Current IRS Regulations Impacting International Assignees and Foreign Trusts in 2025
The current foreign trust regulations governing 2025 tax compliance include significant proposed changes released by the Treasury and IRS in May 2024. With millions of US citizens living overseas, these regulatory updates address long-standing compliance burdens that have created headaches for expats dealing with foreign retirement plans and trust reporting.
These proposed regulations allow taxpayers to elect and apply consistently for their 2025 tax year, potentially reducing reporting obligations and compliance costs. The IRS has also assembled a working group to review penalty processes, signaling a shift toward more reasonable enforcement.
Why Do These Proposed Regulations Matter for International Assignees?
International assignees frequently participate in foreign retirement plans and savings arrangements that the US classifies as foreign trusts. This classification subjects them to stringent reporting requirements using Forms 3520 and 3520-A, significantly increasing administrative burden and compliance costs.
Many assignees also receive gifts or inheritance from family abroad, triggering additional reporting when amounts exceed certain thresholds. The proposed regulations offer substantial relief from these requirements, particularly for “dual resident” taxpayers who can claim treaty benefits.
What Relief Do the Proposed Regulations Provide?
Expanded Foreign Retirement Plan Exemptions
The proposed regulations build upon Revenue Procedure 2020-17 by significantly expanding which foreign retirement plans qualify for reporting exemptions. The relief now includes plans that meet either contribution limitations OR value thresholds:
- Contribution limits based on percentage of earned income, annual limit of $75,000 (increased from $50,000), or lifetime limit of $1,000,000
- OR a new value threshold of $600,000 at any point during the tax year
This disjunctive test makes it much easier for typical workplace pensions to qualify for exemptions.
Inflation-Adjusted Gift Reporting Thresholds
The $100,000 threshold for reporting foreign inheritance and gifts from individuals now adjusts annually for inflation. For 2025, gifts from foreign corporations or partnerships must be reported when they exceed $19,570.
Special Rules for Dual Resident Taxpayers
Perhaps the most significant change involves substantial reporting exemptions for “dual resident taxpayers” – foreign nationals who qualify as US residents under domestic law but can invoke treaty tie-breaker provisions to be treated as non-residents.
What Forms Are Required for Foreign Trust Reporting?
US persons involved with foreign trusts must file Form 3520 to report:
- Transfers to foreign trusts
- Ownership interests under grantor trust rules
- Distributions received from foreign trusts
- Large foreign gifts or inheritance
Additionally, foreign trusts with US owners must file Form 3520-A, or the US owner must file a substitute version. The proposed regulations clarify when these requirements apply and provide new exemptions.
How Do the Proposed Loan and Distribution Rules Work?
The proposed regulations clarify that distributions through intermediaries, to grantor trusts, or from entities owned by foreign trusts are treated as distributions to the ultimate US beneficiary. This prevents taxpayers from avoiding reporting through complex structures.
The regulations maintain that qualified obligations meeting specific requirements won’t be treated as distributions for loans from foreign trusts. However, new anti-abuse rules allow the IRS to treat multiple loans as one if they are structured to avoid restrictions.
What Are the Penalties for Non-Compliance?
Penalties for foreign trust reporting failures remain substantial:
- Form 3520: Initial penalties of $10,000 or 35% of unreported amounts
- Form 3520-A: Initial penalties of $10,000 or 5% of trust assets
- Additional $10,000 penalties for each 30-day period after the IRS notice
However, the IRS working group reviewing penalty processes aims to “reduce burden and incentivize voluntary compliance,” suggesting more reasonable enforcement approaches may be coming.
Can You Apply These Rules for Your 2025 Tax Return?
Yes, but with essential conditions. The proposed regulations allow taxpayers to elect to apply them for any tax year ending after May 8, 2024, provided they apply the regulations entirely and consistently across all related tax years until final regulations are published.
This means you can potentially benefit from expanded exemptions and higher thresholds for your 2025 filing. Still, you must commit to using all aspects of the proposed regulations, not just favorable parts.
When Will the Final Regulations Be Released?
The proposed regulations are expected to apply to tax years beginning after final regulations are published in the Federal Register. Given the 2024 comment period and public hearing process, final regulations could be published in 2025, potentially affecting the 2026 tax year.
Until then, taxpayers can continue operating under existing guidance or elect to apply the proposed regulations consistently.
What Should International Assignees Do Now?
Immediate Steps:
- Review foreign retirement plans to determine if they qualify for expanded exemptions under the proposed rules
- Assess whether dual resident taxpayer status might apply to your situation
- Evaluate whether electing to apply proposed regulations makes sense for your 2025 filing
Planning Considerations:
- The election to apply proposed regulations requires analyzing your specific circumstances.
- Professional guidance is essential, given the complexity of the interacting rules.
- Early planning can help you take advantage of beneficial changes while ensuring full compliance.
How Can You Get Professional Help?
The intersection of proposed regulations, existing revenue procedures, and tax treaties creates complex planning opportunities that require specialized knowledge. These changes represent the most significant improvements to foreign trust compliance in decades, but proper implementation is crucial.
Given the high penalties for errors and the complexity of the rules, working with tax professionals who specialize in expat situations can save significant time, money, and stress. The proper guidance helps ensure you take advantage of beneficial changes while fully complying with all requirements.
The proposed regulations signal the IRS’s recognition that foreign trust reporting has created disproportionate burdens for legitimate taxpayers. While the rules remain complex, these changes move in the right direction by providing practical relief for everyday expat situations.
Need help with foreign trust reporting? If you’re ready to be matched with a Greenback accountant, click the get started button below. For general questions on expat taxes or working with Greenback, contact our Customer Champions.
Whether you’re years behind or just unsure about the thresholds, our team is ready to help.
This article is for informational purposes only and should not be considered legal or tax advice. IRS regulations, including the proposed rules discussed here, are complex and subject to change. Individual circumstances vary, and the application of these rules may differ depending on your situation.
