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In Revenue Procedure 2020-17, the IRS has exempted US citizens and resident individuals (US individuals) from foreign trust information reporting requirements under IRC Section 6048 for certain tax-favored foreign trusts established and operated exclusively, or almost exclusively, to provide pension, retirement, medical, disability, or educational benefits. In particular, the IRC Section 6048 reporting exemption applies to US individuals' (1) ownership of these foreign trusts, (2) transfers to such trusts, and (3) distributions from such trusts. To qualify for the reporting exemption, US individuals must have filed requisite US income tax returns for all tax years during which they were US citizens or residents and for which the statute of limitations for the assessment of tax has not expired (generally the most recent past three tax years). Eligible individuals who have already incurred penalties for failing to comply with the foreign trust information reporting requirements for these types of foreign trusts, before this guidance was issued, may request that the IRS abate assessed penalties or refund amounts paid to satisfy penalties according to the instructions provided in the revenue procedure.

US individuals must continue to report contributions made to the trusts, earnings in the trusts, and distributions from the trusts on their US income tax returns and pay tax on these amounts as required under US tax law. Additionally, the revenue procedure does not relieve individuals from other information reporting requirements that may apply to the trusts, such as the requirement to file the Form 8938, Statement of Specified Foreign Financial Assets, under IRC Section 6038D or FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), under 31 U.S.C. Section 5314 and the related regulations.

The revenue procedure is effective 16 March 2020, the date it will be published in the Internal Revenue Bulletin, and applies to all tax years for which the IRS may still assess taxes (generally the most recent past three tax years), taking into account the time limit for requesting a refund when applicable. Treasury and the IRS plan to issue parallel proposed regulations and have also requested comments on other types of foreign trusts that should be considered for an exemption from reporting under IRC Section 6048.

Background

US individuals must file the 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, to provide the IRS information on their ownership of a foreign trust. See IRC Section 6048(b). Additionally, they must file the Form 3520 to report (1) any transfers of money or other property they make to a foreign trust and (2) any distributions they receive from a foreign trust during the tax year. See IRC Section 6048(a), (c).

For tax year 2019, the Form 3520-A is due 16 March 2020 for calendar-year taxpayers. The Form 3520-A due date may be extended to 15 September 2020, by filing Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns, with the IRS on or before March 16, 2020. Form 3520-A and Form 7004 must include the foreign trust's Employer Identification Number (EIN). The Form 3520 for tax year 2019 is due 15 April 2020, for calendar-year taxpayers. The Form 3520 due date is automatically extended to 15 October 2020, if a US individual files a Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, to extend the due date of the individual's Form 1040, U.S. Individual Income Tax Return. The IRS may impose penalties under IRC Section 6677 on US individuals who fail to timely file or accurately complete the Form 3520 or Form 3520-A to satisfy each applicable reporting requirement under IRC Section 6048.

IRC Section 6048(a)(3)(B)(ii) provides a reporting exception for transfers to foreign compensatory trusts described in IRC Sections 402(b), 404(a)(4), or 404A. The Treasury Secretary may also suspend or modify IRC Section 6048 reporting requirements if the United States has no significant tax interest in obtaining information required under the code section. See IRC Section 6048(d)(4).

IRC Section 6048 information reporting exemption for applicable tax-favored foreign trusts

Treasury and the IRS indicate that relief from the IRC Section 6048 reporting requirements is appropriate for certain tax-favored foreign retirement trusts and tax-favored foreign non-retirement savings trusts because the countries in which these trusts are established impose various restrictions on the trusts, and there may be duplicative reporting to the IRS when reporting requirements under other sections of the Internal Revenue Code apply to the trusts. The countries in which such foreign trusts are established generally impose written restrictions and requirements (e.g., contribution limitations, conditions for withdrawal), as well as information reporting requirements, on the trusts. Additionally, US individuals with an interest in one of these trusts may be required under IRC Section 6038D to separately report information about their interests in accounts held by or through these trusts to the IRS on the Form 8938. Treasury and the IRS, therefore, exempt US individuals from the IRC Section 6048 reporting requirements otherwise applicable to these foreign trusts.

A US individual is an "eligible individual" who qualifies for the IRC Section 6048 reporting exemption for a tax-favored foreign retirement trust or tax-favored foreign non-retirement savings trust, if the individual is a US citizen or resident who has both:

• Filed US income tax returns for all tax years during which the individual was a US citizen or resident and for which the statute of limitations for the assessment of tax under IRC Section 6501 (not taking into account IRC Section 6501(c)(8)) has not expired (generally the most recent past three tax years)
• Reported as income any contributions to, earnings of, or distributions from an applicable tax-favored foreign trust, as required under US tax law, on an applicable return.

A "tax-favored foreign retirement trust" is a foreign trust for US tax purposes that (1) is created, organized, or otherwise established under the laws of a foreign jurisdiction as a trust, plan, fund, scheme, or other arrangement to operate exclusively or almost exclusively to provide, or earn income to provide, pension or retirement benefits and ancillary or incidental benefits; and (2) meets the following requirements established by the laws of the trust's foreign jurisdiction:

• Is exempt from income tax or otherwise tax-favored (e.g., contributions to the trust are deductible or excluded from income or taxed at a reduced rate and/or investment income the trust earns is tax-deferred or taxed at a reduced rate)
• Provides annual information reporting about the trust, its participants, or its beneficiaries, or this information is otherwise available, to the relevant tax authorities in the trust's jurisdiction
• Limits contributions made to the trust to income earned from the performance of personal services
• Limits contributions to the trust to a percentage of the participant's earned income, no more than $50,000 annually or no more than $1 million in a lifetime
• Allows withdrawals from the trust only when the beneficiary reaches a specified retirement age, is disabled, or dies (but penalty-free disbursements may be allowed for hardship reasons, educational purposes, or purchase of a primary residence)
• For employer-maintained trust, must (i) be nondiscriminatory (offered to a wide range of employees), (ii) actually provide significant benefits for a substantial majority of eligible employees, and (iii) provide benefits that are nondiscriminatory

A"tax-favored foreign non-retirement savings trust" is a foreign trust for US tax purposes that (1) is created, organized, or otherwise established under the laws of a foreign jurisdiction as a trust, plan, fund, scheme, or other arrangement to operate exclusively or almost exclusively to provide medical, disability, or educational benefits; and (2) meets the following requirements:

• Is generally exempt from income tax or is otherwise tax-favored in the trust's jurisdiction
• Provides annual information reporting about the trust, its participants, or its beneficiaries, or this information is otherwise available, to the relevant tax authorities in the trust's jurisdiction
• Limits contributions to $10,000 annually or $200,000 in a lifetime
• Withdrawals from the trust are only permitted for the provision of medical, disability, or educational benefits

Abatement/refund procedures

The revenue procedure instructs taxpayers seeking a refund or abatement of IRC Section 6677 penalties imposed for the failure to comply with IRC Section 6048 reporting requirement for these tax-favored foreign trusts to file Form 843, Claim for Refund and Request for Abatement, by (1) mailing the form to Internal Revenue Service, Ogden, UT 84201–0027; (2) writing "Relief pursuant to Revenue Procedure 2020-17" on line 7; and (3) explaining on line 7 how the eligible individual and foreign trust meet the revenue procedure's requirements.

Implications

The revenue procedure provides welcome relief from foreign trust information reporting requirements that would otherwise apply to certain tax-favored foreign retirement trusts and tax-favored foreign non-retirement savings trusts that do not qualify for any existing exceptions to IRC Section 6048 reporting, such as the exception under IRC Section 6048(a)(3)(B)(ii) for transfers to foreign compensatory trusts described in IRC Sections 402(b), 404(a)(4) or 404A. These tax-favored foreign trusts have been a source of complexity regarding the foreign trust reporting rules. It is often not clear to the public that these tax-favored foreign savings plans are classified for US tax purposes as foreign trusts, and the tax community often has a wide array of opinions as to whether a "foreign trust classification" is appropriate.

The revenue procedure does not exempt eligible individuals from the applicable requirement under US tax law to report contributions made to these trusts, earnings in the trusts, and distributions from the trusts on their US income tax returns and to pay tax on those amounts. Additionally, eligible individuals must continue to comply with any other applicable reporting requirements that apply to these trusts, such as the filing of the Form 8938 or FinCEN Form 114.

For tax year 2019, if further analysis is required to definitively determine whether a particular tax-favored foreign trust falls within the exemptions provided in the revenue procedure, US individuals may be well advised to complete and timely file the Form 3520-A or Form 7004 by 16 March 2020, to extend the Form 3520-A due date (including the trust's EIN on both forms) for calendar year 2019 taxpayers. Similarly, such US individuals should timely file the Form 3520 or Form 4869 to extend the Form 3520 due date on or before 15 April 2020, if they are unclear whether the revenue procedure affords relief.

In determining whether a particular tax-favored foreign trust qualifies for the reporting exemptions, taxpayers should note that trust contributions may exceed limits provided in the revenue procedure when converted into US dollars. Exceeding these limits may prevent some trusts from obtaining relief, even though they may meet the other requirements.

Significant penalty risks exist if a US individual inappropriately relies on the revenue procedure and fails to timely file the Form 3520-A or Form 3520. US individuals who are settlors/grantors or beneficiaries of foreign trusts may be required to file Form 3520-A and/or Form 3520 to report: (1) ownership of the trust, (2) transfers of property to the trust, or (3) distributions from the trust. It is essential that these forms be filed timely and correctly. Two separate penalties equal to 5% of the trust's value (with a minimum penalty of $10,000) may be imposed for failure to report information on foreign trust ownership on Form 3520-A and Form 3520. Separate penalties of up to 35% of a contribution to a foreign trust or 35% of a distribution from such a trust (both with a minimum penalty of $10,000) may be imposed for failure to report the trust contribution or distribution on Form 3520. With this level of risk, taxpayers should be certain that their reliance on the revenue procedure is appropriate.

EY can assist US individuals in determining whether they are eligible for the relief provided in Revenue Procedure 2020-17, including whether it is appropriate to request abatement of penalty assessments or a refund of penalties already paid for the failure to timely file accurate and complete Forms 3520-A and/or Forms 3520.