On March 2, 2020, the IRS released an advanced copy of Rev. Proc. 2020-17. Rev. Proc. 2020-17 grants exemption from information reporting requirements under section 6048 of the Internal Revenue Code for certain eligible individuals with respect to certain applicable tax-favored foreign trusts. The release also outlines procedures for eligible individuals to request abatement of assessed penalties imposed by section 6677 and/or a refund of penalties already paid, subject to certain statutory limitations discussed below. This could be very significant for taxpayers who have foreign pensions that are trusts for U.S. tax purposes.
Section 6048 generally requires annual information reporting of (1) transfers of money or other property to, (2) ownership of (3) and distributions from a United States person’s foreign trust. A taxpayer may satisfy this requirement by filing Forms 3520 and/or 3520-A. Failure to comply results in penalties imposed under section 6677. Rev. Proc. 2020-17 would provide relief from these reporting requirements for ‘eligible individuals’ with respect to their ownership of and/or transactions with certain applicable tax-favored foreign trusts.
According to the revenue procedure, Treasury and IRS indicated that an exemption from the reporting requirements under section 6048 is appropriate as tax-favored foreign trusts are typically already subject to numerous limitations and reporting requirements imposed under the laws of the country in which the trust is established. Moreover, U.S. individuals with an interest in such trusts may already be subject to the information reporting requirements under section 6038D. Notably, the requirements to file Form 8938, Statement of Specified Foreign Financial Assets and FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) are not affected by this revenue procedure.
In order to take advantage of this relief, the taxpayer must be an ‘eligible individual’, who, (prior to the issuance of the revenue procedure) is or was required to report a transaction with, or ownership of, an applicable tax-favored foreign trust pursuant to section 6048. An eligible individual is a U.S. citizen or resident within the meaning of section 7701(a)(30)(A), who is presently tax compliant with all income tax filing requirements for any period for which the assessment statute remains open under section 6501, and who is current on their income reporting of any contributions, earnings, or distributions related to their ownership in an applicable tax-favored foreign trust as required under U.S. tax law.
The revenue procedure provides further clarification as to what constitutes a tax-favored foreign trust by breaking out the requirements into two groups: tax-favored foreign retirement trusts and tax-favored foreign non-retirement savings trusts. As the revenue procedure alludes to the laws of the trust’s foreign jurisdiction in determining the trust’s conformity with the definition of an applicable tax-favored foreign trust, a careful review of the foreign jurisdiction’s laws will likely be required in order to properly evaluate whether the foreign trust will meet the requirements contained in the revenue procedure.
In addition to providing relief for annual foreign trust reporting hereafter, qualifying taxpayers can request relief from section 6677 penalties. Section 6677 imposes a civil penalty of $10,000 or 35% (5% if failure is by U.S. owner of foreign trust under section 6048(b)), whichever is greater. Taxpayers may request abatement of assessed penalties or file a claim for refund of paid penalties. The statute of limitations under section 6511 and the offset provisions under section 6402 apply to claims for refund. In either case, the taxpayer should file Form 843, Claim for Refund and Request for Abatement with the IRS Service Center, Ogden, Utah 84201-0027. Taxpayers should write, “Relief pursuant to Revenue Procedure 2020-17” and explain how they are eligible individuals in the space provided on line 7 of the form.
Taxpayers who believe they may be eligible for relief should consult with their tax advisors to assess whether their trust fits within the requirements of what constitutes an applicable tax-favored foreign trust under Rev. Proc. 2020-17. Taxpayers should also take steps to confirm that they are fully compliant with all U.S. income tax return filing and reporting requirements because compliance will ultimately determine their eligibility for penalty relief. The Treasury Department and IRS plan to issue proposed regulations that would modify the requirements under section 6048 to exclude individuals’ ownership of and/or transactions with the reporting outlined in the revenue procedure. The revenue procedure will be effective upon publication in the March 16, 2020 Internal Revenue Bulletin, and apply to all open tax years.