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TAX CLINIC

to Dec. 15. A written request must be qualified under the treaty, the specific announced that it will rule on the issue
made with the IRS. income provision should be reviewed. (Bittner, No. 21-1195 (U.S. 6/21/22)
FinCEN Form 114 (formerly Form Importantly, one must also take care (cert. granted)).
TD F 90-22.1), Report of Foreign Bank to review the “savings clause,” which can
and Financial Accounts (FBAR), is generally be found within the first ar- 4. Gifts received from non-US
extended automatically from April 15 ticles or general scope article. Essentially, persons may be penalized if not
to Oct. 15 (or Oct. 17, 2022, for 2021 the savings clause gives the right to the disclosed to the IRS
filings), regardless of the status of the United States to tax its citizens and While the United States will generally
personal income tax return. There is no resident aliens as if the treaty had not not impose federal income tax on receipt
form to file or request to make with the been in force. Other provisions of the tax of foreign gifts, the Internal Revenue
IRS or the Financial Crimes Enforce- treaty will identify those specific sections Code requires that taxpayers notify the
ment Network (FinCEN). of the treaty containing benefits that are IRS about the receipt of certain gifts.
Finally, U.S. owners of foreign trusts exempted from modification under the Any amount from a non-U.S. person
who are obligated to file Form 3520-A, savings clause. that is treated as a gift or bequest ex-
Annual Information Return of Foreign ceeding $100,000 must be reported on
Trust With a U.S. Owner, must file the 3. A treaty tie-break claim for Form 3520, Part IV, relating to the tax
form or an extension (via Form 7004) income tax residency does not year in which the gift was received. A
annually by March 15 for a calendar- relieve FBAR filing obligation gift from a non-U.S. person can include
year trust. This is one month before the Due to the unique approach of the transfers from a non-U.S. spouse to a
deadline for filing Form 3520, Annual United States in taxing citizenship U.S. citizen spouse. (It is also important
Return to Report Transactions With For- status rather than physical residency, to be mindful of gifts from a U.S. spouse
eign Trusts and Receipt of Certain Foreign U.S. citizens and permanent residents to a non-U.S. spouse, which would be
Gifts, which uses the due dates of an who live outside the United States find reportable on a gift tax return if the
individual’s personal income tax return themselves in an uncommon situation: value exceeds $164,000 (the 2022 exclu-
and accepts extensions via Form 4868, They may be income tax residents in sion amount).)
Application for Automatic Extension of more than one country at the same time. The information reported about a
Time to File U.S. Individual Income Tax A U.S. taxpayer who is a dual income tax foreign gift is not very detailed: date
Return. Missing the March 15 deadline resident might avail himself or herself of receipt, description of the property
can result in substantial penalties for of a treaty tie-break claim in the income received, and the fair market value of
late filing. Advisers and taxpayers can tax treaty between the United States and the property. Required reporting also
be caught by surprise since this is a the other home country. The tests set includes amounts received from foreign
month earlier than the expected April forth in the tie-break provision will be corporations or partnerships that are
15 due date. applied to determine, for instance, that treated as gifts.
the individual is considered resident in The IRS can impose civil penalties of
2. Beware the savings clause the other country and not the United up to 25% for failure to disclose receipt
Income tax treaties are in place to elimi- States for income tax purposes. Gener- of a gift or inheritance from a foreign
nate double taxation of individuals with ally, that individual would then file as a person. The penalty is initially imposed
income tax obligations in two countries. nonresident in the United States. at 5% of the gift for each month the fail-
As noted above, a U.S. person residing However, the above treaty claim of ure to disclose continues.
outside the United States will often nonresidence would not exempt the As noted above, Form 3520 follows
have income tax residency in two (or taxpayer from the obligation to file an the due dates of an individual’s personal
more) countries. FBAR. The individual’s FBAR is gov- income tax return and can be extended
Each tax treaty contains language ad- erned by Title 31 of the U.S. Code, not by a timely filed Form 4868.
dressing which country has the primary Title 26 of the U.S. Code.
or exclusive right to tax different types Penalties for noncompliance with 5. Totalization agreements may
of income (such as dividends, gains, FBAR obligations can be substantial. relieve US citizens of double
director’s fees, and so on). When deter- However, there is a difference of opinion social security obligations
mining if a treaty provision applies to among the U.S. courts of appeal as to Since the 1970s, the United States has
your client, after evaluating whether he whether the nonwillful civil penalty entered into agreements with other
or she is a qualified taxpayer covered by amount is assessed per form or per countries around the world to limit the
the treaty and the taxes in question are account. In June, the Supreme Court imposition of double social security

14 October 2022 The Tax Adviser