2020-03-03
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:
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:
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.