Americans Abroad Want Relief From IRS on Foreign-Trust Reporting

The IRS’s efforts to revamp its standards on the disclosure of foreign trusts are disappointing to US expatriates, who say the agency hasn’t done enough to clarify whether they’re caught up in the rules.

Many foreign retirement plans are classified as foreign trusts, which requires the overseas Americans who hold them to report such trusts to the IRS out of concern that they could be used to avoid taxes.

Practitioners and advocates for US expatriates say proposed IRS rules on foreign trusts don’t clear up ambiguities about who has to report and who doesn’t, leaving hundreds of thousands of expatriates in financial limbo.

After the IRS issued its proposed foreign-trust rules in May, more than 1,500 people sent comments to the agency, the bulk of them from Americans abroad pleading with the IRS to be clearer about whether they and their particular foreign retirement vehicles must file. One American living in Canada wrote that the issue has “caused me undue stress and anxiety as I grow older.”

Practitioners expect foreign retirement plans to be a major issue at the IRS’s public hearing on the regulations, which is scheduled for Aug. 21.

“I think some people were hoping there’d be more clarity there, and the IRS has not done that,” said Matthew Roberts, a partner with Gray Reed & McGraw in Dallas.

Foreign-trust reporting is “an area full of traps for the unwary,” said Ian Weinstock, a partner at Kostelanetz LLP in New York. Good regulations could help ease the burden on taxpayers posed by the foreign-trust rules, but the set of rules the IRS proposed are “not sufficiently well thought through,” he said.

The IRS didn’t respond to a request for comment.

The proposed rules would implement, with some modifications, a series of changes to the treatment of transactions with foreign trusts the IRS issued in preliminary form as far back as 1997. They stem from longstanding concerns that US taxpayers’ transfers of assets to offshore trusts make it harder to identify whether they were properly reporting and paying taxes on the trusts’ income, or whether they owned an interest in the trusts to begin with.

Foreign-trust holders and their trusts have to file with the IRS on Form 3520 and 3520-A—a process some have said needs improvement—and penalties for non-filing are stiff.

Retirement Plans

It’s so confusing, practitioners say, that sometimes taxpayers aren’t aware they have to report the vehicles in which they save for retirement as foreign trusts, and different tax pros have given them different opinions on whether the IRS would regard a particular retirement plan as a foreign trust.

The reporting regime “can rapidly become a nightmare for Americans overseas,” said Charles Bruce, legal counsel for American Citizens Abroad (ACA), a group that advocates for US citizens living in other countries.

That’s what’s spurred a lot of the comments submitted to the IRS. Groups like ACA and people affected “got the word around that the IRS is working on these rules and they affect you,” Bruce said.

Marga Lamoreaux, a Californian who lives in New Zealand, said in her comments to the IRS that she’s had conflicting advice on how the agency recognizes her state-sponsored New Zealand retirement account. “The rules are so confusing and unclear,” she wrote.

Connie Coleman, an American who moved to Canada to marry her Canadian husband, said her retirement-planning options have been affected by the lack of clarity from the IRS over foreign trusts. “I feel I have not been able to provide adequate financial savings for my retirement years,” she wrote in comments.

Practitioners say they need clarity, too. The IRS should “help us and help taxpayers, make it easier to classify the pension and benefit plans at issue,” said Hank Alden, a CPA and personal financial specialist who chairs an American Institute of CPAs task force on foreign-trust reporting penalties.

The IRS’s proposed rules do include some provisions that would exempt more taxpayers from having to report foreign trusts. Under one key proposed change, trusts that have an aggregate value of less than $600,000 would be exempt.

Those measures help, but some practitioners say the IRS should go further than that toward making more taxpayers exempt. “We’re just asking the limits to be broadened,” Alden said.

At the public hearing, “most of the comments are going to be ‘can you please rethink your approach to the foreign retirement plans and can you please put in some comprehensive relief,’” Weinstock said. “That’s where these rules fall short.”