IRS Drafts Gift and Trust Reporting Changes

Details: IRS officials believe that some taxpayers reduce taxes by disguising gifts from non-U.S. sources as loans. Some requirements in the proposed regulations would treat arrangements described as loans as gifts.

To keep real loans from being treated as gifts, “all payments on the obligation must be made in cash in U.S. dollars,” according to the preamble, or official draft regulation summary. “The Treasury and the IRS stress this requirement to make all payments in cash in U.S. dollars, in light of abusive transactions in which taxpayers have used an inflated valuation of in-kind property to reportedly repay an obligation.”

The term of an obligation eligible for special treatment must not exceed five years, and the yield to maturity must be somewhere between 100% and 130% of a federal benchmark rate.

Other provisions deal with issues such as the definition of a “U.S. person.” Special rules apply to residents who live in two different countries and then begin computing their taxes as U.S. residents.

A valuation provision states that the amount of a foreign gift is the value of the property involved at the time of transfer, based on the “price at which the property would change hands between a willing buyer and willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of relevant facts.”

The regulations include many examples showing how the proposed requirements might apply to specific types of situations. One shows how an accountant could ask for a reporting deadline extension for the children of a U.S. taxpayer who owned a foreign trust and died.

Analysts at KPMG suggest that the proposed regulations would expand access to IRS reporting exemptions for many taxpayers, by, for example, indexing the $100,000 gifting reporting threshold, the retirement plan account reporting threshold and some other reporting thresholds for inflation.

Penalties: The penalty for failing to provide the required information could be 5% of the foreign gift for each month, up to 25% of the amount of the foreign gift.

The IRS can waive the penalties if a U.S. person shows that the failure to comply was due to a reasonable cause and not due to willful neglect.

For certain foreign trusts, the reporting failure penalty could be 35% of the reportable amount or $10,000, whichever amount is higher. U.S. persons who get an IRS notice about foreign trust reporting problems and fail to comply could owe an additional $10,000 penalty for each 30-day period of delaying compliance with the request for information.

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