Proposed Regulations Exempt Qualifying Dual Residents from Form 3520 Filing Requirements

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.

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