Treasury Proposes Increased Covered Gift Reporting For Expatriates

Treasury Proposes Increased Covered Gift Reporting For Expatriates

Treasury Proposes Increased Covered Gift Reporting For Expatriates

It is no secret, that the United States government wants to keep track of gifts that come from covered expatriates to U.S. persons, and based on these proposed regulations, the IRS may begin keeping more tabs on covered gifts. By way of background, a covered expatriate is a person who terminated their long-term lawful permanent resident status or renounced their U.S. citizenship and was deemed a covered expatriate when they did so. As a result of being a covered expatriate, these taxpayers unfortunately remain on the U.S. government’s radar — with an emphasis on gifts and bequests made by covered expatriates to U.S. persons. The concern from the U.S. government’s standpoint stems from the fact that when the gift comes from a non-resident alien — unless certain exceptions apply — the gift is not taxable in the United States. Thus, you can imagine the situation in which a wealthy long-term lawful permanent resident has U.S. citizen children living in the United States (or even abroad) and the foreign national is transferring gifts to the United States which the U.S. government is concerned could otherwise be taxable income. As a result, The United States wants to tax these gifts and keep track of them by requiring reporting by the U.S. person recipient. This concept is nothing new, as tax professionals are still waiting for the IRS to publish Form 708, which is supposed to be the Form created for reporting these types of covered gifts under IRC 2801. Let’s look at the IRS’ and Treasury Department’s proposed regulations for ‘Covered Gift’ reporting on Form 3520. 

Proposed §1.6039F-1(c)(2)(ii)

      • Under proposed §1.6039F-1(c)(2)(ii), notwithstanding the reporting threshold described above, beginning on the date on which final regulations under section 2801 (tax on gifts and bequests from expatriates) apply, a U.S. person who receives foreign gifts that are covered gifts or bequests will be required to report the covered gifts or bequests under proposed §1.6039F-1(a) if the aggregate amount of all covered gifts and bequests received by the U.S. person during the calendar year exceeds the exclusion amount under section 2801(c). See proposed §1.6039F-1(h)(2).

      • This exclusion amount is the dollar amount of the per-donee gift tax exclusion in effect under section 2503(b) for the calendar year ($18,000 for 2024).

Per this proposed regulation, and in conjunction with code section 2801, if a U.S. person receives a covered gift from a foreign person, the U.S. person will be required to report the gift per section IRC 6039F. The threshold for having to report this type of gift is relatively low since the Treasury Department proposes that if the grift exceeds the exclusion amount then it would be reportable, noting that the exclusion amount is $18,000 in 2024 — whereas gifts from non-covered, non-resident alien individuals has a +$100,000 threshold

Proposed Regulation Example 1

      • (5) Example 5: Covered gift within meaning of section 2801(e). Z is a resident of Country F and relinquishes U.S. citizenship on July 1, Year 1, becoming a covered expatriate within the meaning of section 877A(g)(1). On December 31, Year 10, a date after the date final regulations under section 2801 are published in the Federal Register, Z gives $50,000 to Z’s son, X, who is a U.S. person. The transfer is a covered gift within the meaning of section 2801(e) and a foreign gift within the meaning of paragraph (b) of this section.

      • Because the value of the foreign gift exceeds the threshold specified in paragraph (c)(2)(ii) of this section (assuming that for Year 10 this amount is under $50,000), X must report receipt of the foreign gift on Part IV of Form 3520 under paragraph (a) of this section. X also is subject to tax and separate reporting requirements under section 2801.

This is an example of how a U.S. Person may have additional gift reporting requirements when the gift is a covered gift — even though the gift amount is below the standard +$100,000 Form 3520 reporting requirement threshold.

Proposed Regulation Example 2

      • (16) Example 16: Distribution attributable to covered gift. Z relinquishes Z’s U.S. citizenship on September 15, Year 1. Z is a covered expatriate within the meaning of section 877A(g)(1). On August 1, Year 2, Z creates and transfers $300x to a foreign trust, FT, for the benefit of Z’s son, S, a U.S. citizen.

      • On December 30, Year 3, S receives a $40x distribution from FT. Whether or not the entire amount of the distribution is a covered gift within the meaning of section 2801(e), under paragraph (b)(7) of this section, the $40x is a distribution. Under paragraph (a) of this section, S must report the distribution on Part III of Form 3520. S also may have additional reporting requirements under section 2801 for the covered gift.

What is very important about example #2, is that while the Son would typically have to report the foreign trust distribution, there may be additional reporting requirements for the U.S. citizen if ay portion of the distribution is covered — and may ultimately to additional tax implications if any portion is considered to be a covered gift distribution.

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