Service Focusing On Foreign Trusts, Real Property Transactions

If Your Client Owns A Foreign Trust, Or Sells U.S. Property To a foreign person, strict guidelines must be adhered to.

This tax season, the Internal Revenue Service is attempting to make tax professionals whose clients have foreign trusts, or who transfer real property to foreign interests aware of rules and filing requirements.

This month, individuals with holdings in foreign trusts must file, or have their tax fiduciary file the proper form for trusts entered into on or before December 31, 2001.

Each U.S. person treated as an owner of the Foreign Trust is responsible for ensuring that the foreign trust files the Form 3520-A and that the trust annually furnishes copies of the Foreign Grantor Trust Owner Statement and the Foreign Grantor Trust Beneficiary Statement to the U.S. owners and U.S. beneficiaries.

IRC Sec. 6048(b) covers this requirement.

In addition, the Service is attempting to make persons involved in transferals of U.S. real property to foreign interests aware of their tax responsibilities.

The amount of tax required to be withheld and paid to the IRS by the buyer is 10% of the amount realized on the transfer, or, 35 percent of the gain recognized by a domestic corporation, domestic partnership, domestic trust or domestic estate. A Form 8288 ("U.S. Withholding Return for Disposition by Foreign Persons of U.S. Real Property Interests"), is required to be filed by the Transferee (Buyer or Designated Agent) of the U.S. real property interest.

The tax on Form 8288 is due the IRS by the 20th day after the Date of Transfer.

Note: A person who meets the substantial presence test (183 day rule per IRC Sec. 7701) or is considered a resident alien for income tax purposes is no longer considered to be a foreign person.