IRS Foreign Trust Reporting Rules Explained: Proposed Regulation Changes and Relief for Expats
In May 2024, the Treasury Department and IRS released proposed regulations that would significantly reduce foreign trust reporting burdens for Americans abroad, particularly those participating in foreign retirement plans. The proposed rules expand exemptions from Form 3520 and Form 3520-A filing, raise contribution and value thresholds for qualifying foreign pension plans, and create new relief for dual-resident taxpayers who claim tax treaty benefits.
However, these regulations remain in proposed status as of March 2026. In January 2025, an executive order froze all new federal rulemaking, and no timeline for finalization has been announced. Taxpayers can still elect to rely on the proposed rules for their 2025 tax year filing, but doing so locks you in: you must apply the proposed regulations in their entirety and consistently for all future years until final regulations take effect. If the final rules differ from the proposed version, or if finalization is delayed indefinitely, that commitment carries risk.
For Americans abroad who have been filing costly and complex Form 3520 and 3520-A returns for foreign retirement plans, deciding whether to elect reliance on these proposed rules is one of the most consequential decisions this filing season. Here’s what the proposed regulations change, who benefits, and the risks to weigh before making a decision.
Foreign Trust Rules Are Changing
Current Status: Where Do the Proposed Regulations Stand?
| Milestone | Date | Status |
|---|---|---|
| Proposed regulations published | May 8, 2024 | Complete |
| Public comment period closed | July 8, 2024 | Complete |
| Public hearing held | August 21, 2024 | Complete |
| Regulatory freeze executive order | January 20, 2025 | In effect |
| Final regulations published | TBD | Not yet issued |
The proposed regulations were on track for potential finalization in 2025, but the January 2025 regulatory freeze halted all new federal rulemaking across agencies, including the IRS. There is no public timeline for when (or whether) the freeze will be lifted for these specific regulations.
What this means for the 2025 tax year: The proposed regulations are not law. You cannot be required to follow them, and the IRS cannot enforce them. However, you can voluntarily elect to rely on them if you apply them entirely and consistently.
What Relief Do the Proposed Regulations Offer?
Expanded Foreign Retirement Plan Exemptions
The proposed rules build on Revenue Procedure 2020-17 by significantly expanding the list of foreign retirement plans that qualify for exemption from Form 3520 and Form 3520-A reporting. The key change is a new disjunctive test: a plan qualifies if it meets either contribution limitations OR a value threshold (not both).
| Test | Threshold | What It Means |
|---|---|---|
| Contribution limit (percentage) | Based on percentage of earned income | Typical employer pension contribution formulas qualify |
| Contribution limit (annual cap) | $75,000 per year (up from $50,000 under Rev. Proc. 2020-17) | More generous cap covers higher-contribution plans |
| Contribution limit (lifetime) | $1,000,000 | Covers long-tenure employees with significant accumulations |
| Value threshold (alternative) | $600,000 at any point during the tax year | NEW: Plans under this value qualify regardless of contribution structure |
The value threshold is the biggest practical change. Under Rev. Proc. 2020-17, you had to analyze the contribution structure of your foreign pension, which was often difficult to determine. Under the proposed rules, if your plan’s value stays under $600,000, it qualifies for the exemption automatically.
Dual-Resident Taxpayer Relief
The proposed regulations create substantial new exemptions for “dual-resident taxpayers”: foreign nationals who qualify as U.S. residents under domestic law (Green Card or substantial presence test) but can invoke a tax treaty tie-breaker to be treated as non-residents of the U.S.
For qualifying dual-resident taxpayers, the proposed rules would exempt most foreign trust transactions from Form 3520 and 3520-A reporting entirely, provided the taxpayer consistently treats themselves as a non-resident under the applicable treaty.
This is particularly relevant for international assignees temporarily in the U.S. on work visas who participate in home-country retirement plans.
Inflation-Adjusted Gift and Inheritance Thresholds
The $100,000 threshold for reporting foreign gifts and inheritances from individuals would be adjusted annually for inflation under the proposed rules. The threshold for gifts from foreign corporations or partnerships ($20,116 for 2025) already adjusts for inflation.
Clarified Loan and Distribution Rules
The proposed regulations clarify that distributions routed through intermediaries, to grantor trusts, or from entities owned by foreign trusts are treated as distributions to the ultimate U.S. beneficiary. This prevents avoidance through complex layered structures. At the same time, qualified obligations (loans that meet specific repayment terms) would continue to be excluded from distribution treatment.
Should You Elect to Rely on the Proposed Regulations?
This is the critical question for the 2025 filing season, and the answer depends on your specific situation.
The Benefits of Electing
- Immediate relief from Form 3520/3520-A filing for qualifying foreign retirement plans
- Thousands of dollars in annual compliance savings (preparation fees for Form 3520 and 3520-A are significant)
- Reduced audit risk from technical errors on complex forms you no longer need to file
The Risks of Electing
| Risk | Why It Matters |
|---|---|
| Lock-in requirement | Once you elect, you must apply the proposed regulations in their entirety and consistently for all future years until final regulations take effect. You cannot cherry-pick provisions. |
| Final rules may differ | If the final regulations change thresholds, definitions, or exemption criteria, your prior reliance may create inconsistencies. |
| Regulatory freeze = indefinite delay | With no timeline for finalization, you could be locked into proposed rules for years. If a future administration withdraws the proposed regulations entirely, the status of your prior elections becomes uncertain. |
| No force of law | Proposed regulations do not carry the force of law. In a dispute, the IRS is not bound by them, even if you relied on them in good faith. |
When Electing Makes Sense
- Your foreign pension clearly qualifies under the expanded exemptions (especially the $600,000 value threshold)
- Your compliance costs for Form 3520/3520-A are substantial
- You are comfortable with the lock-in commitment
- A tax professional has reviewed your specific plan and confirmed eligibility
When You Should Be Cautious
- Your pension value is near the $600,000 threshold and could exceed it
- Your plan’s contribution structure is ambiguous under the proposed rules
- You have multiple foreign trusts or complex trust structures beyond retirement plans
- You want to preserve flexibility if the final rules differ significantly
What Are the Penalties If You Don’t File?
The penalties for missing Form 3520 and Form 3520-A remain among the harshest in the tax code, regardless of whether you elect to rely on the proposed regulations:
| Form | Penalty |
|---|---|
| Form 3520 (foreign gift/inheritance) | 25% of the unreported amount |
| Form 3520 (foreign trust transactions) | 35% of the gross distribution amount |
| Form 3520-A (annual trust return) | 5% of trust assets, or $10,000 minimum |
| Continued failure after IRS notice | Additional $10,000 for each 30-day period |
The IRS has assembled a working group to review its penalty processes for international information returns. The IRS statement indicates the group aims to “reduce burden and incentivize voluntary compliance,” but no formal changes to penalty procedures have been announced.
If you’ve missed prior filings, the Streamlined Filing Procedures may provide a penalty-free path to compliance for non-willful failures.
Frequently Asked Questions
No. As of March 2026, the regulations remain in proposed status. A January 2025 regulatory freeze halted new federal rulemaking, and no timeline for finalization has been announced.
Yes, but you must elect to apply them in their entirety and consistently for all future years until final regulations are published. You cannot selectively apply some provisions and ignore others.
This is an open question. If the final rules change thresholds or definitions, taxpayers who relied on the proposed version may need to adjust their positions. The risk is higher given the regulatory freeze, which could delay finalization indefinitely.
Under the proposed rules, your plan may qualify if it meets either the contribution limits (up to $75,000/year or $1,000,000 lifetime) OR the value threshold ($600,000). This is a disjunctive test. Have a tax professional analyze the specific structure of your plan before electing.
A foreign national who qualifies as a U.S. resident under domestic law (substantial presence or Green Card) but can claim non-resident status under a tax treaty tie-breaker provision. The proposed regulations provide substantial exemptions from Form 3520/3520-A for these taxpayers.
The proposed regulations do not change the penalty amounts. However, the IRS has established a separate working group to review penalty processes for Forms 3520 and 3520-A, signaling potential future relief.
That depends on your compliance costs and risk tolerance. If you’re spending thousands annually to prepare Forms 3520 and 3520-A for a qualifying foreign pension, the immediate savings from electing may outweigh the risks. If your situation is complex or your plan is near the thresholds, waiting may be more prudent.
The decision of whether to elect reliance on the proposed foreign trust regulations is one of the most consequential choices expats face in the current filing season. At Greenback, our CPAs and Enrolled Agents analyze your foreign retirement plans, assess whether the proposed exemptions apply, and help you weigh the benefits against the lock-in risks.
If you’re ready to be matched with a Greenback accountant, click the get started button below. For general questions on foreign trust reporting or working with Greenback, contact our Customer Champions.
Stay Compliant With Foreign Trust Reporting
This article is for informational purposes only and does not constitute tax or legal advice. The proposed regulations discussed are not final and do not carry the force of law. Tax situations involving foreign trusts are complex and fact-specific. For the latest guidance, see the IRS statement on proposed foreign trust regulations and the instructions for IRS Publication 3520. Always consult with a qualified tax professional regarding your specific situation.
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