their reporting requirements.

To claim treaty benefits, an individual must file IRS Form 8833, Treaty-Based Return Position Disclosure, with their tax return. This disclosure allows them to be treated as a nonresident alien, altering their tax and information reporting obligations under U.S. law.

While claiming treaty benefits may alter an individual's income tax obligations, it does not exempt them from FBAR filing requirements, as FBAR is determined by legal residency status and not tax residency. However, for FATCA, individuals treated as nonresident aliens for part of the tax year and who comply with all relevant filing requirements (including timely filing Form 1040-NR and attaching Form 8833) are not required to report specified foreign financial assets on Form 8938 for that part of the tax year.

Special considerations apply to Form 5471 for individuals claiming treaty benefits. Under certain conditions outlined in Reg. 1.6038-2(j)(2)(ii), such individuals may fulfill their reporting obligations by filing the audited financial statements of the foreign corporation, provided no other U.S. person is required to furnish information under section 6038 with respect to the foreign corporation.

Navigating the complexities of international tax compliance requires a thorough understanding of the regulations and the potential consequences of noncompliance. For those eligible to claim treaty benefits, understanding the specific alterations to your reporting obligations is crucial. Given the severe penalties for noncompliance, individuals with international tax obligations should consult with their tax service providers to ensure full compliance and to leverage treaty-based positions effectively.

As the November 2024 presidential election draws near, the tax policies of the two presumptive candidates, Joe Biden and Donald Trump, are at the forefront of economic discussions. Both candidates propose vastly different approaches to taxation, reflecting their broader economic philosophies. These policies not only signal the future direction of the U.S. economy but also have direct implications for businesses, individuals, and the overall fiscal health of the nation. Here's a comparative analysis of Biden and Trump's tax proposals.

 

Joe Biden

Joe Biden's tax policy under his proposed budget for fiscal year 2024 emphasizes increasing tax rates on corporate, individual, and capital gains income. Additionally, Biden aims to expand tax credits for workers and families and broaden the tax base to include more types of income.

 

Business Taxes

• Increase in Corporate Taxes:  Biden proposes raising the corporate income tax rate to 28%, aiming to fund infrastructure and social programs.

 

• Increase GILTI tax rate & repeal FDII deduction:  The plan includes increasing the global intangible low-taxed income (GILTI) tax rate from 10.5% to 21% and repealing favorable tax rates on foreign-derived intangible income (FDII).

 

• Expansion of Investment Income Tax:  The proposal extends the net investment income tax to cover nonpassive business income and increases taxation on the fossil fuel industry.

 

Individual Taxes

• Limit favorable long term capital gains tax rate:  For incomes above $1 million, long-term capital gains and qualified dividends would be taxed at ordinary income tax rates. Additionally, a minimum effective tax rate of 20% on an expanded measure of income for households with net wealth above $100 million is proposed.

 

• Estate and Wealth Taxes:  Biden's policy includes tightening rules related to the estate tax, aiming to prevent wealth accumulation through inheritance.

 

• Expansion of Tax Credits: The Child Tax Credit and Earned Income Tax Credit would see significant enhancements, alongside an expansion of premium tax credits.

 

• Individual Income Tax Rate Increase: An increase in the top individual income tax rate to 39.6% for high earners and an extension of certain TCJA tax changes for those making under $400,000.

 

Donald Trump

Donald Trump's tax policy focuses on maintaining low tax rates, particularly for businesses and high-income individuals, and implementing aggressive tariffs, especially against China.

 

Business Taxes

• Maintain Corporate Tax Rate:  Trump intends to keep the corporate income tax rate at 21%, maintaining the TCJA level.

 

• Estate Tax Cut: The plan includes making the TCJA's estate tax cuts permanent, benefiting high-net-worth estates.

 

• Import Tariffs:  A notable policy is the imposition of a universal baseline tariff on all U.S. imports and a significant 60% tariff on imports from China, aiming to encourage domestic production and address trade imbalances.

 

Other Proposals

• Taxation of University Endowments:  Trump proposes taxing large private university endowments, targeting institutions that he perceives as having significant untaxed wealth.

 

The tax policies of Joe Biden and Donald Trump present clear contrasts in their vision for America's economic future. Biden's approach focuses on increasing tax rates for higher earners and corporations to fund social programs and infrastructure, aiming for a more equitable tax system. On the other hand, Trump's strategy emphasizes low taxes to spur economic growth and aggressive tariffs to correct trade imbalances. As voters head to the ballot box in November 2024, the economic implications of these policies will undoubtedly play a crucial role in their decision-making process.