IRS Provides Tax Relief for Certain Foreign Trusts and Steps for Requesting Refunds

(Parker Tax Publishing March 2020)

New IRS guidance exempts from foreign trust information reporting requirements some U.S. individuals' transactions with, and ownership of, certain tax-favored foreign trusts that are established and operated exclusively or almost exclusively to provide pension or retirement benefits, or to provide medical, disability, or educational benefits. In addition, procedural guidance is provided for requesting the abatement of penalties that have been assessed, or refunds of penalties that have been paid, for a failure to comply with the information reporting requirements regarding these foreign trusts. Rev. Proc. 2020-17.

Background

Code Sec. 6048 generally requires annual information reporting of a United States person's transfers of money or other property to, ownership of, and distributions from, foreign trusts, and Code Sec. 6677 imposes penalties on U.S. persons for failing to comply with Code Sec. 6048. Code Sec. 6048(a)(3)(B)(ii) provides an exception from reporting with respect to transfers to foreign compensatory trusts described in Code Secs. 402(b), 404(a)(4), or 404A. In addition, Code Sec. 6048(d)(4) authorizes the IRS to suspend or modify any requirement under Code Sec. 6048 if the United States has no significant tax interest in obtaining the required information.

The Treasury Department and the IRS have previously issued guidance providing that reporting is not required under Code Sec. 6048(c) with respect to distributions from certain foreign compensatory trusts, provided that the recipient of the distribution reports the distribution as compensation income on an applicable federal income tax return, and that information reporting under Code Sec. 6048(a) through (c) is not required with respect to certain Canadian retirement plans. Code Sec. 6048 information reporting is provided on Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner (Under Code Sec. 6048(b)).

Code Sec. 6038D, enacted in 2010, and the regulations thereunder generally require a specified person, which includes a U.S. citizen or resident alien, to report any interest in a specified foreign financial asset provided that the aggregate value of all such assets exceeds certain thresholds. Code Sec. 6038D(d) imposes a penalty for failing to comply. A specified foreign financial asset includes interests in certain foreign retirement, pension, and non-retirement savings funds or accounts. Code Sec. 6038D information reporting is provided on Form 8938, Statement of Specified Foreign Financial Assets. A specified person who is required to report information under Code Sec. 6038D on Form 8938 may also be required to report similar identifying information under Code Sec. 6048 on Form 3520 or Form 3520-A.

New Procedure Exempts Individuals from Trust Information Reporting Requirements

The IRS has determined that, because applicable tax-favored foreign trusts generally are subject to written restrictions, such as contribution limitations, conditions for withdrawal, and information reporting, which are imposed under the laws of the country in which the trust is established, and because U.S. individuals with an interest in these trusts may be required under Code Sec. 6038D to separately report information about their interests in accounts held by, or through, these trusts, it is appropriate to exempt U.S. individuals from the requirement to provide information about these trusts under Code Sec. 6048. Accordingly, the IRS is exempting from Code Sec. 6048 information reporting an eligible individual's transactions with, or ownership of, an applicable tax-favored foreign trust. An applicable tax-favored foreign trust means a tax-favored foreign retirement trust as defined under Section 5.03 of Rev. Proc. 2020-17 or a tax-favored foreign non-retirement savings trust as defined under Section 5.04 of Rev. Proc. 2020-17.

As a result, the penalties under Code Sec. 6677 do not apply to eligible individuals who fail to report transactions with, or ownership of, these trusts under Code Sec. 6048. In addition, eligible individuals who have been assessed penalties under Code Sec. 6677 for failing to comply with Code Sec. 6048 with respect to these trusts may, subject to the limitations of Code Sec. 6402 and Code Sec. 6511, request abatement of penalties that have been assessed or refund of penalties that have been paid.

Procedure for Requesting Abatement of Penalties Assessed

Rev. Proc. 2020-17 provides that, subject to the limitations of Code Sec. 6402 and Code Sec. 6511, eligible individuals who have been assessed a penalty under Code Sec. 6677 for failing to comply with Code Sec. 6048 with respect to an applicable tax-favored foreign trust (without regard to whether such failure was due to reasonable cause under Code Sec. 6677(d)) and who wish to obtain relief under Rev. Proc. 2020-17 may request an abatement of the penalty assessed, or a refund of the penalty paid, under Code Sec. 6677 by filing Form 843, Claim for Refund and Request for Abatement. Eligible individuals are not precluded from requesting relief under any other applicable relief provisions. In addition, Rev. Proc. 2020-17 applies to all prior open tax years, subject to the limitations of Code Sec. 6511.

Eligible individuals should complete the form and write the statement "Relief pursuant to Revenue Procedure 2020-17" on Line 7 of the form. In addition, Line 7 should include an explanation of how the eligible individual and the foreign trust meets each relevant requirement under Rev. Proc. 2020-17.

FBAR Reporting Is Not Affected by Rev. Proc. 2020-17

The IRS notes that Rev. Proc. 2020-17 does not affect any reporting obligations under Code Sec. 6038D or under any other provision of U.S. law, including the requirement to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), imposed by 31 U.S.C. Section 5314 and the regulations thereunder. In addition, Rev. Proc. 2020-17 does not affect previously issued guidance providing an exception from Code Sec. 6048 reporting with respect to distributions from certain foreign compensatory trusts under Section V of Notice 97-34, and an exception from all information reporting requirements under Code Sec. 6048 with respect to certain Canadian retirement plans under Rev. Proc. 2014-55.

For a discussion of foreign trust reporting requirements, see Parker Tax ¶203,165.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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