Yesterday the IRS published Rev. Proc. 2020-17.  This revenue procedure provides an exemption from filing Forms 3520 and 3520-A for an “eligible individual’s” transactions with, or ownership of, an “applicable tax-favored foreign trust” (“ATFFT”).

An eligible individual generally means an individual who is a U.S. citizen or resident and who is compliant with all requirements for filing U.S. federal income tax returns and has reported as income (to the extent required) any contributions to, earnings of, or distributions from, an ATFFT.  Rev. Proc. 2020-17, Sec. 5.02.

There are two types of ATFFTs.  The first is a foreign pension or retirement trust (a “tax-favored foreign retirement trust”).  Rev. Proc. 2020-17, Sec. 5.03.  The second is a foreign medical, disability, or educational trust (a “tax-favored foreign non-retirement savings trust”).  Rev. Proc. 2020-17, Sec. 5.04.

Both types of ATFFTs must be “tax-favored.”  An ATFFT is tax favored if the trust is generally exempt from income tax or is otherwise tax-favored under the laws of the trust’s jurisdiction.  A trust is tax-favored if (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/or (ii) taxation of investment income earned by the trust is deferred until distribution or the investment income is taxed at a reduced rate.  Rev. Proc. 2020-17, Sec.s 5.03(1) and 5.04(1).

Tax-Favored Foreign RETIREMENT Trusts

Tax-favored foreign retirement trusts generally have the following requirements:

1. The trust must be created to operate exclusively or almost exclusively to provide, or to earn income for the provision of, pension or retirement benefits. Rev. Proc. 2020-17, Sec. 5.03.
2. The trust generally must annually report information with respect to the trust to the relevant tax authorities in the trust’s jurisdiction. Rev. Proc. 2020-17, Sec. 5.03(2).
3. The trust must only permit contributions with respect to income earned from the performance of personal services. Rev. Proc. 2020-17, Sec. 5.03(3).
4. Contributions to the trust must: (a) be limited by a percentage of earned income of the participant, (b) be subject to an annual contribution limit of $50,000 or less, or (c) be subject to a lifetime contribution limit of $1,000,000 or less. Rev. Proc. 2020-17, Sec. 5.03(4).
5. Withdrawals from the trust must be conditioned upon reaching a specified retirement age, disability, or death, or penalties must apply to withdrawals made before such conditions are met. However, an exception is provided for early withdrawals for hardship or educational purposes, or for the purchase of a primary residence. Rev. Proc. 2020-17, Sec. 5.03(5).
6. If the trust is employer-maintained, then certain additional requirements must be met:
   1. The trust must be nondiscriminatory insofar as a wide range of employees, including rank and file employees, are eligible to make or receive contributions or accrue benefits under the terms of the trust. Rev. Proc. 2020-17, Sec. 5.03(6)(i).
   2. The trust must actually provide significant benefits for a substantial majority of eligible employees. Rev. Proc. 2020-17, Sec. 5.03(6)(ii).
   3. The benefits actually provided under the trust to eligible employees must be nondiscriminatory. Rev. Proc. 2020-17, Sec. 5.03(6)(iii).

A trust is not disqualified because it may receive a rollover from another tax-favored foreign retirement trust established and operated under the laws of the same jurisdiction.  Rev. Proc. 2020-17, Sec. 5.03(6), flush.

Although Rev. Proc. 2020-17 provides that an “employer-maintained” trust must be “nondiscriminatory,” it does not define the terms “employer-maintained” or “nondiscriminatory.”

Tax-Favored Foreign NON-RETIREMENT SAVINGS Trusts

Tax-favored foreign non-retirement savings trusts generally have the following requirements:

1. The trust must be created to operate exclusively or almost exclusively to provide, or to earn income for the provision of, medical, disability, or educational benefits. Rev. Proc. 2020-17, Sec. 5.04.
2. The trust generally must annually report information with respect to the trust to the relevant tax authorities in the trust’s jurisdiction. Rev. Proc. 2020-17, Sec. 5.04(2).
3. Contributions to the trust must be limited to $10,000 or less annually or $200,000 or less on a lifetime basis. Rev. Proc. 2020-17, Sec. 5.04(3).
4. Withdrawals from the trust must be conditioned upon the provision of medical, disability, or educational benefits, or penalties must apply to withdrawals made before such conditions are met. Rev. Proc. 2020-17, Sec. 5.04(4).

A trust is not disqualified because it may receive a rollover from another tax-favored foreign non-retirement savings trust established and operated under the laws of the same jurisdiction.  Rev. Proc. 2020-17, Sec. 5.04, flush.

Penalties Not Applicable

Because an ATFFT is exempt from reporting on Forms 3520 and 3520-A, the penalties under Code §6677 do not apply to an eligible individual who doesn’t report transactions with, or ownership of, an ATFFT under Code §6048.  Rev. Proc. 2020-17, Sec. 3 and 4.

Abatement Or Refund Of Penalties

Rev. Proc. 2020-17 also includes procedures for eligible individuals who have been assessed a penalty under Code §6677 for failing to comply with Code §6048 with respect to an ATFFT (without regard to whether such failure was due to reasonable cause) to request an abatement of the penalty assessed, or a refund of the penalty paid.  The request is made by filing Form 843, Claim for Refund and Request for Abatement.

The Form 843 should be mailed to the IRS service center in Ogden, UT.  Line 7 of the Form 843 should include the statement “Relief pursuant to Revenue Procedure 2020-17,” and should include an explanation of how the eligible individual meets each relevant requirement under section 5.02 and how the foreign trust meets each relevant requirement under section 5.03 or 5.04.

We have created a flowchart that goes through the requirements of Rev. Proc. 2020-17.  The flowchart is available for purchase on Tax-Charts.com.