U.S. Federal Tax Perspective On Getting The Structure, The Substance, And The Paperwork Right From Day One

Foreign trusts have a reputation problem. Clients tend to arrive with one of two pictures in mind. Either the trust is an impenetrable shield that puts family wealth beyond the reach of every creditor and tax authority, or it is something slightly disreputable that only people with something to hide would consider. Neither picture is accurate, and both get in the way of good planning.

A foreign trust is nothing more exotic than a trust that fails a two-part U.S. classification test. It can be a perfectly ordinary vehicle for a family whose assets, trustees, and heirs sit in more than one country. It can also be the centerpiece of a structure the IRS treats as abusive. What separates the two has almost nothing to do with the trust deed’s jurisdiction. It has everything to do with whether the structure is real, whether control sits where the documents say it sits, and whether every required form is filed on time.

That last point deserves emphasis. In my experience, most foreign trust disasters are not planning failures. They are reporting failures. The plan was defensible, the income tax was paid, and then a form nobody knew about went unfiled for six years. Below is how I work through these structures with clients, and where the expensive mistakes tend to hide.

Start With Classification, Not With The Jurisdiction

Everything downstream depends on a single question, so it belongs at the front of the analysis rather than the end.

For U.S. federal tax purposes, a trust is a U.S. person, commonly called a domestic trust, only if it meets two tests. A court within the United States must be able to exercise primary supervision over the administration of the trust, and one or more U.S. persons must have authority to control all substantial decisions of the trust. Any trust that does not meet both tests is a foreign trust. 

The word “all” in the control test carries considerable weight. Substantial decisions are the core fiduciary calls. Whether to distribute, when, how much, and to whom. Whether to litigate or settle. Whether to remove and replace a trustee. How to invest. A single non-U.S. person holding a single one of those powers can move the trust across the border. 

Be aware of the automatic migration clause. Plenty of older asset protection templates include language that shifts the trust offshore the moment a creditor files suit in a U.S. court. Drafters like the clause because it looks protective. The regulations treat it very differently, because a trust subject to that kind of provision can fail the court test from the day it was signed

The successor trustee problem is quite common. A trust can be drafted in the United States, funded by a U.S. person, and administered here for years, and still become a foreign trust without anyone signing a new document. All it takes is for the named successor trustee to be a non-U.S. person. The control test asks who holds authority over substantial decisions at any given moment, not who held it at the time of signing. When the U.S. trustee dies, resigns, or moves abroad and a foreign successor steps in automatically under the terms of the instrument, U.S. persons no longer control all substantial decisions, and the trust becomes foreign as of that date.

The regulations give an illustration worth reading before signing anything. A trust that satisfies the court test has three fiduciaries deciding by majority vote. Two are U.S. citizens, and one is a nonresident alien. The instrument names a successor fiduciary who is also a nonresident alien. One of the U.S. fiduciaries dies, the successor takes over automatically, and control over substantial decisions is no longer in U.S. hands. 

There is relief, and it runs on a clock. Where the change in a person holding power over a substantial decision is inadvertent, such as the death, resignation, or change of residence of a U.S. trustee, the trust has 12 months from the date of the change to correct it. The correction can go either way, by changing who controls substantial decisions or by changing where those people are resident. Act within the window and the trust keeps its domestic status without interruption. Miss it and residency changes as of the date of the inadvertent change, which means retroactively to the day the trustee died rather than the day someone noticed. 

Deliberately naming a foreign individual as successor trustee is not an inadvertent change, so the 12-month cure is not available. And a trust that has quietly been foreign for several years usually has exposure to unfiled Forms 3520-A.

Build The Structure For Protection, Not For Concealment

A foreign trust used for genuine wealth protection should have real non-tax substance behind it. In practice that means an independent trustee who actually exercises discretion, administration that genuinely happens in the chosen jurisdiction, separate books and bank accounts, distributions that are documented as distributions, and no habit of paying the settlor’s personal expenses out of trust funds.

The test I apply is simple. If the trustee declined a distribution request, would that be the end of the conversation? If the honest answer is no, then the trust is not doing what the documents say it does, and no amount of jurisdiction shopping will fix that.

Concealment is another issue associated with some trusts. The IRS treats abusive trust arrangements as a standing enforcement priority and specifically warns that offshore structures are promoted to obscure true ownership and control. A structure that depends on the IRS not discovering it is not a plan.

Expect Grantor Trust Treatment When A U.S. Person Funds The Trust

This is the point at which clients are most often surprised, because it undoes the assumption that funding the trust means giving the assets away.

Under section 679, when a U.S. person directly or indirectly transfers property to a foreign trust, that transferor is generally treated as the owner of the portion of the trust attributable to the transferred property, provided the trust has a U.S. beneficiary. The statutory exceptions are narrow. Transfers by reason of the transferor’s death, and transfers for consideration of at least fair market value.

Section 679 is deliberately broader than the ordinary grantor trust rules. It applies even where the transferor retained none of the powers or interests under sections 673 through 677 that would otherwise create grantor trust status. Giving up control does not get you out of it.

The U.S. beneficiary question is also broader than most people expect. A foreign trust is generally treated as having a U.S. beneficiary unless its terms both prevent income or corpus from being paid to or accumulated for a U.S. person during the year and prevent any U.S. person from benefiting if the trust terminated that year. Contingent interests count. A remote remainder beneficiary who holds a U.S. passport is sufficient.

Where section 679 applies, the trust’s income flows onto the U.S. owner’s personal return. The client, who thought the structure had removed income from the U.S. tax base, is now reporting all of it and has annual trust reporting on top of that.

Gain On Funding, And An Everything That Happens Afterward

Clients almost always ask whether moving assets into the trust will trigger tax. The general rule sounds alarming, the exception that follows it is broad, and the real planning lives in understanding how the two fit together and when the exception runs out.

The General Rule

Section 684 treats a transfer of property by a U.S. person to a foreign trust as a sale or exchange for fair market value, with gain recognized to the extent that fair market value exceeds adjusted basis. The regulations then make the arithmetic worse in two ways. Losses are not recognized, and losses on depreciated assets cannot be netted against gains on appreciated assets transferred at the same time. 

Why Most Funding Transfers Do Not Actually Produce Gain

This is the part that gets missed by anyone who stops reading at section 684(a). Gain is not recognized to the extent that any person is treated as the owner of the trust under section 671. That exception sits in section 684(b) and is repeated in Treas. Reg. section 1.684-3(a).

Now read it alongside section 679. A U.S. person who funds a foreign trust with a U.S. beneficiary is treated as the owner of the portion funded. Because that person is an owner under the grantor trust rules, the section 684(b) exception applies, and there is no gain on funding.

So for the most common fact pattern, a U.S. settlor funding a foreign trust for U.S. family members, the answer to “does this transfer trigger gain?” is generally no. The two provisions clients find most alarming, sections 679 and 684, largely cancel each other out at the funding stage. What section 679 does instead is keep the trust’s income on the settlor’s own Form 1040, year after year.

When Gain Does Arise

The exception depends entirely on someone being treated as the owner. Remove that and the deemed sale reappears. Four common situations:

• No U.S. beneficiary. If the trust has no U.S. beneficiary, section 679 does not apply, nobody is treated as owner, and the exception is unavailable. Funding is an immediate taxable deemed sale. This is the classic case of a U.S. person providing for family who live abroad.
• Loss of grantor trust status during life. If a portion of the trust ceases to be treated as owned by the U.S. person, that person is treated as transferring the assets of that portion to a foreign trust immediately before the change. Gain is recognized at that point, including on appreciation that accrued in the intervening years.
• Death of the U.S. grantor. Death ends grantor trust status, and the deemed transfer is treated as occurring immediately before death. Because it lands immediately before, section 1014 does not automatically rescue it. There is an exception where the property is included in the decedent’s estate and the transferee’s basis is determined under section 1014(a), in which case no gain is recognized. Whether that inclusion exists is a question to settle while the client is alive.
• Outbound migration of a domestic trust. If a U.S. person funded a domestic trust, the trust later becomes foreign, and neither trust is treated as owned by anyone under the grantor trust rules, the trust is treated as transferring all of its assets to a foreign trust and must recognize gain. 

The Filing Burden Is The Price Of Admission

Foreign trust planning is paperwork heavy. Section 6048 sets out the reportable events. Creation of a foreign trust by a U.S. person. A direct or indirect transfer of money or property to a foreign trust by a U.S. person. Certain deaths involving foreign trusts. Notice is generally required on or before the 90th day after the reportable event, in the manner the IRS prescribes. That 90-day clock starts at formation or funding, long before anyone is thinking about next April’s return.

A U.S. person treated as the owner of a foreign trust carries two obligations. Provide the prescribed information about the trust, and make sure the trust itself files an annual return giving a full accounting of its activities and furnishes the required statements to U.S. owners and U.S. beneficiaries. Form 3520-A is that annual information return for a foreign trust with at least one U.S. owner, and responsibility for seeing that it gets filed rests on the U.S. owner rather than on the foreign trustee.

That allocation of responsibility catches people out. If the offshore trustee simply does not file, the U.S. owner may need to complete a substitute Form 3520-A and attach it to their own Form 3520 in order to avoid the penalty for the trust’s failure. “The trustee did not send me anything” is not a defense. It is a reason to build annual trustee reporting into the trust agreement and the fee arrangement from the outset.

U.S. beneficiaries have their own obligation. Direct and indirect distributions from a foreign trust must be reported, and indirect covers more ground than most beneficiaries assume, including certain uses of trust property and loans.

Do Not Treat Form 8938 And The FBAR As Optional Extras

These are separate regimes with separate thresholds, and satisfying one says nothing about the others.

Form 8938 reports specified foreign financial assets. Section 6038D requires an individual holding an interest in such assets to attach the required information to the annual income tax return once aggregate value exceeds the applicable threshold. 

Penalty Exposure Is Large Enough To Design Around

For failures under section 6048, the section 6677 penalty is generally the greater of $10,000 or 35 percent of the gross reportable amount, plus a further $10,000 for each 30-day period or fraction of a period that the failure continues more than 90 days after the IRS gives notice. For annual foreign trust owner reporting under section 6048(b), the 35 percent figure drops to 5 percent.

What counts as the gross reportable amount depends on which failure occurred. It may be the gross value of property involved in a reportable event, the gross value of trust assets treated as owned by the U.S. person, or the gross amount of distributions. 

Reasonable cause is available, and it is worth taking seriously. Foreign secrecy laws are expressly not reasonable cause, so a trustee’s refusal to hand over information because local law prohibits it will not help. Contemporaneous records showing what the client asked for, when, and what they were told will.

Form 8938 carries its own regime. A failure to disclose draws $10,000, with additional $10,000 increments if the failure continues after notice, capped at $50,000 for each failure. The reasonable cause exception requires an affirmative showing and is judged on all the facts and circumstances.

Two developments are worth knowing about. On the enforcement side, the courts have shown little sympathy. On the relief side, the IRS changed course in late 2024 and stopped automatically assessing penalties on late-filed Forms 3520 and 3520-A before reviewing any reasonable cause statement attached to the filing. That is a meaningful improvement over the old assess-first approach, and it makes one point of practice essential. If a form is going in late, the reasonable cause statement goes in with it, not afterward in response to a notice.

The Bottom Line

Foreign trusts can do real work for families with genuine cross-border lives. They can segregate assets, provide for succession across jurisdictions, and give a professional trustee the mandate to administer wealth over generations. What they cannot do is hide anything, and they cannot be bolted together first and reported later.

The safest planning posture is unglamorous. Use the trust for real administration and real asset protection objectives, keep control and record-keeping consistent with what the documents say, report the structure completely and on time, and price the penalty regime into the design before the first asset moves. Do that, and the structure holds up. Skip it and the paperwork will find you eventually, usually with a penalty attached that has nothing to do with how much tax was ever at stake.

If you are considering a foreign trust, already hold an interest in one, or have discovered that a structure you assumed was domestic is not, the analysis is worth doing properly and early. Correcting a classification or reporting problem voluntarily is always cheaper than responding to a notice.

Owning assets in more than one country can be a sign of success, mobility, and family opportunity. It can also create one of the most complicated estate planning situations a family will ever face.

A cross-border estate may involve real estate in one country, investment accounts in another, a family business in a third, and heirs who live somewhere else entirely. Different countries may tax the same transfer, apply different inheritance rules, require different court procedures, and recognize different estate planning documents. The result can be costly if the planning is not coordinated before death or incapacity.

Inheritance, estate, and gift taxes vary widely across countries. Inheritance and estate taxes are imposed in 24 OECD countries, but the design of those taxes differs significantly, including whether the tax applies to the estate as a whole or to each recipient, and how much wealth can pass tax-free. That variation is exactly why families with international assets should avoid “one-country” estate planning.

Mistake 1: Assuming One Will Covers Everything

A will prepared in one country does not always work smoothly in another. Even when it is legally valid, it may not be practical.

A U.S. will, for example, may be accepted by a foreign court only after translation, legalization, apostille, or a local recognition process. Some countries require local probate or succession proceedings before real estate, bank accounts, or company shares can be transferred. Other countries have forced heirship rules that limit how much property can pass freely under a will.

The better approach is usually coordinated planning. Families often need either:

• One carefully drafted international will designed to be used across jurisdictions
• Separate wills for separate countries, drafted so that one does not revoke the other
• Local estate documents for real estate or business interests
• Trust, entity, or beneficiary designation planning that avoids probate where appropriate

Do not make this mistake of assuming the domestic estate plan will automatically operate abroad without delay, expense, or conflict.

Mistake 2: Confusing Citizenship, Residence, and Domicile

Cross-border estate planning often turns on a person’s legal status. Citizenship, tax residence, immigration residence, and domicile are not always the same thing.

For U.S. federal estate tax purposes, the rules distinguish between citizens or residents and nonresidents who are not U.S. citizens. A U.S. “resident” decedent for estate tax purposes is someone domiciled in the United States at death; a “nonresident” decedent is someone domiciled outside the United States. Domicile generally depends on where a person lives and intends to remain, not simply where the person has a visa, passport, bank account, or vacation home.

This distinction matters because the U.S. estate tax base changes dramatically depending on status:

Decedent’s U.S. Estate Tax Status	General U.S. Estate Tax Exposure
U.S. citizen or U.S.-domiciled resident	U.S. estate tax can apply to the worldwide estate.
Nonresident who is not a U.S. citizen	U.S. estate tax generally applies only to U.S.-situated assets.

The U.S. gross estate rules for citizens and residents are part of the federal estate tax system under Chapter 11 of the Internal Revenue Code. For nonresident noncitizens, only the portion of the estate situated in the United States is generally included for U.S. estate tax purposes, unless special rules such as certain expatriation rules apply.

A family that gets domicile wrong can miss a filing requirement, understate estate tax exposure, or fail to plan for assets that a tax authority treats as part of the taxable estate.

Mistake 3: Ignoring U.S.-Situated Assets Owned By Non-U.S. Persons

Many non-U.S. families are surprised to learn that relatively modest U.S. holdings can trigger U.S. estate tax filing requirements.

For a nonresident who is not a U.S. citizen, U.S.-situated property includes U.S. real estate, tangible personal property located in the United States, stock issued by a U.S. corporation, and certain debt obligations or bank deposits, depending on the applicable rules and exceptions.

The filing threshold is low. Under IRC § 6018(a)(2), the executor of a nonresident noncitizen’s estate must file a U.S. estate tax return if the U.S.-situated gross estate exceeds $60,000. Form 706-NA is used to compute U.S. estate and generation-skipping transfer tax for nonresident noncitizen decedents, and the instructions state that the executor must file Form 706-NA if the date-of-death value of U.S.-situated assets, together with the gift tax specific exemption and adjusted taxable gifts, exceeds the $60,000 filing threshold.

This is one of the biggest traps in cross-border estate planning. A non-U.S. person may own a U.S. brokerage account with U.S. stocks, a condominium in Florida, shares of a U.S. private company, or tangible property located in the United States and assume no U.S. estate filing is needed simply because the person was not American. That assumption can be wrong.

Mistake 4: Assuming The U.S. Estate Tax Exemption Applies The Same Way To Everyone

For U.S. citizens and U.S.-domiciled residents, the federal estate tax exemption is large. Estates of decedents dying during 2026 have a basic exclusion amount of $15,000,000, up from $13,990,000 for estates of decedents who died in 2025. Under IRC § 6018(a)(1), an estate tax return is required for a U.S. citizen or resident when the gross estate exceeds the basic exclusion amount in effect for the calendar year of death.

Nonresident noncitizens do not simply receive the same practical filing threshold. Their U.S. estate tax return requirement can arise when U.S.-situated assets exceed $60,000.

That difference can produce surprising results. A U.S. citizen with a worldwide estate under the 2026 exclusion amount may have no federal estate tax return filing obligation, while a nonresident noncitizen with more than $60,000 of U.S.-situated assets may have a Form 706-NA filing requirement. Planning should identify the owner’s status before deciding whether U.S. estate tax exposure is material.

Mistake 5: Failing To Plan For Double Taxation

Cross-border estates can be taxed by more than one country. One country may tax based on the decedent’s domicile or residence. Another may tax based on the location of real estate. A third may tax the beneficiary. Some countries tax the estate; others tax the recipient.

The United States provides a foreign death tax credit in certain cases. Under IRC § 2014(a), U.S. estate tax is credited with estate, inheritance, legacy, or succession taxes actually paid to a foreign country with respect to property situated in that foreign country and included in the gross estate. The credit is subject to limitations, including limits tied to the foreign tax attributable to the property and the U.S. estate tax attributable to the property. Treasury regulations also state that no credit is allowed for interest or penalties paid in connection with foreign death taxes.

The foreign death tax credit is not automatic. The estate must prove the amount paid, the date of payment, the property taxed, and other information needed to verify and compute the credit. The credit generally applies only to taxes actually paid and claimed within four years after the federal estate tax return is filed, subject to specific exceptions.

For U.S. estate tax reporting, Schedule P to Form 706 is used to claim the credit for certain foreign taxes, and Form 706-CE is used to certify payment of foreign death tax. If more than one foreign country imposes death tax, the Form 706 instructions require a separate computation for each foreign country.

The planning point is straightforward: families should identify possible tax claims country by country before death. Waiting until the estate is already in probate can make it harder to claim credits, gather proof, and avoid unnecessary double taxation.

Mistake 6: Overlooking Estate And Gift Tax Treaties

Tax treaties can change the result in a cross-border estate. Some treaties may affect domicile, situs, marital deductions, credits, or taxing rights. But treaty coverage is limited, and not every country has an estate or gift tax treaty with the United States.

Where a treaty applies, it must be reviewed alongside domestic law. The Form 706 instructions state that the foreign death tax credit may be authorized by statute or treaty, and if a treaty authorizes a credit, the estate may use the most beneficial of the treaty credit, the statutory credit, or a combination described in the instructions for certain taxes not creditable under the treaty.

A common mistake is assuming that an income tax treaty also solves estate tax problems. Income tax treaties and estate tax treaties are not the same. A family with assets in multiple countries should confirm whether the relevant treaty covers estate, inheritance, succession, or gift taxes.

Mistake 7: Leaving Assets Outright To A Noncitizen Spouse Without Reviewing The Marital Deduction Rules

U.S. estate plans often assume that assets passing to a surviving spouse qualify for the marital deduction. That assumption can fail when the surviving spouse is not a U.S. citizen.

Under IRC § 2056(d)(1), if the surviving spouse is not a U.S. citizen, the marital deduction is generally not allowed for property passing to that spouse. The key exception is property passing to a qualified domestic trust, often called a QDOT. IRC § 2056(d)(2) allows the marital deduction for certain transfers in a QDOT, including property transferred or irrevocably assigned to the QDOT by the required time.

There is also a special rule if the surviving spouse becomes a U.S. citizen before the estate tax return is filed and was a U.S. resident at all times after the decedent’s death and before becoming a citizen. In that case, the general disallowance rule does not apply.

QDOT planning is technical, and it applies only when the surviving spouse is not a U.S. citizen. Form 706-QDT is used by the trustee or designated filer to report estate tax due on certain QDOT events, and that person may be responsible for filing and paying the tax.

Families with a noncitizen spouse should address this during the estate planning process, not after the first spouse dies.

Mistake 8: Missing U.S. Reporting For Foreign Gifts, Bequests, And Trusts

A U.S. beneficiary who receives money or property from abroad may not owe U.S. income tax merely because the transfer is a gift or inheritance, but reporting can still be required.

Form 3520 is one of the most commonly missed forms. A U.S. person must file Form 3520 if, during the year, the person receives more than $100,000 from a nonresident alien individual or foreign estate and treats the amount as gifts or bequests. Reporting is also required for gifts from foreign corporations or foreign partnerships above the applicable threshold amount.

Foreign trusts create additional reporting obligations. Reportable events include the creation of a foreign trust by a U.S. person, the transfer of money or property to a foreign trust by a U.S. person (including by reason of death), and the death of a U.S. citizen or resident if the decedent was treated as owning part of a foreign trust or if part of a foreign trust was included in the gross estate. U.S. beneficiaries receiving distributions from a foreign trust must also report information such as the trust name and aggregate distributions.

The deadlines matter. In general, Form 3520 is due on the 15th day of the 4th month after the end of the U.S. person’s tax year, which is usually the same day as the income tax return due date for a calendar-year individual. If the U.S. person receives an income tax return extension, Form 3520 is due no later than the 15th day of the 10th month after year-end. Certain U.S. citizens or residents living abroad, or serving in the military outside the United States and Puerto Rico, may have the due date extended to the 15th day of the 6th month after year-end if the required statement is included.

The penalties can be severe. For failure to report certain foreign trust transactions, the initial penalty can be the greater of $10,000 or 35% of the gross value of property transferred to a foreign trust, 35% of foreign trust distributions received, or 5% of the gross value of the portion of foreign trust assets treated as owned by a U.S. person, depending on the reporting failure. For failure to report foreign gifts, the penalty is 5% of the foreign gift for each month the failure continues, up to 25%, unless the taxpayer shows reasonable cause and not willful neglect.

The biggest mistake is assuming “inheritance” means “nothing to report.”

Mistake 9: Forgetting That Legal Title Controls More Than The Will

Estate planning documents do not automatically override how assets are titled. Joint ownership, beneficiary designations, company registers, nominee arrangements, local land records, and trust ownership can all determine who controls or receives an asset at death.

Cross-border families should review:

• How each real estate parcel is titled
• Whether accounts have transfer-on-death or beneficiary designations
• Whether jointly owned property passes automatically or through the estate
• Whether shares of private companies require director, shareholder, or court approval before transfer
• Whether local law recognizes trusts
• Whether marital property or community property rules apply
• Whether a nominee or holding company structure creates tax or disclosure issues
• Whether powers of attorney are recognized in the country where the asset is located

A well-drafted will cannot fix every title problem. Asset ownership should be reviewed country by country.

Mistake 10: Ignoring Local Succession Rules And Forced Heirship

Some countries give children, spouses, or other family members mandatory inheritance rights. These rules can override a will or limit the ability to leave assets freely.

This is especially important for families that include:

• Children from prior marriages
• Unmarried partners
• Second spouses
• Estranged family members
• Beneficiaries living in different countries
• Religious or civil-law inheritance systems
• Real estate located in forced-heirship jurisdictions
• Family businesses where control is intended to pass to one child but economic value is intended to be shared

If the estate plan assumes U.S.-style testamentary freedom, but the foreign jurisdiction applies forced heirship or reserved share rules, the result can be litigation, delay, and family conflict.

Mistake 11: Creating Liquidity Problems

Cross-border estates often need cash quickly. Taxes, legal fees, translations, appraisals, court deposits, and local administration costs may be due before assets can be sold or transferred.

A family may be asset-rich but cash-poor. Estate liquidity planning should identify which country will need cash, in what currency, by what deadline, and from which source.

Mistake 12: Not Coordinating Advisors Across Countries

A domestic estate lawyer may not know foreign inheritance rules. A foreign lawyer may not know U.S. estate tax rules. An investment advisor may not know that a U.S. brokerage account holding U.S. stocks can create estate tax exposure for a nonresident noncitizen. A trustee may not know that a U.S. beneficiary of a foreign trust distribution has Form 3520 reporting obligations.

Cross-border estates require coordination among advisors. The planning team may include:

• Estate planning counsel in the country of domicile
• Local counsel where real estate is located
• U.S. tax counsel or a U.S. international tax advisor
• Foreign tax counsel
• Fiduciary or trust counsel
• Corporate counsel for business interests
• Investment advisors familiar with cross-border restrictions
• Insurance advisors
• Valuation experts
• Accountants who can manage foreign reporting deadlines

The advisors should work from the same asset schedule. Without coordination, one document can unintentionally undo another.

Mistake 13: Waiting Until Illness Or Death

Cross-border planning takes time. Documents may need translations, notarization, apostilles, legal opinions, local filings, entity approvals, beneficiary updates, or court-recognized formalities. Some planning techniques also work better during life than after death.

Incapacity planning is as important as death planning. If the asset owner becomes incapacitated while assets are spread across multiple countries, family members may need separate court authority in each jurisdiction.

Mistake 14: Treating Lifetime Gifts As Simple

Lifetime gifts can reduce probate complexity, but they can create tax, reporting, and control issues. Gift tax rules differ across countries, and the tax treatment of gifts varies significantly by country, even though lifetime giving often receives preferential treatment compared with transfers at death.

For U.S. purposes, foreign gift reporting can apply to U.S. recipients even when the transfer is treated as a gift or bequest. Transfers involving foreign trusts can also trigger reporting.

Mistake 15: Not Maintaining A Cross-Border Asset Inventory

The simplest planning failure is often the most damaging: no one knows what exists, where it is, or who to contact.

A useful cross-border estate inventory should include:

Asset Category	Information To Collect
Real estate	Country, address, title holder, purchase documents, mortgage details, local counsel, estimated value
Bank and investment accounts	Institution, country, account owner, beneficiaries, account type, reporting history
Business interests	Entity name, jurisdiction, ownership percentage, shareholder agreements, directors, buy-sell provisions
Trusts and foundations	Governing law, trustee or council, beneficiaries, tax classification, reporting obligations
Insurance	Issuer, country, owner, insured, beneficiary, currency, policy number
Retirement accounts	Country, custodian, beneficiary, tax treatment, distribution rules
Personal property	Location of jewelry, art, vehicles, boats, aircraft, collectibles, storage records
Digital assets	Custodians, access procedures, legal authority, password management, private keys if applicable
Liabilities	Country, lender, collateral, guarantees, currency, maturity dates
Advisors	Lawyer, accountant, banker, trustee, investment advisor, insurance advisor in each country

This inventory should be updated regularly and stored securely. The right plan cannot be built around incomplete information.

Cross-Border Estate Planning Is About Coordination

The largest cross-border estate mistakes usually come from treating international assets as an afterthought. A family may have excellent planning in one country and no practical plan in another. That gap can lead to double taxation, frozen accounts, probate delays, family disputes, and missed reporting deadlines.

The goal is not to create a complicated plan. The goal is to create a coordinated plan. Each country’s tax rules, inheritance rules, asset transfer procedures, and reporting obligations should be reviewed together so the family knows what will happen before incapacity or death occurs.

A Practical Guide To The Federal Options For Resolving Tax Debt, And When Each One Fits

There is no single way to resolve a federal tax debt. What people loosely think of as “settling with the IRS” is really a collection system with several distinct paths: payment plans, negotiated settlements, hardship deferrals, appeals, penalty relief, relief for spouses, and procedures that intersect with bankruptcy. Which path fits a given taxpayer turns on the particulars: what they can actually pay, the age and type of the liability, their compliance and filing history, the equity in their assets, their income, and whether they even agree they owe what the IRS says they do.

What follows is an overview of those options under the federal collection rules as they currently stand.

First Principle: Become And Stay Compliant

Before any of this matters, there is a threshold question that trips up more taxpayers than the choice of strategy itself: are you compliant? The IRS will not do much with a balance-due account if the taxpayer is still incurring new liabilities or has returns that should have been filed but weren’t.

For offers in compromise, the IRS Form 656 Booklet states that, before an offer can be considered, the taxpayer must: file all legally required tax returns, have received a bill for at least one tax debt included in the offer, make all required estimated tax payments for the current year, and, if the taxpayer is a business owner with employees, make all required federal tax deposits for the current quarter and the two preceding quarters. The same practical compliance concept applies to installment agreements: default can occur if the taxpayer misses required installment payments or fails to timely pay a balance due on a later-filed return.

So the real first move usually isn’t deciding between an installment agreement and an offer. It’s getting the missing returns filed, stopping new balances from piling up, and pulling together a clear picture of current income, expenses, assets, and liabilities.

Comparison Of Major IRS Tax Debt Resolution Strategies

Strategy	Best Fit	What It Does	Key Limits / Risks
Installment agreement	Taxpayer can pay over time	Allows monthly payments toward full or partial collection	Interest and penalties continue; default can trigger enforcement; IRS may file a Notice of Federal Tax Lien
Guaranteed installment agreement	Individual income tax debt of $10,000 or less, meeting statutory conditions	IRS must accept if statutory criteria are met	Full payment required within 3 years; clean recent compliance history required
Streamlined installment agreement	Taxpayer owes within IRS streamlined thresholds	Easier approval, often without full financial disclosure	Must pay within 72 months or by the collection statute expiration date, whichever is shorter
OIC — doubt as to collectibility	Taxpayer’s assets and income are less than the full liability	Settles the debt for less than the full amount	IRS generally rejects if full payment is available through assets or installments
OIC — doubt as to liability	Taxpayer disputes the existence or amount of the liability	Compromises a genuinely disputed liability	Not available where liability is fixed by final court decision or judgment
OIC — effective tax administration	Taxpayer can technically pay, but full collection would cause hardship or be unjust	Allows settlement despite theoretical collectibility	Requires strong hardship or exceptional-circumstance proof
Currently not collectible hardship status	Taxpayer cannot pay anything without losing ability to meet necessary living expenses	Suspends active collection while hardship exists	Does not eliminate the debt; liens may still be filed; IRS may reactivate collection if income improves
Collection Due Process / appeals	Taxpayer receives lien or levy notice and wants review or alternatives	Provides Appeals review and can raise collection alternatives	Strict deadlines apply; generally one CDP hearing per tax period
Penalty relief	Balance includes penalties caused by reasonable cause, IRS error, statutory exception, or administrative waiver	Reduces or removes penalties	Does not generally remove underlying tax or interest on tax
Innocent spouse relief	Joint return liability should not be collected from one spouse	Relieves qualifying spouse from tax, interest, and penalties	Applies only to joint-return liabilities and depends on the type of relief
Bankruptcy	Older or qualifying tax debts, or broader insolvency issues	Can discharge some taxes and stop certain collection actions	Many tax debts are nondischargeable; liens may survive discharge

Installment Agreements

An installment agreement is the most common tax debt resolution tool when the taxpayer can pay the liability over time. 

Guaranteed Installment Agreements

A guaranteed installment agreement is the strongest statutory installment right for qualifying individual taxpayers. The IRS must accept full payment in installments for an individual income tax liability if, as of the date the taxpayer offers to enter the agreement:

• The aggregate tax liability, determined without interest, penalties, additions to tax, and additional amounts, does not exceed $10,000;
• The taxpayer, and the spouse if the liability relates to a joint return, has not during the preceding 5 taxable years failed to file an income tax return, failed to pay income tax required to be shown on a return, or entered into an installment agreement for income tax;
• The IRS determines the taxpayer is financially unable to pay in full when due, based on information required by the IRS;
• The agreement requires full payment within 3 years; and
• The taxpayer agrees to comply with the Internal Revenue Code while the agreement is in effect.

Streamlined Installment Agreements

Most installment agreements use streamlined criteria rather than full financial negotiation. The Form 9465 instructions state that a taxpayer is generally eligible for a streamlined installment agreement if:

• The assessed tax liability is $25,000 or less for an individual, in-business taxpayer with income tax only, or out-of-business taxpayer; or
• The assessed tax liability is $25,001 to $50,000 for an individual or out-of-business sole proprietorship, and the taxpayer agrees to pay by direct debit or payroll deduction.

The proposed payment must pay the assessed tax liability in full within 72 months or by the Collection Statute Expiration Date, whichever is less. The Collection Statute Expiration Date is normally 10 years from the date of assessment, although it may be suspended or extended for various reasons. 

Levy Protection During Installment Agreements

An installment agreement can protect the taxpayer from levy while the request is pending, while the agreement is in effect, and during certain appeal windows. 

However, installment agreements do not eliminate the debt. If the taxpayer misses payments or fails to timely pay a later-filed balance due return, the taxpayer will be in default, the IRS may terminate the agreement, and enforcement actions such as filing a Notice of Federal Tax Lien or issuing a levy may follow.

Offers In Compromise

An offer in compromise is a settlement of tax debt for less than the full amount owed. The core difference between an installment agreement and an offer in compromise is that an installment agreement generally pays the liability over time, while an offer in compromise seeks to settle the liability for less than the full balance.

The contrast with an installment agreement is straightforward: the installment agreement pays the liability off over time, while the offer tries to settle it for less than the whole balance.

Grounds For An Offer In Compromise

There are three recognized grounds for an offer, and Treasury regulations lay them out:

OIC ground	Standard
Doubt as to liability	A genuine dispute exists as to the existence or amount of the correct tax liability under law; it does not exist where liability has been established by final court decision or judgment.
Doubt as to collectibility	The taxpayer’s assets and income are less than the full amount of the liability.
Effective tax administration	The IRS determines that, although full collection could be achieved, full collection would cause economic hardship.

The IRS generally will not accept an offer if the taxpayer can pay the tax debt in full through an installment agreement and/or equity in assets. If full payment would create economic hardship or exceptional circumstances make full payment unjust, the taxpayer may qualify under effective tax administration guidelines.

OIC Forms, Fee, and Initial Payments

An offer must be submitted in writing, signed under penalties of perjury, and contain the information required by the IRS. Taxpayers submitting offers solely on doubt as to liability are not required to provide financial statements. 

For payment structure:

• A lump-sum offer is an offer payable in 5 or fewer installments and must be submitted with 20 percent of the offer amount under IRC § 7122(c)(1)(A).
• A periodic payment offer must be submitted with the first proposed installment, and failure to make later proposed installments while the offer is being evaluated may be treated as withdrawal under IRC § 7122(c)(1)(B).

Evaluation Of The Offer

Under IRC § 6331(k)(1), no levy may be made while an offer in compromise is pending, for 30 days after rejection, or during a timely appeal of the rejection. An offer is pending beginning when the IRS accepts it for processing.

Acceptance, Rejection, Appeals, And Deemed Acceptance

Nothing here is final until it’s in writing. An offer isn’t accepted until the IRS sends written notice of acceptance to the taxpayer or the taxpayer’s representative.

This acceptance conclusively settles the liability specified in the offer. 

An offer is not rejected until the IRS issues a written notice stating the reasons for rejection and the right to appeal. The taxpayer may administratively appeal a rejected offer to Appeals if the appeal is requested within the 30-day period beginning the day after the date on the rejection letter.

Under IRC § 7122(f), an offer is deemed accepted if the IRS does not reject it within 24 months after submission, excluding any period during which the liability is disputed in a judicial proceeding. 

Five-Year Compliance Obligation After OIC Acceptance

An accepted OIC is not the end of the taxpayer’s obligations.  After acceptance, the taxpayer must continue to file required returns and pay estimated and federal tax payments on time. If the taxpayer fails to timely file and timely pay obligations that become due within five years after acceptance, the IRS may default the offer; upon default, the taxpayer becomes liable for the original tax debt, less payments made, plus accrued interest and penalties.

During the five-year period after acceptance, the taxpayer cannot request an installment agreement or another offer for unpaid taxes incurred before or after the accepted offer.

Currently Not Collectible Hardship Status

Currently not collectible status is not a settlement. It is a collection deferral when the IRS determines the taxpayer cannot pay without hardship.

The Internal Revenue Manual (IRM) states that a hardship exists if the taxpayer is unable to pay reasonable basic living expenses. The hardship determination is based on financial information provided on Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-B, Collection Information Statement for Businesses. These cases generally involve no income or assets, no equity in assets, or insufficient income to make any payment without hardship.

The IRM also states that accounts should not be reported as currently not collectible (CNC) if the taxpayer has income or equity in assets, and enforced collection of that income or equity would not cause hardship.

CNC status does not necessarily prevent lien filing. In general, a Notice of Federal Tax Lien should be filed on accounts being reported CNC when the aggregate unpaid balance of assessments equals or exceeds $10,000.00, subject to lien determination criteria and exceptions.

If hardship is established, levies must be released in certain circumstances. IRC § 6343(e) requires release of a levy on salary or wages payable to or received by the taxpayer upon agreement that the tax is currently not collectible, and that release should be accomplished immediately.

Liens, Levies, And Collection Due Process Rights

Tax debt resolution often occurs because the taxpayer receives a lien or levy notice. Understanding those notices is critical.

Notice Of Federal Tax Lien

Under IRC § 6320(a)(1), the IRS must give written notice after filing a notice of lien.  The notice must be given in person, left at the taxpayer’s dwelling or usual place of business, or sent by certified or registered mail to the taxpayer’s last known address, not more than 5 business days after the lien notice is filed.

The notice must explain the right to request a hearing during the 30-day period beginning the day after the 5-day notice period. 

Levy Notices

Under IRC § 6331(a), if a taxpayer liable for tax neglects or refuses to pay after notice and demand, the IRS may collect by levy on property and rights to property, except property exempt under IRC § 6334.

Levy on salary, wages, or other property generally may occur only after the IRS gives written notice of intent to levy at least 30 days before the levy. The levy notice must include a brief, simple explanation of levy procedures, administrative appeals, collection alternatives including installment agreements, redemption and lien-release procedures, and passport-related certification rules for seriously delinquent tax debts.

A wage levy is continuous, meaning that a levy on salary or wages continues from the date first made until released under IRC § 6343.

Collection Due Process Hearing Issues

At a Collection Due Process hearing, the taxpayer may raise broad collection issues. The taxpayer may raise relevant issues relating to the unpaid tax or proposed levy, including spousal defenses, challenges to the appropriateness of collection actions, and collection alternatives such as bond, substitution of assets, installment agreement, or offer in compromise.

A timely CDP request can suspend collection. Under IRC § 6330(e)(1), if a CDP hearing is requested, the levy actions that are the subject of the hearing and the running of the limitations periods under IRC §§ 6502, 6531, and 6532 are suspended while the hearing and appeals are pending.

Penalty Relief And Abatement

Penalty relief can be a powerful tax debt reduction strategy when penalties make up a substantial part of the balance. Penalty relief does not generally eliminate the underlying tax, but it can materially reduce the amount owed.

The Internal Revenue Manual states that penalty relief generally falls into four categories, considered in this order unless otherwise specified:

• Correction of IRS error;
• Statutory and regulatory exceptions;
• Administrative waivers; and
• Reasonable cause.

The IRM states that reasonable cause may be considered where the taxpayer exercised ordinary business care and prudence but nevertheless was unable to comply with a prescribed duty within the required time.

The IRM identifies administrative relief for the following penalties, if the qualifying criteria are met:

• Failure to File penalty under IRC § 6651(a)(1), IRC § 6698(a)(1), or IRC § 6699(a)(1);
• Failure to Pay penalty under IRC § 6651(a)(2) and/or IRC § 6651(a)(3); and
• Failure to Deposit penalty under IRC § 6656.

To request abatement of a penalty after assessment, the taxpayer must submit a written request to the IRS. If the taxpayer disagrees with the IRS’s penalty determination, the taxpayer generally has the right to an administrative appeal, although Appeals review is not automatic.

Innocent Spouse Relief

For joint returns, both spouses are generally exposed to joint and several liability. Innocent spouse rules provide a separate resolution path when one spouse should not be held liable for all or part of a joint liability.

Three types of relief are available to married persons who filed joint returns:

• Innocent spouse relief;
• Separation of liability relief; and
• Equitable relief.

Under IRC § 6015(b), qualifying innocent spouse relief can relieve the requesting spouse from tax, interest, penalties, and other amounts to the extent the liability is attributable to an understatement.

Under IRC § 6015(c), qualifying taxpayers who are no longer married, legally separated, or not living together may limit liability through separation of liability. Publication 971 explains that separation of liability allocates the understated tax, plus interest and penalties, between the spouses or former spouses.

Under IRC § 6015(f), equitable relief is available if, considering all facts and circumstances, it is inequitable to hold the individual liable for an unpaid tax or deficiency and relief is not available under IRC § 6015(b) or IRC § 6015(c). Equitable relief can apply to an unpaid tax properly shown on the return but not paid, unlike innocent spouse relief or separation of liability relief.

For innocent spouse relief or separation of liability relief, Form 8857 generally must be filed no later than 2 years after the date on which the IRS first began collection activities against the requesting spouse.

While an innocent spouse request is pending for a tax year, the IRS cannot collect from the requesting spouse for that year, but interest and penalties continue to accrue.

Bankruptcy As A Tax Debt Strategy

Bankruptcy is not an IRS administrative program, but it can be relevant to tax debt resolution. A bankruptcy discharge is a permanent injunction against the collection of certain debts as a personal liability of the debtor.

The bankruptcy court may discharge a debtor from personal liability for certain debts, including taxes, but not all debts are dischargeable. Many tax debts are excepted from discharge, and the scope of discharge depends on the bankruptcy chapter and the nature of the debt. Chapter 7 debtors do not have an absolute right to discharge; Chapters 12 and 13 debtors generally receive discharge after completing all payments under the bankruptcy plan.

Secured creditors with valid pre-bankruptcy liens may enforce those liens to recover property secured by the lien, even after discharge of personal liability.

If debt is canceled in bankruptcy, the canceled amount is not taxable income, but it can reduce other tax benefits. Debt canceled under a bankruptcy proceeding is not taxable income, and the bankruptcy exclusion applies only where the discharge of indebtedness occurs within the bankruptcy case.

A failure-to-pay penalty is not imposed in certain cases involving taxes incurred by the bankruptcy estate or by the debtor before the earlier of the order for relief or trustee appointment, subject to stated requirements. This relief does not apply to penalties for failure to pay or deposit taxes withheld or collected from others, and it does not apply to failure-to-file penalties.

Bankruptcy should be evaluated where the taxpayer has broader insolvency issues or older tax liabilities, but it requires careful analysis because many taxes survive bankruptcy, and federal tax liens may remain enforceable against property.

Practical Resolution Workflow

In practice, working a tax debt case tends to follow the same disciplined sequence:

• Confirm The Liability – Verify tax periods, assessments, penalties, interest, payments, offsets, and whether the taxpayer disputes the debt.
• Check The Collection Statute – Under IRC § 6502(a)(1), the IRS generally has 10 years after assessment to collect by levy or court proceeding, subject to suspensions and extensions.
• Bring Filings Current – File missing returns before requesting most collection alternatives.
• Stop New Liabilities – Adjust withholding, make estimated tax payments, and make required business payroll deposits.
• Analyze Ability To Pay – Determine monthly disposable income and asset equity.
• Request Penalty Relief Where Available – Consider IRS error, statutory exceptions, administrative waivers, and reasonable cause before locking in a long-term resolution.
• Choose The Resolution Path – if full payment over time is feasible, use an installment agreement; if full payment is not feasible, evaluate an OIC; if no payment is feasible, request CNC hardship status; and if the taxpayer received a lien or levy notice, preserve CDP rights.
• Document Everything – Financial statements, bank records, proof of expenses, medical hardship, unemployment, asset valuations, and compliance records often determine the outcome.
• Maintain Compliance After Resolution – Installment agreements and accepted offers can default if future filing and payment obligations are missed.

If you have just opened an envelope from the IRS or refreshed your IRS Online Account and seen a letter you weren’t expecting, take a breath. Receiving an audit notice is unsettling. It does not have to be a disaster.

I represent both U.S. and foreign clients in IRS examinations, and I can tell you that audits are, more than anything else, a process. The taxpayers who get the best outcomes treat it that way, methodical, deadline-driven, evidence-based, rather than as a crisis. This guide walks you through how to do that, from the day the notice arrives through Appeals, Tax Court, and post-assessment options. If you have cross-border facts such as foreign accounts, foreign entities, foreign trusts, foreign gifts, or treaty positions, read the international section below even if the audit notice does not appear to raise those issues. The information-return penalties can dwarf the underlying tax.

Understand What An Audit Actually Is

An audit is a review of a tax return and supporting records to confirm that what was reported is accurate. The IRS accepts most returns as filed. The ones it examines are usually flagged for a third-party mismatch (W-2, 1099, K-1, brokerage), an algorithmic score, a related-party examination, or random selection.

The most important point I make to clients in the first conversation is this: an audit is a verification process, not an accusation. Holding that distinction in mind changes how you behave during the audit, and how you behave changes the outcome.

It is also worth noting that our tax system depends on honest reporting. In consultations, prospective clients often ask, “But how would they know about…” followed by whatever amount or issue concerns them.

Identify The Type Of Audit

Correspondence Audit – Handled by mail or through the IRS Document Upload Tool. Usually, one or two specific items, such as a credit, deduction, or a 1099 mismatch.

Office Audit – You appear at an IRS office with documentation. Typically broader than a correspondence audit but narrower than a field audit.

Field Audit – A Revenue Agent visits your home, business, or your representative’s office. The most comprehensive type, common for business taxpayers, high-income individuals, and complex international cases.

If you have a choice about where the meeting takes place, hold it at your representative’s office. You control the documents produced and avoid letting the examiner form impressions based on what is sitting on a desk.

Step 1: Read The Notice Carefully Before You Do Anything Else

The audit letter is the operative document. Before you call, email, or send anything, identify five things:

1. The tax year (or years) under examination.
2. The specific items the IRS is questioning.
3. The response deadline.
4. The form of response the IRS expects (mail, fax, upload, in-person).
5. Whether the IRS is requesting documents or proposing a change.

A document request calls for substantiation. A proposed change calls for a decision; you either agree, partially agree, or appeal. Resist the impulse to call the IRS the moment the notice arrives. An unprepared call expands issues, creates confusion, and produces statements you may later need to correct.

Step 2: Do Not Ignore Notice

Ignoring an IRS notice is the single most damaging response I see. The audit does not go away. The IRS proceeds without your input, disallows deductions and credits it cannot independently verify, and assesses tax, penalties, and interest. Even if you cannot fully respond by the deadline, contact the IRS or have your representative do so. Most deadlines can be extended for a reasonable period if you ask before they expire. Almost none can be extended after they expire.

Step 3: Decide Whether You Need Representation 

You have the right to represent yourself, but for many audits, representation is the difference between a clean resolution and a multi-year proceeding. I generally recommend representation when the audit involves business income, Schedule C, rental real estate, or cryptocurrency; foreign accounts, foreign assets, or foreign entities; an in-person interview; multiple tax years; proposed penalties; incomplete records; or any potential exposure beyond civil tax.

A qualified representative communicates with the examiner on your behalf, preserves legal privileges where they apply, organizes the evidence so the examiner can verify your position quickly, and keeps the audit focused on the items in the notice instead of letting it spread.

A Note For Non-U.S. Taxpayers: The U.S. tax system is procedurally different from most foreign systems, and the consequences of routine missteps like admissions in an interview, late information returns, and signing the wrong form can be severe. If you have U.S. tax exposure, do not attempt an IRS audit without U.S. tax controversy counsel.

Step 4: Gather And Organize Your Documentation

Documentation is the foundation of an audit defense. The burden of proof is on you to substantiate deductions, credits, and most return positions. The IRS does not have to prove you are wrong; you have to prove you are right.

Beyond the return itself, assemble the third-party reporting forms (W-2, 1099, K-1, 1095, 1098); bank and credit card statements; receipts, invoices, contracts, and closing statements; mileage logs and calendars; loan and payroll records; accounting ledgers; and prior-year and later-year returns that explain carryovers, basis, or depreciation.

Organize by issue, not just chronologically. For each item the IRS has questioned, build a short proof schedule that ties documents to the tax return. The goal is to make it easy for the examiner to verify your position. One practical rule: never send originals. Send photocopies and keep complete copies of everything you submit, along with mailing or upload confirmation.

Step 5: Know Your Rights

The Taxpayer Bill of Rights and the Internal Revenue Manual give you specific protection. The IRS lists quality service, representation, the right to challenge the IRS and be heard, the right to appeal, the right to pay only the correct amount, and the right to privacy and confidentiality. These are not theoretical. If an examiner is not considering the documents you provided, you can ask for a manager conference. If an examiner is applying the wrong legal standard, you can challenge it. If negotiations are deadlocked, you can move the matter to Appeals.

Step 6: Respond And Answer Only What Is Asked

The cardinal rule of audit defense is to answer the question that was asked and nothing more. If the IRS asks for substantiation of your charitable contributions, send that, not unsorted bank statements full of unrelated transactions. Cooperation is not the same as expansiveness.

A focused written response usually includes a copy of the IRS notice; taxpayer name, identification number, and tax year; a short statement that you are responding to the notice; a list of the issues addressed; organized photocopies of supporting documents; a summary schedule tying documents to the return; a clear statement of the outcome you are requesting; and representative authorization (Form 2848 or 8821) where applicable.

Step 7: Prepare Carefully For Any Interview

If the audit involves an in-person meeting, prepare. Review the return line by line. Review the documents you have produced. Anticipate what the examiner will ask. A few rules I give clients before any IRS interview: do not guess (if you do not remember, say you need to check); answer only the question asked; do not volunteer unrelated information, even if it feels harmless; defer to your representative on what is produced and what is said; and do not allow a tour of a business without a plan for what is shown and why.

Step 8: Pay Special Attention To International Compliance

This deserves its own section because international compliance is where I see the most damage done in audits.

The U.S. international tax system runs on information returns. These are forms that disclose foreign accounts, assets, entities, trusts, and gifts. They are separate from your income tax return, separate from each other, and each carries its own penalty regime. Penalties apply even where no additional income tax is due.

If you have foreign accounts, foreign financial assets, ownership of or signature authority over a foreign entity, an officer or director role in a foreign corporation, CFC or PFIC exposure, an interest in a foreign partnership, a foreign disregarded entity or branch, a relationship with a foreign trust, a large gift or bequest from a non-U.S. person, or any treaty or cross-border withholding position — treat the audit as an international case until proven otherwise.

The main international information returns and their penalty exposure:

Form	Trigger	Initial Penalty Exposure
FBAR (FinCEN Form 114)	U.S. person with foreign financial accounts exceeding $10,000 in aggregate at any time during the year	Up to $10,000 per non-willful violation; willful violations up to the greater of $100,000 or 50% of account balance; criminal penalties available
Form 8938	Specified foreign financial assets above filing thresholds (IRC §6038D)	$10,000, plus $10,000 per 30-day continuation after IRS notice, capped at $50,000
Form 5471	Certain U.S. officers, directors, or shareholders of certain foreign corporations	$10,000 per annual accounting period, plus $10,000 per 30-day continuation, capped at $50,000; foreign tax credit reductions also apply
Form 8865	Controlled foreign partnerships, transfers, and certain interest changes	$10,000 for certain failures, plus continuation penalties; foreign tax credit reduction may apply
Form 8858	U.S. persons operating a foreign branch or owning a foreign disregarded entity	Generally follows IRC §6038 regime
Form 3520 / 3520-A	Foreign trust creation, transfers, ownership, distributions; large foreign gifts	Greater of $10,000 or 35% of gross reportable amount for many trust events; 5% per month, capped at 25%, for unreported foreign gifts

A Few Patterns I See Repeatedly: the taxpayer reported foreign interest on Schedule B but did not file the FBAR (the income is on the return; the FBAR is still required); the foreign company had no profit, so the taxpayer assumed there was nothing to report (Form 5471 is still required); the foreign LLC is disregarded for U.S. income tax (Form 8858 is still required); the foreign trust did not make a taxable distribution (Form 3520 and possibly Form 3520-A may still be required); the receipt from a non-U.S. relative was a gift, not income (for large foreign gifts, Form 3520 may still be required).

Income reporting and information reporting are separate compliance questions. During an audit, you have to answer both.

One Practical Word: do not casually file a late FBAR, Form 8938, Form 5471, Form 8865, Form 8858, Form 3520, or Form 3520-A during an audit without first developing a procedural strategy. Once the IRS has opened an examination, your options narrow. Some penalties are immediately assessable and are not subject to ordinary deficiency procedures. Reasonable-cause defenses depend on what you knew, what you told your advisor, and what advice you received. Get the facts and the file complete before you argue the penalty.

Step 9: Evaluate The Examiner’s Findings

When the examination closes, you will receive either an acceptance of the return as filed or a report of proposed adjustments. The possible outcomes:

Outcome	Meaning
No change	The IRS accepts the return as filed for the issues examined.
Agreed adjustment	You agree to the IRS changes and sign the agreement form.
Partially agreed	You agree to some changes and dispute others.
Unagreed adjustment	You preserve your appeal rights and do not sign.
Penalty proposal	The IRS proposes penalties in addition to tax and interest.

If you intend to appeal, do not sign the agreement page. If you partially agree, sign only what reflects the items you actually accept and continue to dispute the rest.

Step 10: The 30-Day Letter And Appeals

If you do not agree with the examiner’s proposed changes, the IRS generally issues a 30-day letter transmitting the examination report. You have 30 days to agree and sign, submit additional information, or request Appeals consideration.

The IRS Independent Office of Appeals is separate from the examination function. Appeals officers have broad settlement authority and are trained to consider the “hazards of litigation” — the risk to both sides of going to court. In my experience, Appeals is where most disputes that survive examination actually get resolved, often on terms that examiners cannot offer.

The form of the Appeals request depends on the amount in dispute. For $25,000 or less per tax period, you may use a small case request (Form 12203 or a brief written statement). For more than $25,000 per tax period, a formal written protest is required, signed under penalties of perjury, identifying the disputed adjustments, the amount in dispute, the facts supporting your position, the legal authority you rely on, and any disputed penalties with reasons they should not apply. The protest is the first impression Appeals gets of your case, thus draft it carefully.

Fast Track Settlement can be an alternative for appropriate cases. It keeps the case in examination jurisdiction while a trained Appeals employee acts as a neutral facilitator. You retain your normal appeal rights if Fast Track does not produce a settlement.

Step 11: The 90-Day Letter And Tax Court

If the matter is not resolved at examination or Appeals, the IRS issues a statutory notice of deficiency — the 90-day letter. You have 90 days from the date of the notice (150 days if the notice is addressed outside the United States) to file a petition with the U.S. Tax Court.

The 90-day deadline is one of the most important deadlines in tax practice. The IRS cannot extend it. Missing it forfeits your right to petition the Tax Court without first paying the tax. You can still litigate in U.S. District Court or the U.S. Court of Federal Claims, but only after paying the assessed tax and filing a refund claim.

Forum	When Used	Payment Required First?
U.S. Tax Court	Within 90 days of a statutory notice of deficiency (150 days if addressed outside the U.S.)	No
U.S. District Court	Refund litigation after payment and a refund claim	Yes
U.S. Court of Federal Claims	Refund litigation after payment and a refund claim	Yes

Tax Court has subject-matter expertise; District Court offers a jury option; the Court of Federal Claims has unique precedential authority for certain issues. Forum selection deserves serious analysis with experienced tax litigation counsel. A note on interest and payment: interest accrues on unpaid balances throughout the dispute, and paying part or all of a deficiency at the wrong moment can shift you out of the deficiency-jurisdiction track. These are strategic decisions, not clerical ones.

Step 12: Post-Assessment Options

Audit Reconsideration – The IRS will reconsider a prior audit if you present information that was not previously considered. This is most useful when the original audit closed without taxpayer participation, when records were unavailable at the time, or when a credit was reversed, and you now have proof it should be allowed. You do not have to pay first. But audit reconsideration is not a do-over for taxpayers who failed to respond on time; the IRS expects new information.

Refund Claims – A refund claim (Form 1040-X for individuals) must generally be filed by the later of three years from the date the original return was filed or two years from the date the tax was paid. If the IRS denies the claim, Appeals rights typically follow, and a refund suit becomes available if the claim is denied or not acted on within six months.

Common Mistakes To Avoid

The same mistakes recur in audit after audit: ignoring the notice; sending originals instead of photocopies; signing an agreement while intending to appeal; missing the 30-day letter deadline; missing the 90-day Tax Court deadline; producing an unorganized document dump; volunteering unrelated information; lying to the IRS or providing false documentation (this converts a civil audit into a criminal investigation — never do it); signing a statute extension on Form 872 without understanding the consequences; and treating audit reconsideration as a guaranteed second chance.

Final Thoughts

The taxpayers I see come out of audits in the best shape are the ones who treat the process with the seriousness it deserves and the discipline it rewards. They read the notice. They get representation early when the stakes warrant it. They organize their records. They answer only what is asked. They meet every deadline. They preserve their appeal rights. They do not sign away positions they intend to fight.

If you are facing an audit and want help thinking through your position before responding, my colleagues at CST Tax Advisors and I are here to help.

The IRS enforcement environment in 2026 is moving in two directions at once. On one hand, the agency has publicly committed to higher audit coverage for large corporations, complex partnerships, and very high-income individuals. On the other hand, the IRS is operating with a materially smaller workforce than it had at the beginning of 2025.

This does not mean the IRS is stepping back from enforcement. It means enforcement is becoming more selective, more data-driven, and more focused on taxpayers and transactions that the agency believes offer the highest compliance risk or revenue potential. For many taxpayers, the risk is not simply that the IRS will open more audits. The greater risk is that, when an audit is opened, the IRS may already have substantial third-party data, foreign account information, digital asset reporting, Form 1099 data, K-1 information, and statistical comparisons against similar taxpayers.

The result is a different type of examination environment. Fewer taxpayers may be selected overall, but those selected can expect a more focused and more technically demanding audit.

The IRS’s Stated Enforcement Priorities

The IRS has continued to identify three categories of taxpayers for increased audit coverage: large corporations, large and complex partnerships, and wealthy individuals. At the same time, the IRS has stated that it does not intend to increase audit rates for small businesses and taxpayers making under $400,000, relative to historical levels.

For large corporations with assets over $250 million, the IRS has stated that it intends to increase the audit rate from 8.8% to 22.6% by the 2026 tax year. These examinations are expected to remain specialist-driven and document-intensive, with continued attention on transfer pricing, intercompany transactions, foreign tax credits, basis-shifting transactions, and complex entity structures. The IRS’s own budget materials note that large corporate examinations have an average case cycle time of approximately 36 months, which means staffing and training changes can affect examination capacity over several years.

For large and complex partnerships with assets over $10 million, the IRS has stated that it intends to increase audit rates from 0.1% to 1.0%, a nearly tenfold increase. This remains one of the most significant enforcement developments for pass-through entities. Partnerships have historically been difficult to examine because of tiered ownership, special allocations, partner-level tax attributes, capital account issues, debt allocations, and transfers of partnership interests. The centralized partnership audit regime gives the IRS a more efficient procedural path to examine and adjust partnership items at the entity level.

For wealthy individuals, the IRS has stated that it intends to increase audit coverage for taxpayers with total positive income over $10 million to 16.5% by the 2026 tax year. These examinations often extend beyond the Form 1040 itself and into related entities, trusts, private investment vehicles, foreign accounts, charitable structures, real estate activities, and pass-through income reported on Schedules K-1.

The DOGE Effect: Fewer Agents, Smarter Tools

The IRS’s enforcement plans must be read together with the agency’s staffing reductions. The Treasury Inspector General for Tax Administration reported that between January 2025 and May 2025, the IRS workforce decreased from approximately 103,000 to 77,000 employees, a 25% reduction. Those employees either separated from the agency or accepted deferred resignation or other incentive offers.

Reuters reported that IRS enforcement revenue declined by 5%, or almost $5 billion, in the fiscal year, and that the agency opened more than 120,000 fewer tax audits in 2025 than in the prior year. Reuters also reported that the IRS enforcement function lost roughly 5,000 employees heading into 2026 and is projected to lose another 5,000 in the coming year. Longer term, the agency reportedly aims to employ approximately 69,000 people by fiscal year 2027, compared with a recent peak of 103,000 employees.

Despite these reductions, the IRS has not signaled an end to enforcement. Treasury officials told Reuters that enforcement revenue increased 12% in the first five months of fiscal year 2026, which began October 1. The apparent strategy is to concentrate limited resources on cases that appear more likely to produce significant adjustments.

The mechanism for that recovery is technology. IRS leadership under CEO Frank Bisignano has doubled down on artificial intelligence and data analytics to compensate for lost staffing. The agency now uses AI-powered tools to:

• Cross-match returns against third-party data (W-2s, 1099s, brokerage records, digital asset reports, and international FATCA feeds) at unprecedented scale
• Identify statistical anomalies in deductions, income characterization, and entity allocations relative to peer benchmarks
• Flag mismatches between FBAR/FATCA reporting and income tax return positions
• Prioritize audit case selection by estimated tax recovery potential

The net effect: the IRS is auditing less, but when it audits, it arrives better prepared, with more data, and with enforcement as its objective.

International Reporting Remains A Major Enforcement Risk

Cross-border compliance remains one of the IRS’s highest-priority enforcement areas in 2026. The FATCA network now spans over 110 jurisdictions, and the IRS receives automated account-level data from thousands of foreign financial institutions. Where that data does not reconcile with FBAR filings (FinCEN Form 114) or Form 8938, the IRS’s AI matching tools will surface the discrepancy.

Penalties for FBAR non-compliance are severe. Non-willful violations carry penalties up to $16,536 per annual report (following the Supreme Court’s 2023 Bittner decision, which confirmed the per-report rather than per-account penalty standard). Willful violations carry civil penalties of the greater of $165,353 or 50% of the account balance, plus potential criminal exposure. The IRS has a six-year statute of limitations for FBAR penalty assessments.

Taxpayers with unreported or inconsistently reported foreign accounts should evaluate corrective options before the IRS initiates contact. Once an examination begins, available options may become more limited and the risk profile can change quickly.

Digital Asset Reporting Is Entering A New Phase

Digital asset enforcement is also changing. Treasury and the IRS have issued final regulations requiring brokers to report certain digital asset sale and exchange transactions beginning with transactions that take place in calendar year 2025, reported on Form 1099-DA. Brokers must report gross proceeds for transactions effected on or after January 1, 2025.

The next stage begins with basis reporting. Basis reporting is required by certain brokers for transactions occurring on or after January 1, 2026. The 2026 Form 1099-DA instructions state that, for sales effected on or after January 1, 2026, brokers are not required to report basis information for digital assets that are noncovered securities, although they may voluntarily report that information and receive penalty protection if the appropriate box is checked.

This creates a new matching environment for cryptocurrency and other digital asset taxpayers. Many early digital asset filings were prepared with incomplete cost basis records, inconsistent wallet transfer tracking, exchange migration issues, staking income questions, NFT transactions, stablecoin transactions, or DeFi activity that was not reported consistently. The IRS will now have more third-party reporting to compare against Form 1040 digital asset disclosures, Schedule D, Form 8949, and other return positions.

Taxpayers should not assume that the absence of a Form 1099-DA means there is no reporting obligation. IRS guidance states that decentralized finance brokers and some foreign brokers are not required to file Form 1099-DA or furnish statements to taxpayers. The taxpayer remains responsible for accurate reporting even when no form is issued.

Pass-Through Entities Should Expect More Scrutiny

Partnerships and S corporations remain central enforcement targets because income, deductions, credits, and basis adjustments flow from the entity to the owner. A federal adjustment at the entity level can affect multiple owners, multiple tax years, and state tax reporting.

The IRS’s stated increase in audit coverage for partnerships with assets over $10 million is particularly important for partnerships with contributed property, special allocations, tiered structures, related-party transactions, debt allocations, Section 754 elections, Section 743(b) adjustments, carried interests, or significant capital account activity. The agency’s focus is not limited to whether income was reported. It also includes whether allocations have substantial economic effect, whether basis adjustments are properly calculated, whether liabilities are properly allocated, and whether transfers of partnership interests have been correctly reported.

California taxpayers should also consider state follow-on exposure. A federal partnership adjustment can create California issues involving California-source income, apportionment, withholding, composite filings, and pass-through entity tax positions. For multistate partnerships and owners, the federal audit may be only the first stage of a broader compliance review.

High-Income Individual Examinations Are Broader Than The Form 1040

For individuals with total positive income over $10 million, the IRS’s stated audit-rate increase to 16.5% means return preparation and supporting documentation are increasingly important. High-income examinations often involve more than the individual income tax return. The IRS may examine related entities, family partnerships, trusts, foundations, foreign accounts, private investment structures, aircraft or yacht expenses, real estate losses, charitable contributions, installment sale reporting, and related-party loans.

The IRS is also likely to compare reported income against third-party reporting and broader financial indicators. A taxpayer with significant assets, visible liquidity events, substantial debt service, or large lifestyle expenditures may face questions if the reported income profile does not appear consistent with available data.

For high-income taxpayers, contemporaneous documentation is essential. Large deductions, recurring business losses, nonstandard investment structures, foreign tax credit positions, treaty positions, and related-party arrangements should be supported before the return is filed. Reconstructed records are generally less persuasive than documentation prepared at the time of the transaction.

Employee Retention Credit Claims Remain High Risk

Employee Retention Credit enforcement remains a priority, particularly for claims prepared by promoters or filed late in the program. The IRS has issued FAQs addressing new ERC compliance provisions under the One Big Beautiful Bill. Those provisions affect ERC claims for the third and fourth quarters of 2021 filed after January 31, 2024.

Under Section 70605(d) of the OBBB, effective July 4, 2025, the IRS is prevented from allowing or refunding ERC claims for the third and fourth quarters of 2021 if those claims were filed after January 31, 2024, even if the employer otherwise met the eligibility requirements. The IRS guidance also states that the law strengthens compliance enforcement by imposing penalties on certain ERC promoters who fail to meet due diligence requirements when assisting with claims.

If an ERC claim is disallowed, the IRS states that the taxpayer will receive Letter 105-C, Claim Disallowed. A taxpayer may appeal to the IRS Independent Office of Appeals if the taxpayer believes the ERC claim was timely filed on or before January 31, 2024, and was improperly disallowed under Section 70605(d).

Employers with pending or previously paid ERC claims should review the quarter claimed, filing date, eligibility analysis, payroll records, government order support, gross receipts calculations, promoter involvement, and IRS correspondence. Claims based on broad supply-chain arguments, general economic disruption, or boilerplate shutdown narratives remain especially vulnerable.

Abusive Transactions Remain on the IRS Radar

Syndicated conservation easements, micro-captive insurance arrangements, monetized installment sale structures, and other listed or high-risk transactions remain enforcement priorities. Taxpayers who participated in these arrangements should not assume that the passage of time eliminates risk. Listed transaction reporting failures, promoter investigations, extended statutes, and penalty assertions can significantly increase exposure.

In many of these cases, the IRS may examine not only the claimed tax benefit, but also the taxpayer’s reporting obligations, reliance on professional advice, valuation support, transaction documents, and communications with promoters or advisors. Privilege and document production issues should be considered early, not after the examination is underway.

What Taxpayers Should Expect If Examined

The character of IRS examinations has changed. Audits that once began as broad information-gathering inquiries are now more likely to begin with a defined enforcement objective. Examiners may have already reviewed third-party reporting, foreign account information, digital asset records, K-1 reporting, and peer comparisons before contacting the taxpayer.

Initial Information Document Requests may therefore be more specific and more demanding. Taxpayers should expect requests for original records, contemporaneous workpapers, transaction documents, account statements, basis schedules, foreign reporting support, and communications relevant to the return position. For cross-border taxpayers, an income tax issue can quickly become an information reporting issue, and an information reporting issue can lead to broader questions about unreported income, foreign tax credits, GILTI, Subpart F, PFICs, treaty positions, or FBAR compliance.

Taxpayers should also consider privilege before responding to an IRS notice. Communications with a CPA are generally not protected in the same way as communications with legal counsel. Sensitive matters involving offshore reporting, promoter transactions, digital assets, high-dollar partnership positions, or potential penalties should be reviewed carefully before documents are produced.

Practical Preparation For 2026

The most effective risk management is proactive. Taxpayers in the IRS’s priority categories should review open tax years before receiving an IRS notice. That review should focus on material filing positions, missing or inconsistent information returns, foreign account reporting gaps, digital asset reporting issues, partnership basis matters, large deductions, related-party transactions, ERC claims, and state follow-on exposure.

Taxpayers should also reconcile returns against information the IRS is likely to receive independently. This includes Forms W-2, Forms 1099, Schedules K-1, brokerage statements, Form 1099-DA, FATCA data, mortgage interest reporting, charitable contribution acknowledgments, payroll tax filings, and state tax filings. Because the IRS is using statistical and machine-learning techniques in audit selection, mismatches and outlier positions are more likely to be identified.

International taxpayers should maintain organized workpapers for FBAR filings, Form 8938, Form 5471, Form 8865, Form 3520, Form 3520-A, PFIC reporting, foreign tax credit calculations, GILTI, Subpart F, Section 962 elections, treaty-based return positions, foreign pensions, and foreign trust analysis. The IRS’s active LB&I campaigns show continued attention to FATCA reporting, offshore private banking, foreign earned income exclusion claims, and Forms 5471.

Digital asset taxpayers should review exchange histories, wallet transfers, cost basis records, staking income, airdrops, NFTs, stablecoin transactions, DeFi activity, lost wallets, and prior-year reporting consistency. Gross proceeds reporting began with 2025 transactions, and basis reporting for certain covered digital asset transactions begins with transactions occurring on or after January 1, 2026.

Taxpayers with ERC claims should separately review eligibility and timing. Section 70605(d) prevents the IRS from allowing or refunding ERC claims for the third and fourth quarters of 2021 after July 4, 2025, if the claims were filed after January 31, 2024. Employers should retain payroll records, gross receipts calculations, government order analysis, copies of amended payroll tax returns, IRS correspondence, and any promoter engagement materials.

Final Thoughts

The 2026 enforcement environment is not defined by audit volume alone. The IRS is smaller than it was at the start of 2025, but it is relying more heavily on data matching, artificial intelligence, third-party reporting, and targeted case selection.

Taxpayers with clean records, consistent reporting, and contemporaneous documentation are in a stronger position if selected for examination. Taxpayers with foreign reporting gaps, digital asset reporting issues, unsupported pass-through positions, high-income return anomalies, or promoter-driven ERC claims should evaluate those risks before the IRS contacts them.

Introduction

Divorce is among the most financially complex events in a person’s life. When international borders are involved, that complexity multiplies. A couple may have built their financial life across two or more countries, holding bank accounts, superannuation or pension funds, real estate, and investment portfolios in multiple jurisdictions, and they are now separating under family law regimes that may be fundamentally incompatible with one another and with U.S. federal and state tax law.

This article addresses the principal U.S. tax issues that arise when families with international ties divorce: the treatment of child and spousal support, the allocation of child-related tax benefits, the transfer of foreign and domestic assets between spouses, the division of foreign retirement plans, and the compliance obligations that follow each party across borders. 

A recurring theme is the gap between what the family court orders and what the tax code permits. Family law practitioners, mediators, and financial advisors focused solely on domestic law frequently produce agreements that are unenforceable or tax-inefficient from a U.S. perspective. Early coordination between international tax counsel and family law counsel, ideally before a settlement agreement is drafted, is essential.

I. Alimony And Spousal Support: The Post-TCJA Landscape

A. The Domestic Baseline: How The TCJA Changed Everything

Prior to 2019, spousal support payments were deductible by the payor and includible in income by the recipient under IRC §§ 71 and 215. The Tax Cuts and Jobs Act of 2017 reversed this treatment for divorce or separation agreements executed after December 31, 2018. Under current law, alimony payments made pursuant to a post-2018 agreement are neither deductible by the payor nor includible in the recipient’s gross income. 

Agreements executed before January 1, 2019, remain subject to the pre-TCJA rules unless the parties affirmatively modify the agreement and elect new-law treatment. This grandfathering rule requires careful attention in modification proceedings since a seemingly minor amendment can inadvertently trigger new-law treatment if not carefully drafted.

B. Cross-Border Complications: Treaty Override And Source Rules

The TCJA change matters in cross-border cases because U.S. income tax treaties were negotiated on the assumption that alimony would be treated consistently with pre-TCJA domestic law. Most U.S. income tax treaties (including those with Australia, the U.K., and France) contain specific provisions governing alimony and support payments.

U.S. – Australia Treaty (Article 18)

Article 18(6) of the U.S.–Australia treaty provides that alimony or other maintenance payments, including child support, arising in one state and paid to a resident of the other state are taxable only in the first-mentioned state.

U.S. – France Treaty (Article 18 — Pensions And Annuities)

The U.S.–France treaty’s pension article should not be treated as a straightforward alimony provision; alimony requires separate treaty and domestic-law analysis. 

U.S. – U.K. Treaty (Article 17)

Under Article 17(5) of the U.S.–U.K. treaty, periodic divorce/support payments are generally exempt in both states unless the payer is entitled to a deduction in the payer’s state of residence, in which case the payments are taxable only in the recipient’s state of residence.

C. Qualified Payments: What The Statute Still Requires

For pre-2019 agreements still subject to the old rules, the requirements of former IRC § 71 continue to govern: payments must be in cash or cash equivalent, pursuant to a written divorce or separation instrument, with no obligation to continue after the payee’s death, and the parties must not be members of the same household. These requirements can be difficult to satisfy in cross-border cases where payments are denominated in foreign currency or routed through foreign accounts.

IRC § 988 foreign currency gain or loss may arise where the payor makes payments in a non-dollar currency. If the obligation is denominated in Australian dollars and the payor uses dollars to acquire Australian dollars for transfer, a § 988 transaction arises on the currency exchange. Whether any § 988 gain or loss is recognized depends on whether the transaction is treated as a personal transaction under Treas. Reg. § 1.988-1(a)(7), which provides a limited exclusion for personal transactions, but only up to $200 of gain per transaction. For recurring support payments, this exclusion is easily exceeded, and currency gain or loss must be tracked.

II. Child-Related Tax Benefits In Cross-Border Divorces

A. Dependency Exemption, Child Tax Credit, And Head Of Household

The child tax credit (up to $2,200 per qualifying child under age 17 for 2025, subject to income phaseouts for tax year 2025), the additional child tax credit, the child and dependent care credit, and the earned income tax credit (EITC) are tied to the concept of a qualifying child. For divorced parents, the allocation of these benefits turns on which parent has primary physical custody, the custodial parent, and whether the custodial parent has executed a Form 8332 release to the noncustodial parent.

The custodial parent is generally the parent with whom the child resided for the greater number of nights during the year. In a cross-border arrangement, counting nights can become genuinely complicated: What if the child spends 180 nights in Australia and 185 nights in the United States, split between two parents? What if the child is enrolled in boarding school in a third country?

The IRS tie-breaker rules for qualifying child status under IRC § 152 are determined by nights spent. The release mechanism under IRC § 152(e). Form 8332 allows the custodial parent to release the dependency and child tax credit to the noncustodial parent for one or more tax years. Critically, the EITC and the head-of-household filing status cannot be transferred via Form 8332. Only the custodial parent qualifies for these benefits, regardless of Form 8332 release.

B. Cross-Border Issues: Non-Resident Alien Spouses And Qualifying Children

Where one parent is a nonresident alien (NRA), and the other is a U.S. citizen or resident, the U.S.-resident parent’s claim for child-related credits depends on whether the child is a U.S. citizen, national, or resident. A child’s U.S. citizenship can satisfy one eligibility element for certain U.S. child-related tax benefits, but qualifying-child status still depends on the applicable residency/custody rules, including the greater-number-of-nights test for divorced parents. A child who is neither a U.S. citizen nor a resident cannot be a qualifying child for most credit purposes.

This creates an acute problem in situations where, following divorce, a U.S.-citizen parent retains physical custody of minor children in the United States, and the NRA parent seeks credit or exemption benefits. Conversely, if the U.S.-citizen parent moves abroad with the children and becomes a bona fide resident of a foreign country, the children may remain qualifying children for U.S. tax purposes (being U.S. citizens), but the parent may face additional foreign tax obligations under local law on the same economic benefits.

C. Dependency and Support Under Foreign Law

In Australian, U.K., and French tax practice, the treatment of child support is generally income-tax neutral, as payments are neither deductible by the payor nor includible in the recipient’s income. This aligns with current U.S. domestic law for child support (which has never been deductible/includible) but creates a clean tax baseline that can simplify negotiations in some respects.

III. Division of Marital Assets: The IRC § 1041 Framework and Its International Limits

A. The § 1041 Nonrecognition Rule

Under IRC § 1041, no gain or loss is recognized on a transfer of property between spouses or incident to a divorce. The transferee spouse takes a carryover basis equal to the transferor’s adjusted basis, regardless of the property’s fair market value at the time of transfer. This rule applies to U.S. property and, as a general matter, to foreign property held by U.S. persons.

The phrase “incident to a divorce” has a specific statutory definition: a transfer occurring within one year after the date the marriage ceases, or a transfer that is related to the cessation of the marriage (i.e., required by the divorce or separation instrument and occurring within six years after the date the marriage ceases). In cross-border cases, it is essential to verify that international asset transfers satisfy this timing requirement before relying on § 1041 nonrecognition.

B. The Critical Exception: Transfers To Or From A Nonresident Alien

Section 1041(d) provides an important and often overlooked exception: the nonrecognition rule does not apply to transfers to or from a nonresident alien spouse. Where the transferor is a U.S. person, and the transferee spouse is a nonresident alien (or vice versa), the transfer is a fully taxable event to the transferor under normal gain recognition rules. This means the transfer is treated as a taxable event, and the transferor must report any gain or loss on their U.S. tax return. The basis of the property for the nonresident alien spouse will be its fair market value at the time of transfer. This provision ensures that the U.S. tax system captures any built-in gain on property transferred to a nonresident alien, who may not be subject to U.S. tax on future dispositions of the property.

This exception has dramatic consequences in cross-border divorces. Consider a U.S. citizen transferring highly appreciated stock, real estate, or cryptocurrency to an NRA spouse as part of a divorce settlement. The transfer is immediately taxable to the transferring spouse at the time of transfer, with gain measured by the difference between fair market value and adjusted basis. 

C. Foreign Property: Additional Complications

In many cross-border divorces, the marital estate includes foreign real estate, foreign bank and investment accounts, and interests in foreign entities. Several additional issues arise:

• FIRPTA And Foreign Real Property – A divorce-related transfer of U.S. real property that qualifies for §1041 nonrecognition is generally exempt from FIRPTA withholding, but FIRPTA can become a problem if §1041 does not apply, for example, because the transferee spouse is a nonresident alien under §1041(d).
• Foreign Real Property – Transfers of foreign real estate between spouses incident to a divorce generally qualify for § 1041 nonrecognition if both parties are U.S. persons. But the foreign jurisdiction’s transfer taxes, stamp duties (Australia’s stamp duty, U.K. Stamp Duty Land Tax, France’s droits de mutation) apply independently and can be substantial.
• Australian Real Property – Australian CGT applies to dispositions of taxable Australian property (TAP), even by non-residents. A divorce transfer of Australian real property may trigger Australian CGT notwithstanding § 1041 U.S. nonrecognition. 
• Foreign Currency Accounts – The division of foreign currency bank accounts between spouses may trigger § 988 gain or loss to the extent the value of the foreign currency has changed from the date the account was opened (or from the date of a § 988 election). Each lot or tranche of currency acquisition has its own basis for § 988 purposes.

IV. Foreign Retirement Plan Division: A Category Without Domestic Analogue

A. The Fundamental Problem: QDROs Don’t Travel

In a domestic U.S. divorce, the division of a qualified retirement plan (401(k), defined benefit pension) is accomplished through a Qualified Domestic Relations Order (QDRO), which allows a tax-free transfer of a retirement benefit to an alternate payee spouse without triggering premature distribution penalties. The QDRO mechanism has no counterpart in most foreign jurisdictions, and foreign retirement orders have no effect under U.S. qualified plan rules.

Conversely, when a U.S. resident spouse is awarded a share of a foreign retirement plan, an Australian superannuation fund, a U.K. SIPP or occupational pension, a French plan d’épargne retraite (PER), or a Singapore CPF account, neither a QDRO nor any domestic mechanism exists to effect the division. The parties must look to the foreign pension law, the applicable bilateral totalization agreement (if any), and U.S. treaty provisions to understand what, if anything, can be transferred and what the U.S. tax consequences are.

B. Australian Superannuation

Australia allows splitting of superannuation accounts upon divorce under the Family Law Act 1975 via a superannuation splitting order or agreement. The split creates a new interest for the non-member spouse in the same (or a different) fund. 

For U.S. tax purposes, Australian superannuation funds held by U.S. persons may be subject to the onerous PFIC rules if the fund invests in pooled foreign mutual fund structures (which most do). 

Distributions from an Australian superannuation fund to a U.S. person may be taxable in the United States. The U.S.–Australia treaty does not expressly exempt superannuation distributions from U.S. tax, as the U.K. treaty does for U.K. pensions. 

C. U.K. Pensions (SIPP And Occupational)

The Revenue Procedure 2020-17 exempts certain tax-favored foreign non-employer retirement plans (including U.K. SIPPs that meet the relevant criteria) from the otherwise onerous annual Form 3520 foreign trust reporting requirements, provided the individual meets the applicable $600,000 value threshold and contribution requirements. This is a compliance simplification, not a substantive tax exemption.

Upon divorce, a U.K. pension sharing order may transfer a percentage of the SIPP or occupational pension to the former spouse. If the recipient is a U.S. person, the transferred interest remains within the U.K. pension wrapper and retains its U.K. tax-deferred status, but the U.S. tax treatment depends entirely on whether the fund continues to qualify for treaty protection under Article 17 of the U.S.–U.K. treaty.

Article 17(1)(a) is the general residence-state rule, and Article 17(1)(b) is a separate exemption carveout for certain scheme-based amounts.

D. French Pensions And Retirement Plans

France’s plan d’épargne retraite (PER) and mandatory occupational pension regimes (ARRCO/AGIRC) present particular difficulty in divorce planning. France’s mandatory pension system does not permit the type of capital transfer contemplated by U.S. QDRO law, retirement benefits are typically accrued as annuity rights, not as a segregated account balance, and the family court may award a compensatory share (prestation compensatoire) rather than a direct pension interest.

U.S.–France treaty. Under Article 18(1) of the U.S.–France treaty, as amended by the 2009 Protocol, pensions and similar remuneration are generally taxable only in the first-mentioned State, meaning the state where the pension arises / source state, not the recipient’s state of residence. For a U.S. citizen, however, the saving clause in Article 29(2) must still be considered unless an Article 29(3) exception applies. 

V. Tax Implications of Cross-Border Custodial Relocations

A. When A Parent Relocates Internationally With Children

International relocation by a custodial parent raises a distinct set of U.S. tax issues. Once a parent establishes residency abroad, that parent may be subject to foreign income tax on U.S.-source income, including support payments, investment income, and wages. The interaction between the U.S. foreign earned income exclusion (IRC § 911), the foreign tax credit (FTCs under IRC §§ 901–908), and the child-related tax benefits requires careful modeling.

A U.S.-citizen parent living abroad may elect the IRC § 911 foreign earned income exclusion, which for 2025 is $130,000. If the parent’s only U.S.-source income is child or spousal support (which is non-includible for post-2018 support), the § 911 exclusion may have limited practical relevance. However, if the parent earns wages abroad, the § 911 exclusion interacts with the child tax credit in a non-obvious way: the additional child tax credit computation under IRC § 24(d) uses earned income, but § 911 excluded earned income does not count for this purpose. The net result is often a reduced or eliminated refundable child tax credit for U.S.-citizen parents living abroad.

B. Exit Tax Considerations

An NRA parent who relinquishes U.S. long-term resident (green card) status in connection with or following a divorce may be subject to the mark-to-market exit tax under IRC § 877A if they are a covered expatriate. The thresholds for covered expatriate status include: (1) net income tax liability exceeding $206,000 (for 2025 expatriations) for five years before expatriation; (2) net worth of $2,000,000 or more on the date of expatriation; or (3) failure to certify compliance with U.S. tax laws for the five prior years.

In divorce planning, the timing of green card surrender by the NRA spouse can dramatically affect the economic outcome. If the marital estate includes deferred income assets (unvested stock options, partnership interests with embedded gain, retirement accounts), the exit tax treatment of those assets as deemed sold on the date of expatriation may be triggered at the same time as the divorce-related property transfers. Coordinating § 1041, the § 877A exit tax, and the NRA exception of § 1041(d) requires careful sequencing of the transaction steps.

C. Hague Convention Abductions And Tax: An Overlooked Intersection

Where one parent unilaterally removes a child from the United States to a foreign country in violation of a custody order, the non-relocating parent faces not only a family law crisis but potentially complex tax issues. During periods of wrongful retention, the non-relocating parent may continue to qualify as the custodial parent under U.S. tax law based on the pre-relocation custody arrangement, but proving the factual predicate for that position and navigating foreign jurisdiction tax treatments simultaneously creates significant practical difficulty.

VI. Foreign Account Reporting Post-Divorce: FBAR, FATCA, And The Aftermath

A. Individual Liability Following Joint Account Division

During marriage, U.S. persons holding foreign financial accounts typically file joint FinCEN Form 114 (FBAR) reporting for jointly held accounts. Upon divorce, each spouse’s individual FBAR obligation depends on their continuing financial interest in or signatory authority over foreign accounts. The division of joint foreign accounts requires not only the actual transfer of funds, but the removal of each party from accounts they no longer beneficially own — failure to do so creates continuing FBAR filing obligations and potential liability for accounts the party no longer controls.

Similarly, FATCA reporting on Form 8938 follows the individual taxpayer after divorce. If the divorce agreement assigns foreign accounts to one spouse, the other spouse’s Form 8938 filing obligation terminates only when the accounts are actually removed, not when the decree is entered. Practitioners should include explicit provisions in the settlement agreement requiring account transfers to be completed within a specified period and conditioning the settlement on confirmation of the account changes.

B. Foreign Entity Interests And Information Returns

Where the marital estate includes interests in foreign entities, such as foreign corporations, foreign partnerships, foreign trusts, or PFICs, the divorce may create or eliminate the threshold ownership requirements that trigger U.S. information return obligations (Forms 5471, 8865, 3520, 8621). For example, if the marital community owned 51% of a foreign corporation and the divorce results in each party receiving 25.5%, the 10% ownership threshold for Form 5471 Category 5 filing may still be met by each party, but the 50% constructive ownership requirement for Category 4 filing is no longer met by either party individually. This reorganization of filing obligations must be mapped in the post-divorce compliance calendar.

Inherited PFIC interests in Australian managed funds or French OPCVM are particularly problematic. The PFIC regime’s annual disclosure and election requirements continue for each holder independently post-divorce, and the new holder is subject to the same rules as the original holder for prior holding period QEF and MTM elections (or lack thereof). If the original holder did not make a QEF election, the new holder may face the harsh excess distribution rules on the entire holding period’s accumulated income.

VII. California-Specific Considerations

A. Community Property And International Assets

California is a community property state, and the community property rules significantly affect the characterization of foreign assets in divorce. Earnings and acquisitions during the marriage are generally community property regardless of where they are located or in which currency they are denominated. However, the community property treatment of assets located in common law foreign jurisdictions (the U.K., Australia, France) is not always mirrored by those jurisdictions’ domestic law; a foreign jurisdiction may treat an asset as solely owned by the titled spouse even if California law would characterize it as community property.

California’s transmutation rules (Family Code § 852) require that transfers of property between spouses be in writing and expressly declared to be a transmutation. In the context of cross-border asset transfers, oral representations or conduct that might suffice to establish a transfer in some foreign jurisdictions are ineffective under California law to change community property characterization. This has practical significance when analyzing the basis for § 1041 nonrecognition, as the writing requirement must be satisfied for the transfer to qualify.

B. California’s Non-Conformity To TCJA Alimony Treatment

For California returns for instruments executed from January 1, 2019 through December 31, 2025, California did not conform to the federal TCJA alimony change. Beginning January 1, 2026, California generally conforms for new instruments and certain modified instruments that elect in.

C. Nonresident Withholding And Support Payments

If a California-resident payor makes support payments to a nonresident of California, California nonresident withholding requirements (R&TC §§ 18662–18668) may apply to California-source income of the payee. However, because spousal support is generally not California-source income to the payee (it is sourced to the payor’s residence), the withholding requirement typically does not apply to routine support payments. Practitioners should nonetheless confirm the sourcing analysis where the payor has complex California-source income that is being paid through a trust or entity structure.

Conclusion

Cross-border divorce tax planning is a discipline that demands expertise in U.S. federal international tax, applicable treaty law, U.S. and foreign retirement plan rules, and sometimes state community property law.

The most important practical advice: involve international tax counsel in the drafting process, not in the review process. Reviewing a final settlement agreement for tax implications is dramatically more difficult and less effective than participating in the drafting of the agreement from the outset. The tax structure of a settlement is not a secondary concern; it is a primary determinant of economic outcome.

A Practical Analysis Of Treaty Interpretation And The Quid Pro Quo Test

Spoiler Alert: If you have a boss, get performance reviews, and can be fired for poor work, you probably have a job and not a grant.

The recent Tax Court decision in Baturin v. Commissioner (T.C. Memo. 2026-12) provides valuable guidance on distinguishing between tax-exempt grants and taxable compensation under international tax treaties. After a Fourth Circuit remand, the Tax Court granted summary judgment to the IRS, clarifying when payments to researchers qualify for treaty exemptions.

This case offers important lessons for nonresident researchers working in the United States and the institutions that employ them.

Background And Treaty Provision

Dr. Baturin, a Russian citizen, worked at Jefferson Lab (a Department of Energy facility in Virginia) from 2007 to 2015. During tax years 2010-2011, he received approximately $76,000-$79,000 annually for his work on the 12 GeV Upgrade Project involving particle detector systems.

Article 18 of the U.S.-Russia Tax Treaty provides an exemption from U.S. taxation for individuals “studying or doing research as a recipient of a grant, allowance, or other similar payment from a governmental, religious, charitable, scientific, literary, or educational organization.”

Dr. Baturin claimed this exemption, arguing that his compensation qualified as a tax-exempt grant. The IRS disagreed, asserting that the payments constituted taxable wages for services rendered.

Procedural History and the Fourth Circuit Remand

The Tax Court initially ruled in Dr. Baturin’s favor in 2019 (Baturin I, 153 T.C. 231), finding that his compensation qualified as a tax-exempt grant under the treaty.

The Fourth Circuit reversed and remanded in 2022 (Baturin II, 31 F.4th 170). The appellate court instructed the Tax Court to apply the analytical framework set forth in IRC Section 117 and its implementing regulations, which distinguish between “Disinterested, no-strings educational grants” (tax-exempt) and “Work done as part of a substantial quid pro quo” (taxable compensation). 

The Fourth Circuit provided specific factors for the Tax Court to consider on remand, such as (1) would Jefferson Lab have hired someone else if Dr. Baturin were unavailable? (2) Did the projects pre-date and post-date his tenure? (3) Who retained the intellectual property rights? (4) How much discretion did Dr. Baturin have over his day-to-day work? (5) Was there a substantial quid pro quo?

Summary Judgment Analysis

On remand, the Commissioner moved for summary judgment, arguing that the undisputed facts established Dr. Baturin’s payments were compensation rather than grants. Dr. Baturin, proceeding pro se, raised several procedural arguments but failed to present specific facts creating a genuine dispute of material fact.

The Court analyzed the Fourth Circuit’s factors:

1. Replaceability

Jefferson Lab confirmed through Dr. Burkert’s declaration that the institution would have hired another qualified individual if Dr. Baturin had not been available. This indicated the position was not dependent on Dr. Baturin’s unique contributions but rather required any qualified scientist to perform specified duties.

2. Project Independence

The 12 GeV Upgrade Project commenced before Dr. Baturin’s employment in 2007 and continued after his departure in 2015. As of December 2024, the CTOF detector remains operational. This demonstrated that the research project existed independently of Dr. Baturin’s participation.

3. Intellectual Property Rights 

As a condition of employment, Dr. Baturin signed an agreement assigning all intellectual property rights from his work to Jefferson Lab. This arrangement is characteristic of an employment relationship rather than an independent research grant.

4. Supervision And Performance Review

Dr. Baturin worked under the supervision of Dr. Burkert (his direct supervisor) and Dr. Eloaudrhiri (project manager). His performance was evaluated annually, and his continued employment was contingent upon satisfactory performance reviews. These elements are consistent with an employer-employee relationship.

5. Substantial Quid Pro Quo

Jefferson Lab provided bi-weekly compensation in exchange for Dr. Baturin’s services on assigned projects. The Court found that “Jefferson Lab’s bi-weekly payments to Dr. Baturin were not disinterested, no-strings grants, but rather were a quid pro quo in exchange for his assigned work on the 12 GeV Upgrade Project.”

Legal Framework: Section 117 And Revenue Ruling 80-36

The Fourth Circuit directed the Tax Court to apply principles from IRC Section 117 (qualified scholarships) to interpret the treaty language. Under this framework, courts distinguish between payments that support independent study or research, and compensation for services rendered under supervision that primarily benefit the payor.

The Court also cited Revenue Ruling 80-36 (addressing researchers under the U.S.-Japan Income Tax Convention), which provides that payments are taxable when a researcher is “performing valuable research services under the supervision of the grantor that are primarily for the benefit of the grantor.”

Applying these principles, the Court concluded that Dr. Baturin’s payments constituted taxable compensation rather than tax-exempt grants.

Key Procedural Issues

Dr. Baturin’s pro se representation led to several procedural difficulties:

Confusion Between Withholding and Liability.

Dr. Baturin argued that withholding exemptions under Section 1441 established tax exemption. The Court clarified that withholding requirements imposed on payers are distinct from the taxpayer’s underlying tax liability.

Impermissible New Arguments On Remand

The Court applied the mandate rule, noting that Dr. Baturin raised arguments on remand that were not presented to the Fourth Circuit. Under the law of the case doctrine, remand proceedings are not appropriate for introducing new legal theories.

Failure To Create Genuine Factual Disputes

When opposing summary judgment, Rule 121(d) requires the non-moving party to present specific facts supported by appropriate evidence. Dr. Baturin’s responses were largely speculative (e.g., “this may be a subject to the genuine dispute”) rather than presenting concrete evidence disputing the Commissioner’s factual assertions.

Practical Implications For Research Institutions And Foreign Nationals

This decision provides important guidance for determining when payments to researchers qualify for tax treaty exemptions. The “Baturin factors” establish a framework for analysis. 

Would the institution hire an alternative candidate if the individual were unavailable? Does the research project exist independently of the individual’s participation? Who retains ownership of the intellectual property? Does the individual work under supervision with performance evaluations? Is there a substantial quid pro quo relationship?

When these factors indicate an employment relationship—characterized by assigned work, supervision, performance reviews, and institutional control over work product—payments constitute taxable compensation regardless of the research nature of the work.

The distinction is not based on the importance or value of the research, but rather on the structural relationship between the payor and payee.

Conclusion

The Tax Court granted summary judgment to the Commissioner, finding that Dr. Baturin’s payments from Jefferson Lab constituted taxable compensation rather than tax-exempt grants under Article 18 of the U.S.-Russia Tax Treaty.

The decision emphasizes that treaty interpretation requires careful analysis of the actual relationship between parties rather than reliance on labels. Employment relationships characterized by supervision, performance reviews, assigned duties, and institutional ownership of work product result in taxable compensation, regardless of whether the work involves research or advances scientific knowledge.

Key Takeaways

Treaty language must be interpreted in context: The terms “grant, allowance, or other similar payment” require analysis of the underlying relationship, not merely the characterization of payments.

The Quid Pro Quo Test Is Determinative –  When payments represent compensation for services that primarily benefit the payor, they constitute wages rather than grants.

Proper Legal Representation Matters – Complex tax treaty issues benefit from professional guidance, particularly when procedural requirements demand specific evidence and timely presentation of arguments.

Note On Treaty Status -The U.S.-Russia Tax Treaty was suspended effective August 16, 2024. However, the analytical framework established in Baturin—particularly the quid pro quo test and the application of Section 117 principles to treaty interpretation—remains applicable to similar provisions in other U.S. tax treaties.

Final thought: The Tax Court has now definitively confirmed that calling your paycheck a “grant” doesn’t make it one. No matter how impressive the research. 

International divorce frequently triggers a foreign-asset reporting cascade: accounts that were previously “handled by the other spouse,” jointly titled assets that get split, and new single-filer thresholds can turn a historically quiet situation into an immediate U.S. compliance problem, often with large civil penalties and, in willful cases, criminal exposure. The enforcement environment is also more aggressive, with enhanced IRS enforcement funding and more sophisticated analytics, increasing the likelihood that previously missed foreign reporting gets detected.

Foreign Asset Reporting: The “Big Three” Regimes (Quick Comparison)

Regime	What It Reports	Where Filed	Core Trigger	Due Date (for 2025 calendar year)	Key Penalty Framework
FBAR (FinCEN Form 114)	Foreign financial accounts (including bank, securities, some insurance/annuity accounts)	Separately from the tax return (FinCEN e-filing)	Aggregate foreign account value > $10,000 at any time during the year (all foreign accounts combined)	April 15, 2026 with automatic extension to October 15, 2026	For 2025 (inflation-adjusted): non-willful up to $16,536 per report; willful greater of $165,353 or 50% of the account balance per violation; criminal possible
FATCA (Form 8938)	Specified foreign financial assets (broader than FBAR: accounts plus many non-account assets like foreign stock/partnership interests, foreign pensions, etc.)	Attached to annual income tax return	Filing-status/residency thresholds (often $50,000/$75,000 for U.S. residents who are single/MFS)	Due with Form 1040 (generally April 15; expats often June deadline)	$10,000 failure-to-file plus $10,000 per 30 days after IRS notice up to $50,000
Foreign trust reporting (Forms 3520 / 3520-A)	Foreign trust transfers, distributions, ownership, gifts and annual foreign trust reporting	IRS (information returns)	Triggered by foreign trust transactions/ownership (common in international family wealth and divorce settlements)[1]	Form 3520-A due 15th day of 3rd month after trust year-end (calendar-year trust: March 15; 6‑month extension available via Form 7004)	Form 3520: often greater of $10,000 or 35% of reportable amount (depending on part); Form 3520‑A: generally greater of $10,000 or 5% of gross reportable amount

Critical Overlap Point: Filing Form 8938 does not replace FBAR. If you meet both sets of rules, you generally file both.

FBAR (FinCEN Form 114): What Divorce Changes (And Why It Gets Missed)

The Filing Trigger (The “$10,000 Aggregate” Test)

FBAR is required when the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the year, a low threshold that is easy to cross when accounts exist in multiple countries or when a spouse holds several accounts.

Divorce-Specific Trap: People often assume FBAR only applies if they own the account. In divorce situations, the risk is that a taxpayer had signature authority or another filing obligation over accounts tied to the other spouse (for example, family business accounts or accounts in the spouse’s name).

Deadline And Extension (For 2025 Accounts)

For the 2025 calendar year, the FBAR is due on April 15, 2026, with an automatic extension to October 15, 2026 (no separate extension form required).

Recordkeeping Expectation (Practical Audit Defense)

FBAR filers should retain supporting documentation with their tax records for at least five years.

In a divorce context, that retention period matters because spouses may lose access to account statements during or after separation; proactively preserving statements and proof of balances is often essential.

Penalties (Inflation-Adjusted Amounts For 2025)

• Non-Willful FBAR Penalty (Civil) – up to $16,536 per report
• Willful FBAR Penalty (Civil) – the greater of $165,353 or 50% of the account balance per violation

Criminal exposure is possible (especially in willful scenarios).

These numbers underscore why “we didn’t know” is not a strategy, particularly when divorce discovery, bank files, and cross-border information flows can surface old accounts.

Statute Of Limitations (Why Old Years Can Still Be In Play)

Standard audit limitation periods may not protect taxpayers when foreign reporting is missing. FBAR has a six-year period, and for certain failures (and fraud) older years may remain examinable.

FATCA Form 8938: “Specified Foreign Financial Assets” And Why Filing Status Changes Matter

What Form 8938 Covers (Broader Than Bank Accounts)

Form 8938 is required for certain U.S. taxpayers who hold specified foreign financial assets exceeding applicable thresholds. The IRS describes the basic rule as reporting when aggregate value exceeds $50,000 (with thresholds varying by taxpayer circumstances).

Form 8938 reaches beyond bank accounts and can include:

• foreign securities,
• foreign partnership/corporate interests,
• trusts, and
• foreign pensions.

This breadth is exactly why divorce restructurings (splitting entities, transferring shares, receiving pension rights) can suddenly trigger reporting even if “no foreign bank account” exists.

The Thresholds (Treas. Reg. §1.6038D-2): U.S. Residents vs. Living Abroad

The filing requirement turns on aggregate value exceeding a threshold that depends on residency and filing status.

Below are the thresholds expressly stated in the Form 8938 regulations:

Taxpayers Living In The U.S.

• Unmarried / Married Filing Separately – file if aggregate value exceeds $50,000 on the last day of the year or $75,000 at any time during the year.
• Married Filing Jointly – file if aggregate value exceeds $100,000 on the last day of the year or $150,000 at any time during the year.

Taxpayers Living Abroad (Qualified Individuals Under §911(d)(1))

• Unmarried (Or Not Filing Jointly) –  file if aggregate value exceeds $200,000 on the last day of the year or $300,000 at any time during the year.
• Married Filing Jointly (Living Abroad) –  file if aggregate value exceeds $400,000 on the last day of the year or $600,000 at any time during the year.

Divorce-Specific Trap: filing status changes (e.g., moving from married filing jointly to single or married filing separately) can materially lower the applicable threshold and create a new Form 8938 requirement even when the assets did not change. The regulation thresholds above show why: the U.S.-resident MFJ threshold is $100,000/$150,000, but single/MFS is $50,000/$75,000.

Deadline (Tied To The Income Tax Return)

Form 8938 is filed with the annual income tax return (as an attachment), not separately like FBAR. This creates a common divorce-year failure mode: the return gets filed on time, but the foreign asset schedule is omitted, even when FBAR was filed (or vice versa).

Penalties (And Why They Can Snowball)

• Initial Failure-To-File Penalty –  $10,000
• Continuation Penalty After IRS Notice – $10,000 for every 30 days of continued noncompliance after notice, up to $50,000 maximum (per year)

Statute Of Limitations Risk

Missing Form 8938 can keep the statute of limitations open, which means taxpayers may find that very old years are still exposed once the IRS identifies an unreported foreign asset footprint.

Foreign Trust Reporting (Forms 3520 And 3520-A): The Divorce Settlement Danger Zone

International divorces frequently involve structures that are “trust-like” (even when they aren’t labeled as such), offshore family arrangements, or wealth vehicles that make distributions or transfers as part of a settlement. 

Form 3520 – when penalties can be a percentage of the transfer/distribution.

The Internal Revenue Manual section provided includes detailed penalty computations that are especially important in divorce cases because transfers/distributions are exactly what settlements do.

For late-filed Form 3520, the IRS penalty computation depends on what is being reported:

If Form 3520 Part I (generally, certain foreign trust transactions such as transfers) is triggered, assess a penalty equal to the greater of $10,000 or 35% of the total amount reported (with specific line references in the IRM guidance). The IRM also provides that the aggregate penalty for Part I cannot exceed the gross reportable amount.

If Form 3520 Part III (generally, certain foreign trust distributions) is triggered, assess a penalty equal to the greater of $10,000 or 35% of the amount reported (again with detailed line references). The IRM similarly limits the aggregate penalty so it cannot exceed the gross reportable amount.

Form 3520-A: Annual Return For Foreign Trusts With A U.S. Owner

A foreign trust must file Form 3520-A annually when a U.S. person is treated as an owner of any portion of the foreign trust under the grantor trust rules (sections 671–679), and Form 3520-A includes required owner and beneficiary statements.

To avoid penalties for failure to timely file Form 3520-A, the U.S. owner must ensure the foreign trust timely files it, or the U.S. owner must file a substitute Form 3520-A with a timely-filed Form 3520.

Due Date

Form 3520-A is due the 15th day of the 3rd month following the end of the trust’s tax year (e.g., for a calendar-year trust, March 15), with a 6-month extended due date if the trust files an extension (Form 7004).

Penalty Framework (Form 3520-A)

The IRM states: the initial penalty for failure to file Form 3520-A generally is the greater of $10,000 or 5% of the gross reportable amount, where the gross reportable amount is the gross value of the portion of the trust’s assets treated as owned by each U.S. owner at year-end.

A Key Practical Point: “FBAR vs. Form 8938” Is Not Either/Or

A recurring compliance failure in international divorce matters is assuming that one form “covers” the other. It does not.

Form 8938 is filed with the IRS as part of the income tax return and covers “specified foreign financial assets.”

FBAR is a separate filing with its own threshold and due date mechanics (including automatic extension).

Filing Form 8938 does not relieve the taxpayer from filing FBAR when the FBAR rules are triggered.

Divorce Implication: You can be “compliant” on the tax return and still have FBAR exposure, or you can have FBAR filed and still have Form 8938 exposure, especially after filing status changes lower the 8938 threshold.

Common International Divorce Reporting Triggers That Deserve Special Attention

“I Never Benefited From The Account” (But Had An Obligation)

Divorce can reveal unrecognized historical obligations tied to a spouse’s accounts or business (including signatory authority). This matters because the FBAR regime is driven by account access/relationship and aggregate balances, not just whether you considered it “your money.”

Filing Status Shift Can Turn “No Form 8938” Into “Form 8938 Required”

The reporting thresholds change significantly when filing status changes (MFJ to single/MFS), creating new reporting requirements. The regulation thresholds show exactly how large the shift can be for U.S. residents: $100,000/$150,000 (MFJ) versus $50,000/$75,000 (single/MFS).

Trust Structures Embedded In Settlements (Or Foreign “Pensions” That Behave Like Trusts)

If a settlement causes a transfer to a foreign trust or a distribution from one, the IRM penalty computations show why the exposure can be economically severe (35% regimes for certain Form 3520 failures; 5% asset-value penalty for certain Form 3520-A failures).

Deadlines And “Hidden” Annual Compliance Calendars

FBAR – April 15 with automatic extension to October 15 (for 2025, due April 15, 2026 / Oct 15, 2026).

Form 8938 –  with the tax return.

Form 3520-A – March 15 for calendar-year trusts (15th day of the 3rd month), extension possible via Form 7004.

International divorce clients often focus on the divorce timeline (court deadlines, settlement deadlines) and miss that these compliance calendars run independently.

Old-Year Exposure Can Persist When Foreign Reporting Is Missing

For most tax issues, the IRS has three years to audit (six years if the income understatement exceeds 25%). But foreign reporting failures have different rules:

• No Form 8938 File – Statute never begins to run on the entire return
• No FBAR Filed – Six-year statute of limitations under Bank Secrecy Act
• Fraudulent Return –  No statute of limitations ever

Real-World Impact: The IRS can audit a 2015 return in 2026 if foreign asset reporting was required but not filed.

Conclusion: International Divorce Turns “Foreign Assets” Into An Active Compliance Event

The foreign reporting rules are deliberately complex. The IRS uses this complexity as a weapon, assuming that confusion equals willful violation. In international divorce cases, the complexity multiplies because you’re dealing with:

• Changing filing statuses mid-year
• Assets you may not have known existed
• Reporting obligations that weren’t yours during marriage but became yours after divorce
• Settlement agreements that don’t account for international tax issues

When divorce changes ownership, access, filing status, and documentation availability all at once, the safest posture is to treat foreign-asset reporting as its own workstream—with clear form-by-form mapping, threshold testing, deadline management, and record retention aligned to the regimes above.

“All happy families are alike; each unhappy family is unhappy in its own way.”

Leo Tolstoy’s Anna Karenina (1878)

Anna felt trapped in her high society marriage in 19th-century Russia. The divorce was frowned upon by the Orthodox Church. Thus, she did not formally divorce Karenin and instead ran off with Vronsky. While most divorces nowadays are less dramatic, they are still unpleasant for both parties and quite complicated. International divorce adds more complications, confusion, and frustration since the divorce process is rarely “just family law.” A decree may be issued under Australian law and negotiated entirely in Australia, but U.S. tax outcomes for a U.S. citizen can still turn on U.S. rules—especially rules that hinge on status (married vs not married), tax residency (resident vs non-resident alien), and ownership/control of offshore accounts and structures.

The key difficulty is that cross-border divorce compresses multiple high-stakes determinations into one year:

• Your U.S. filing status may be determined by what is true on December 31, even if you separated long before that. 
• If your spouse is a non-resident alien for U.S. tax purposes, you generally cannot file a joint return unless a specific election applies. 
• “Divorce transfers are tax-free” is not always true in international divorces because the U.S. divorce-transfer nonrecognition rule generally does not apply when the recipient spouse is a non-resident alien. 
• Divorce often changes ownership and signatory authority over foreign accounts, which can change offshore reporting responsibilities, especially FBAR and Form 8938.

U.S. Citizens Living Abroad: The Baseline Is “Worldwide”

A persistent misconception in expat divorces is that living abroad changes who is a U.S. taxpayer. It does not. The IRS’s Internal Revenue Manual states plainly that U.S. citizens living or traveling outside the United States are generally required to file U.S. income tax returns and report worldwide income. 

That’s the baseline. Even if foreign tax credits, exclusions, or treaty positions reduce U.S. tax, the filing and reporting framework still exists, and divorce often changes what must be reported.

Your Spouse: “Resident Alien” vs “Non-Resident Alien” Drives Most Cross-Border Outcomes

For U.S. tax purposes, an “alien” is anyone who is not a U.S. citizen. IRS Publication 519 explains the core split: aliens are classified as resident aliens and non-resident aliens;

Resident Aliens – are generally taxed on worldwide income,

Non-Resident Aliens – are generally taxed only on U.S.-source income and certain income effectively connected with a U.S. trade or business. 

The IRS also summarizes the practical mechanics of classification: an alien is a resident alien if he or she meets the green card test or the substantial presence test, or makes certain elections (including an election under IRC §6013(g) or (h)). If the person does not meet those tests and does not elect, that person is a non-resident alien and must file Form 1040‑NR to report certain U.S. tax items.

In a U.S./Australia or any other foreign divorce where the non-U.S. spouse lives outside of the U.S. and does not meet U.S. residency requirements, the spouse is commonly treated as a non-resident alien for U.S. tax purposes. That single fact ripples into filing status, withholding, and property transfer consequences.

Filing Status: Why December 31 Controls Even If Your Divorce Is “Non-U.S.”

The year-end rule is statutory, not a “paperwork” detail.

U.S. tax law generally determines whether you are married as of the close of your taxable year. The joint return statute, IRC §6013(d), similarly measures marital status as of the close of the year for spouses with the same taxable year, and provides that individuals legally separated under a decree of divorce or separate maintenance are not considered married. 

Practical Meaning – A divorce finalized in early January can mean you were “married” for U.S. tax purposes for the entire prior year.

“Legally Separated” Is Meaningful In The U.S. Tax Sense

IRC §7703 states that an individual legally separated under a decree of divorce or separate maintenance is not considered married. That phrase matters because not all “separation” ideas used in foreign jurisdictions map neatly to U.S. divorce or separate maintenance decrees. When your divorce is governed by foreign law, you still need to identify whether you have a decree that the U.S. tax rules treat as ending “married” status.

Head Of Household: Possible, But Facts Matter

Many separated expat parents are interested in the Head of Household (HOH) status. IRC §7703(b) provides a “certain married individuals living apart” rule that allows a married person filing separately to be treated as not married if they maintain a household that is the principal place of abode of a qualifying child for more than half the year, provide over half the cost of maintaining the household, and the spouse is not a member of the household during the last six months of the year. 

In international divorces, HOH analysis becomes fact-intensive quickly:

• where the child actually lived,
• who paid household costs,
• whether the spouse was a member of the household during the last six months,
• and dependency entitlement mechanics.

So, while HOH can be a valuable filing status, in cross-border divorce, it should be treated as a fact pattern to prove, not a default assumption.

Married To A Non-Resident Alien Spouse: Why Married Filing Joint (MFJ) Is Often Blocked And How Elections Change The Landscape

The default rule: no joint return if either spouse is a non-resident alien.

IRC §6013(a)(1) provides a clear limitation: no joint return shall be made if either spouse at any time during the taxable year is a non-resident alien. However, non-resident aliens married to U.S. citizens or residents can choose to be treated as U.S. residents and file joint returns.

This is the first major “international divorce fork”:

• If the foreign spouse remains a non-resident alien and no election is made, you may be limited to separate filing (and the spouse may file Form 1040‑NR for U.S. income items). 
• If you want MFJ, you are typically talking about a statutory election regime.

The §6013(g) election (and related rule §6013(h)): MFJ becomes a choice, not a default.

IRC §6013(g) allows spouses to elect to treat a non-resident alien spouse as a U.S. resident for (1) income tax for the entire year, and (2) wage withholding for wages paid during the year.

Regulation §1.6013-6 provides a clear summary of who can elect.  The election is made by either the husband or the wife at year-end, when one spouse is a U.S. citizen or resident, and the other is a non-resident alien. Once an election is made, each spouse is treated as a U.S. resident for various Internal Revenue Code purposes and specific filing/administrative provisions for the entire year. 

The election is made by attaching a statement to a joint return for the first year; the statement must include identification (U.S. Social Security or taxpayer identification numbers) and be signed by both spouses. 

The election terminates if spouses are legally separate under a decree of divorce or separate maintenance; the regulation also provides timing for termination. 

Therefore, if you make the election, you and your spouse are treated as residents for income tax purposes for the entire year; neither spouse can claim under any treaty not to be a U.S. resident; both are taxed on worldwide income; you must file a joint return for the year you make the choice.

US Taxpayer Identification (ITIN) Mechanics

If the non-resident spouse does not have and is not eligible for a U.S. Social Security Number, he or she must apply for an ITIN. In a divorce year, this creates a practical timing issue: the ability to file as intended may depend on whether the spouse will cooperate in obtaining an ITIN.

Community Property Twist: Foreign Community Property Laws Can Matter (And The Election Can Switch Them Off)

International couples sometimes encounter community property concepts. IRC §879 addresses community income where one or both spouses are non-resident aliens and states that “community property laws” include those of a foreign country. It also provides that the §879 rules do not apply for any year in which a §6013(g) or (h) election is in effect. 

Even if Australian marital property isn’t “community property” in the U.S. sense, this section is a reminder that the Code sometimes explicitly contemplates foreign marital property regimes, and elections can change the default allocation framework.

Treaties And Dual Residents: When The Treaty Changes “How You Compute Tax”, But Not Necessarily Everything Else

Dual Resident Taxpayers: Treaty Tie-Breaker Can Require Form 1040-NR + Form 8833

If you are treated as a resident of a foreign country under a tax treaty, you are treated as a non-resident alien in figuring your U.S. income tax; for purposes other than figuring your tax, you will be treated as a U.S. resident. In a practical sense, it means that while you are not going to pay U.S. income tax on foreign source income, you will still need to report all non-US financial assets and file applicable international disclosure forms like 3520, 3520-A, 5471, 8865, etc.

Divorce Support And Cross-Border Cash Flows: Withholding-Agent Issues That Don’t Exist In Domestic Divorces

The cross-border “support” issue is often less about whether something is deductible (U.S. law changed in recent years for many divorces), and more about:

• recipient status (foreign or not),
• income sourcing, and
• withholding and reporting responsibilities.

Withholding Agent Concept (And Why Divorce Can Create One)

The IRS defines “withholding agent” broadly as any person required to withhold income tax on U.S.-source income received by a non-resident alien and others, and states that the withholding agent is responsible for submitting withholding information on Form 1042 and providing recipient information on Form 1042‑S. 

Many divorcing taxpayers do not realize they can become a “withholding agent” simply by agreeing to pay periodic amounts to a foreign recipient out of U.S.-source FDAP streams or other U.S.-source payments.

The non-resident alien withholding baseline and why it can matter in divorce.

Treasury regulations governing non-resident alien taxation explain that a non-resident alien not engaged in a U.S. trade or business is liable for a flat tax of 30% on certain U.S.-source amounts received during the year (subject to treaty limitation). IRS Publication 519 provides the same idea in plain language: dividends, for example, are generally taxed at 30% (or lower treaty) and are generally withheld at source; if not withheld correctly, a Form 1040‑NR may be required to claim refund or pay additional tax. 

Divorce is relevant because many settlements create:

• periodic payments,
• distributions from investment accounts,
• payments funded by dividends or interest,
• and third-party payments for the benefit of the foreign spouse.

These can create withholding and reporting tail obligations that need to be planned in advance, including documentation flow and timing.

For International Marital Gifting, There Are Two Different “Spouse” Regimes

Income tax regime governed by IRC 1041 and gift tax marital deduction under IRC 2523.

Marital deduction is disallowed for transfers to a spouse who is not a U.S. citizen at the time of the transfer. Instead, if the transfer otherwise qualifies (e.g., present interest), there is a special annual exclusion amount (inflation-adjusted). For the calendar year 2025, that amount is $190,000 ($194,000 for 2026). Citizenship drives your gift tax cap, but it does not magically convert a gift into a taxable sale or a basis step‑up.

Property Division: When “Divorce Transfers Are Tax-Free” Is False In International Divorces

The General Rule: IRC 1041 Nonrecognition For Spouse Or Incident-To-Divorce Transfers

IRC 1041(a) provides that no gain or loss is recognized on a transfer of property to a spouse or to a former spouse if the transfer is incident to divorce. Section 1041(b) provides carryover basis: the transferee generally takes the transferor’s adjusted basis.  A transfer is incident to divorce if it occurs within one year after the marriage ceases or is related to the cessation of the marriage. If our analysis stopped here, we would have a familiar US domestic non-recognition outcome.

The International Exception: IRC1041(d) When Spouse Is Non-Resident Alien

Section 1041(d) is explicit; Code section 1041(a) shall not apply if the spouse (or former spouse) receiving the transfer is a non-resident alien

This is the single most important property division issue in the U.S./foreign divorces involving a U.S. citizen spouse and a foreign spouse who remains a non-resident alien for U.S. tax purposes.

As a result, transferring appreciated property to a spouse who is a non-resident alien can be a taxable event for U.S. purposes (absent another nonrecognition provision).

Carryover basis still matters (even when  IRC 1041 does apply)

Even in cases where IRC 1041 applies (e.g., transfers between two U.S. people), the carryover basis rule means that the divorce settlement often shifts built-in gain. For portfolio-heavy couples, “equal value” does not mean “equal after-tax value.”

Transfers In Trust Where Liabilities Exceed Basis

Section 1041(e) provides that IRC 1041(a) does not apply to certain transfers in trust to the extent liabilities exceed basis.  For business-owner divorces involving trusts and leveraged assets, this provision can be relevant. Trust-based settlement structures should be reviewed not only for family-law goals but also for U.S. income tax consequences, including debt and basis mechanics.

Post-Divorce Compliance Reset: FBAR, Form 8938, And Foreign Trust Reporting

Divorce changes facts. Offshore reporting rules often attach to facts like ownership, signatory authority, beneficial interests, distributions and loans, and whether you are elected into broader residency treatment.

A useful approach is to treat post-divorce compliance as a “reset” exercise rather than a continuation of pre-divorce assumptions.

FBAR

A U.S. Treasury reporting requirement that can change with signatory authority.

Every U.S. citizen or resident alien with an interest in or signature authority over foreign financial accounts exceeding $10,000 in aggregate value at any time during the calendar year must report that relationship. The report is filed electronically on FinCEN Form 114 and is separate from the tax return; failure to file may result in civil and criminal penalties. 

Divorce relevance: even if the accounts didn’t change, divorce often changes who is a signer or owner, which can change reporting requirements in the divorce year.

Form 8938 (FATCA)

A broader “specified foreign financial assets” concept.

You may have to file Form 8938 if you are a resident alien for any part of the year, or a non-resident alien who makes an election to be treated as a resident to file a joint return (among others). 

Specified foreign financial assets include foreign financial accounts and, if held for investment, foreign stock and securities, interests in foreign entities, and financial instruments/contracts with non-U.S. issuers/counterparties. 

Penalties can apply for failure to file Form 8938 and for understatement of tax related to undisclosed assets. 

Divorce relevance: if you previously filed jointly and later file separately, or if you are considering a §6013 election in the divorce year, Form 8938 scope and thresholds can change. 

Foreign Trusts And Non-U.S. Trusts

Why do business-owner divorces require special attention?

Many U.S./Australia divorces involve family structures and entities that behave like trusts for Australian purposes or are classified as non-U.S. trusts under U.S. rules. Certain types of foreign accounts or entities are classified as non-U.S. trusts (an example could be certain superannuation accounts). If a U.S. citizen or resident is considered the beneficiary, trustee, or owner, certain information reporting forms may be required, with separate deadlines and penalties for failure to file. 

Form 3520 is filed yearly by an owner of a non-U.S. trust to report ownership, and also for certain contributions/loans to, distributions/loans from, or large gifts from non-U.S. persons/entities; generally filed by the due date (including extensions) of the individual’s return. 

Form 3520‑A is filed yearly by the trustee of a foreign trust with a U.S. owner and is generally due March 15 for a calendar-year trust; a six-month extension may be requested by March 15. 

Divorce Relevance – Divorce is often the first time a U.S. spouse sees trust deeds, trustee statements, trust distributions, or intercompany loans in one place. That is precisely the moment when a controlled “cleanup” plan should be considered if past years were inconsistent or incomplete.

A Practical Checklist Specific To U.S. Citizens Divorcing Foreign Spouses

Year-end marital status: determine what is true on December 31 for U.S. purposes. 

Spouse U.S. tax status: confirm whether the Australian spouse is a non-resident alien. 

MFJ election decision: if MFJ is desired, evaluate the §6013(g) election and its consequences (worldwide income inclusion, treaty limitations, ITIN, and termination timing). 

Divorce property transfers: identify any appreciated property being transferred to a spouse who remains a non-resident alien; §1041 nonrecognition may not apply.

Withholding/FDAP awareness: identify any U.S.-source income streams being paid to a foreign recipient and treat withholding/reporting as part of the settlement administration. 

Offshore reporting reset: rebuild the offshore asset/account/entity/trust inventory after separation and again after final orders; ensure ownership and signatories match what is reported.

International Divorce Is Manageable, But It Rewards Early, Structured Planning

If your divorce is revealing previously undisclosed foreign accounts, inconsistent prior-year offshore reporting, or trust/entity structures that were never fully integrated into U.S. filings, the most effective next step is often a structured offshore disclosure cleanup plan built around the divorce timeline—so ownership changes, trust reporting, FBAR/Form 8938 posture, and any required information returns can be corrected in a controlled, consistent way before asset division and post-divorce filing positions become fixed. 

Section 6048 requires US taxpayers to make an annual report regarding financial or asset transfers in relation to the receipt of distributions from foreign trusts. Taxpayers can be penalised if they fail to comply. Unfortunately many taxpayers have been caught out when it comes to reporting foreign retirement investments and other trusts. 

On March 2nd 2020 the IRS released Rev. Proc. 202-17. This change comes into effect on March 16 and provides taxpayers with certain foreign investments with an exemption from section 6048 reporting requirements on those investments. Accordingly, eligible US citizens with some tax favored foreign retirement investments and other trusts, have less duties in their reporting requirements. Furthermore, eligible individuals can now apply for a refund of any penalties that they have incurred as a result of section 6048 reporting requirements with their applicable tax-favored foreign trusts. 

The reason behind the change is that there are already a number of restrictions imposed by the countries where those trusts are located and there are already additional reporting requirements in the US under section 6038D regarding interests in these trusts. This alleviates the pressure of being penalized for meeting the section 6048 reporting requirements and reverses the penalties previously imposed in such cases. 

Once the change comes into place it will apply to any prior tax year that is still open. 

One of the reasons this relief is important is because it covers a requirement that many taxpayers and tax professionals haven’t realized was in place. This is because people tended to assume that the tax and reporting requirements were deferred until the point of retirement and they didn’t understand which international information reporting forms were to be used. Alleviating this reporting requirement will help reduce a lot of confusion in the field. 

If you have a foreign retirement or trust investment that may qualify you should look into Rev. Proc. 2020-17 or seek further advice for your specific situation.