Revenue Procedure 2020-17 Eliminates Reporting Requirements for U.S. Owners of Tax-Favored Foreign Trusts

On March 16, 2020, the Internal Revenue Service (IRS) published Revenue Procedure (Rev. Proc.) 2020-17 to modify reporting requirements for U.S. individuals regarding transactions with, and ownership of, tax-favored foreign trusts.

Background

Section 6048 requires responsible parties to provide written notice of reportable events, such as the amount of money or property transferred to foreign trusts, as well as the identity of the trust, each trustee and each beneficiary on an annual basis. A reportable event includes the creation of any foreign trust, the transfer of money or property to a foreign trust or the death of a U.S. citizen who was an owner of a foreign trust. Section 6677 imposes penalties for failure to comply with the Section 6048 reporting requirements.

Rev. Proc 2020-17

In recognition that tax-favored foreign trusts are generally subject to restrictions such as contribution and withdrawal limitations, information reporting requirements and Section 6038D annual reporting requirements for the value of assets held in such trusts, the IRS has determined it is appropriate to provide individuals an exemption from providing additional information on Forms 3520 or 3520-A.

Per the Rev. Proc., the definition of a tax-favored foreign trust includes trusts created to provide income for retirement or incidental benefits and certain non-retirement trusts created to provide income for medical, disability or educational benefits that meet specific requirements.

The IRS has not provided guidance on specific foreign trusts that will qualify for the reporting exemption. As such, taxpayers will need to carefully review relevant accounts and plans to determine if the reporting exemption will apply.

Penalty Relief

In addition to providing prospective reporting relief, the Rev. Proc. includes procedures for filing Form 843 to request abatement or refund of penalties previously assessed under Section 6677. Penalty abatement under the Rev. Proc. does not require the taxpayer to demonstrate reasonable cause for failure to file.

For more information, reach out to us at tax@dhg.com.