The IRS has established a new pass-through compliance unit within its Large Business and International division, as announced on October 22, 2024. This unit aims to tackle “complex financial arrangements”, targeting high-net-worth individuals and entities that use partnerships, S-corporations, and trusts to reduce their tax burdens. Funded by the Inflation Reduction Act, the initiative seeks to reverse historically low enforcement rates and increase audits of sophisticated financial structures.
IRS Chief Counsel announced the creation of a new associate office that will focus exclusively on partnerships, S-corporations, trusts and estates. This office will be drawn from the current Passthroughs and Special Industries (PSI) Office. The agency has emphasized it will be “ensuring compliance of pass-throughs of every size and form”. A major area of focus will likely be foreign trusts and foreign foundations. Foreign foundations, which are often treated as equivalent to foreign trusts under U.S. law, are likely to draw particular attention. These entities may raise red flags for the IRS due to their potential use in concealing assets or circumventing U.S. tax reporting requirements. Trust-related compliance issues—such as those reported on Forms 3520 and 3520-A —will be scrutinized, ensuring that ownership and foreign trust transactions are disclosed accurately.
Just yesterday IRS announced the new compliance unit’s first Associate Chief Counsel. Jeffrey Erickson, is expected to join the IRS in January 2025.
Heightened IRS scrutiny of foreign trusts is not new. The IRS has been aggressively targeting various international tax compliance matters and the focus on foreign trusts really began to heat up in 2018, when the IRS introduced a special “compliance campaign.” It centered on foreign trusts and the filing of Forms 3520, and 3520-A. This particular IRS campaign involved “a multifaceted approach to improving compliance with respect to the timely and accurate filing of information returns reporting ownership of, and transactions with, foreign trusts.” It is no longer an active IRS campaign, perhaps being superseded by the latest IRS pass-through compliance unit. IRS has been actively educating its agents in the complex international tax space through International Practice Units, including a specific IPU on foreign trusts.
The new compliance unit will also examine multi-layered financial structures, often involving trusts alongside partnerships, to detect improper income shielding. By identifying arrangements that shift income or assets across borders, the IRS aims to hold taxpayers accountable for reporting and paying the taxes they owe. This heightened focus reflects a broader effort to close loopholes used by high-income individuals. While these measures concentrate on sophisticated filers, the IRS has reiterated that audits of middle- and low-income taxpayers will remain stable under this new strategy.
Case in Point – The Case of Douglas Edelman
Former defense contractor, Douglas Edelman, and his French wife Delphine Le Dain were charged with schemes to defraud the United States and evade taxes on more than $350 million in income earned from contracts with the Department of Defense. Mr. Edelman’s true ownership was allegedly hidden through trust structures in the name of his foreign wife, Ms. Le Dain. It is alleged that this elaborate scheme involving foreign trusts and corporations was created so Mr. Edelman could avoid paying U.S. tax on millions of dollars.
Interesting times ahead!
My US tax blog posts deal extensively with foreign trusts and foundations. Here are a few links to get you started:
- https://us-tax.org/2019/05/16/a-no-go-foreign-trust-with-a-us-beneficiary/
- https://us-tax.org/2019/05/23/ooops-i-created-a-foreign-trust-part-ii/
- https://us-tax.org/2020/10/29/foreign-trust-forms-3520-and-3520-a-penalties-are-a-potential-gold-mine-for-the-irs/
- https://us-tax.org/2019/11/14/us-beneficiary-of-foreign-trust-understanding-us-tax-filings/
- https://us-tax.org/2019/06/20/part-ii-us-tax-filings-by-us-grantor-of-foreign-trust/
- https://us-tax.org/2019/09/05/us-tax-filings-by-fiduciary-of-foreign-trust/
- https://us-tax.org/2021/12/02/foreign-foundations-what-are-they-for-us-tax-purposes-should-i-care-recent-court-case-lays-it-out/
Posted October 30, 2024
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