IRS announces foreign trust reporting exemptions
IRS has issued new guidance exempting current and former U.S. citizens and residents from annual reporting requirements for owning, or transferring money to, certain tax-favored foreign retirement, medical, disability and educational plans that are foreign trusts. The new guidance exempts applicable individuals from the tax year 2019 requirement to disclose their interests under the foreign trust reporting rules. It also provides an opportunity to request abatement and refund of penalties paid for omissions in some earlier tax years.
Internal Revenue Code Sec. 6048 generally requires U.S. persons to annually report money or property transfer to, ownership of, or distributions from foreign trusts. However, there was prior confusion regarding these reporting requirements and their application in connection with certain tax-favored retirement, medical, disability and educational plans that are foreign trusts. Many individuals to whom this provision applied may have failed to make the requisite filings (i.e., Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner and Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts), which triggered automatic penalties.
Prior to new IRS guidance, current and former U.S. taxpayers (such as U.S. citizens who renounced citizenship or U.S. green card holders), with foreign trust reporting penalties had no other recourse but to file an administrative appeal with IRS. The guidance in Rev. Proc. 2020-17 provides long-awaited relief for these taxpayers because it provides an alternative method for eligible U.S. taxpayers to claim an exemption from the annual foreign trust reporting requirements and allows those who have been subject to failure to file penalties in earlier years to seek relief from penalties imposed and potential refunds for those who have paid.
Revenue Procedure 2020-17
Revenue Procedure 2020-17 provides a two-pronged approach to avoiding foreign trust reporting penalties that are often automatically assessed at IRS service center level:
First, Rev. Proc. 2020-17 exempts certain “applicable tax-favored” foreign trusts which are foreign retirement trusts and non-retirement savings trusts from Form 3520-A/3520 reporting requirements. Therefore, Sec. 6677 penalties do not apply to eligible individuals who fail to report transactions with or ownership of such trusts under Sec. 6048.
Second, it provides procedures for obtaining penalty relief abatement or refunds for U.S. taxpayers who have been assessed penalties under Sec. 6677 and are in the process of contesting such penalties or already paid them. The ability to file under this Rev. Proc. is subject to Sec. 6402 and Sec. 6511 limitations.
The Rev. Proc. also states that Treasury and IRS intend to issue proposed regulations to modify Sec. 6048 reporting requirements to exclude eligible individuals’ transactions with, or ownership of, such tax-favored foreign trusts from information reporting. Currently IRS has requested comments on Rev. Proc. 2020-17, which is an explicit acknowledgement from IRS that certain foreign retirement plans and non-retirement plans would be considered for exemption from Sec. 6048 reporting as exempt foreign compensatory trusts under Secs. 402(b), 404(a)(4), 404A and similar foreign trusts.
It is important to note that while Rev. Proc. 2020-17 exempts individuals from filing Forms 3520-A/3520 for certain foreign trusts, it only provides potential relief from filing Forms 3520-A/3520. It does not exempt the requirement to report the same information on other applicable forms (e.g., Form 8938, Statement of Specified Foreign Financial Assets; Schedule B of Form 1040, Interest and Ordinary Dividends; and FinCEN Form 114 (FBAR), Report of Foreign Bank and Financial Accounts).
Recent IRS guidance provides an exemption from reporting requirements for certain current and former U.S. citizens who own or transfer money to certain tax-favored foreign retirement trusts. It also provides an opportunity to request abatement or refund of penalties paid for tax years 2016‒2018, and possibly earlier tax years. It applies only to trusts that are established and operated exclusively to provide pension or retirement benefits, or to provide medical, disability or educational benefits. Some restrictions on the exemption do apply. Andersen’s US international tax advisors can assist you in determining whether you qualify for the exemption and in requesting abatement or refund of penalties.