Rev. Proc. 2020-17: IRS Relief for Foreign Trust Penalties

Rev. Proc. 2020-17: IRS Relief for Foreign Trust Penalties

Rev. Proc. 2020-17: IRC 6048 Exemptions & 3520 Penalty Relief: The Rev. Proc 2020-17  is an IRS Revenue Procedure that provides Relief for certain Reporting of Foreign Trusts and Foreign Trust Penalties.  The new revenue procedure was released in March.

Rev. Proc 2020-17 limits the amount of reporting required for certain foreign trusts (to avoid duplicate reporting) and provides procedures to apply for an abatement of penalties already issued for non-reporting of information returns involving foreign trusts. And, with the Internal Revenue Service taking an aggressive approach on foreign accounts compliance and unreported foreign income — the revenue procedure will prove to be very beneficial to U.S. persons who own – or have an interest in – foreign trusts.

Rev. Proc. 2020-17 (IRS Revenue Procedure)

The Rev. Proc. 2020-17 refers to foreign trust reporting rules and requirements:

As provided by the IRS:

“This revenue procedure provides an exemption from the information reporting requirements under section 6048 of the Internal Revenue Code for certain U.S. citizen and resident individuals (U.S. individuals) with respect to their transactions with, and ownership of, certain tax-favored foreign retirement trusts and certain tax-favored foreign nonretirement savings trusts, as described in sections 5.03 and 5.04 of this revenue procedure (collectively, applicable tax-favored foreign trusts).

Only eligible individuals described in section 5.02 of this revenue procedure (generally U.S. individuals who have been compliant with respect to their income tax obligations related to such trusts) may rely on this revenue procedure.

In addition, this revenue procedure establishes procedures for eligible individuals to request abatement of penalties that have been assessed or a refund of penalties that have been paid pursuant to section 6677 for the individuals’ failure to comply with the information reporting requirements of section 6048 with respect to an applicable tax-favored foreign trust.

Eligible individuals may request relief from section 6677 penalties, subject to the limitations of sections 6402 and 6511, in accordance with section 6 of this revenue procedure.”

What does Rev. Proc 2020-17 Mean?

Rev. Proc. 2020-17 means that the IRS is going to reel in some of the reporting requirements of foreign trusts, which oftentimes results in duplicate reporting for Taxpayers. The emphasis on the exception will be certain tax-favored foreign retirement trusts and tax favored foreign nonretirement savings trusts.

IRC 6048

Notice of certain events:

(1) General rule

On or before the 90th day (or such later day as the Secretary may prescribe) after any reportable event, the responsible party shall provide written notice of such event to the Secretary in accordance with paragraph (2).

(2) Contents of notice

The notice required by paragraph

(1) shall contain such information as the Secretary may prescribe, including—

(A) the amount of money or other property (if any) transferred to the trust in connection with the reportable event, and

(B) the identity of the trust and of each trustee and beneficiary (or class of beneficiaries) of the trust.

(3) Reportable event

For purposes of this subsection —

(A) In general

The term “reportable event” means—

(i) the creation of any foreign trust by a United States person,

(ii) the transfer of any money or property (directly or indirectly) to a foreign trust by a United States person, including a transfer by reason of death, and

(iii) the death of a citizen or resident of the United States if—

(I) the decedent was treated as the owner of any portion of a foreign trust under the rules of subpart E of part I of subchapter J of chapter 1, or

(II) any portion of a foreign trust was included in the gross estate of the decedent.

FBAR Reporting is Still Required

As further provided by the Revenue Procedure:

“This revenue procedure does not affect any reporting obligations under section 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.

This revenue procedure does not affect previously issued guidance providing an exception from section 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 section 6048 with respect to certain Canadian retirement plans under Revenue Procedure 2014-55.

See also section 6048(a)(3)(B)(ii) (providing an exception from reporting with respect to transfers to foreign compensatory trusts described in section 402(b), 404(a)(4), or 404A).”

FATCA (Form 8938) Reporting is Still Required

As further provided by the Revenue Procedure:

Section 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. See §1.6038D-2(a).

Section 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. See §§1.6038D-3.

Section 6038D information reporting is provided on Form 8938, Statement of Specified Foreign Financial Assets. A specified person who is required to report information under section 6038D on Form 8938 may also be required to report similar identifying information under section 6048 on Form 3520 or Form 3520-A.

What is a Tax-Favored Foreign Trust?

“For purposes of this revenue procedure, an applicable tax-favored foreign trust means a tax-favored foreign retirement trust as defined under section 5.03 of this revenue procedure or a tax-favored foreign non-retirement savings trust as defined under section 5.04 of this revenue procedure.”

What is a Tax-Favored Foreign Retirement Trust?

“For purposes of this revenue procedure, a tax-favored foreign retirement trust means a foreign trust for U.S. tax purposes that is created, organized, or otherwise established under the laws of a foreign jurisdiction (the trust’s jurisdiction) as a trust, plan, fund, scheme, or other arrangement (collectively, a trust) to operate exclusively or almost exclusively to provide, or to earn income for the provision of, pension or retirement benefits and ancillary or incidental benefits, and that meets the following requirements established by the laws of the trust’s jurisdiction.”

“The trust is generally exempt from income tax or is otherwise tax-favored under the laws of the trust’s jurisdiction. For purposes of this revenue procedure, a trust is tax-favored if it meets any one or more of the following conditions:

(i) contributions to the trust that would otherwise be subject to tax are deductible or excluded from income, are taxed at a reduced rate, give rise to a tax credit, or are otherwise eligible for another tax benefit (such as a government subsidy or contribution); and

(ii) taxation of investment income earned by the trust is deferred until distribution or the investment income is taxed at a reduced rate.”

What is a Tax-Favored Foreign Non-Retirement Savings Trust?

“For purposes of this revenue procedure, a tax-favored foreign non-retirement savings trust means a foreign trust for U.S. tax purposes that is created, organized, or otherwise established under the laws of a foreign jurisdiction (the trust’s jurisdiction) as a trust, plan, fund, scheme, or other arrangement (collectively, a trust) to operate exclusively or almost exclusively to provide, or to earn income for the provision of, medical, disability, or educational benefits, and that meets the following requirements established by the laws of the trust’s jurisdiction.

(1) The trust is generally exempt from income tax or is otherwise tax-favored under the laws of the trust’s jurisdiction as defined in section 5.03(1) of this revenue procedure.”

The Full Text of the Revenue Procedure 2020-17 can be found here (subscription may be required).

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