New Exemptions & Penalty Relief for Form 3520 and 3520-A

In early March 2020, the IRS released Rev. Proc. 2020-17 which provides an exemption from the information reporting requirements under IRC § 6048 – specifically, the filing of Forms 3520 and 3520-A. In addition, it provides tax relief for taxpayers who’ve been assessed penalties under IRC § 6677 for failure to file these forms.

Exemptions from Form 3520 and Form 3520-A

Section 6048 requires annual information reporting of a United States person’s transfers of money or other property to, ownership of, and distributions from, foreign trusts, and section 6677 imposes penalties on United States persons for failing to comply with section 6048. A taxpayer meets these requirements by filing Forms 3520 and 3520-A as applicable.

The Treasury Department and the IRS are exempting from section 6048 information reporting an eligible individual’s transactions with, or ownership of, an applicable tax-favored foreign trust.

  • As a result, the penalties under section 6677 do not apply to eligible individuals who fail to report transactions with, or ownership of, these trusts under section 6048.
  • In addition, eligible individuals who have been assessed penalties under section 6677 for failing to comply with section 6048 with respect to these trusts may, subject to the limitations of sections 6402 and 6511, request abatement of penalties that have been assessed or refund of penalties that have been paid.

The exemptions do not affect reporting obligations under IRC 6038D or the requirement to file an FBAR.

Applicable tax-favored foreign trusts

An applicable tax-favored foreign trust means (1) a tax-favored foreign retirement trust or (2) a tax-favored foreign non-retirement savings trust.

Tax-favored foreign retirement trust

A tax-favored foreign retirement trust is a foreign trust that is established to provide or to earn income to provide, pension or retirement benefits. It must meet all of the following requirements established by the laws of the trust’s jurisdiction:

  • The trust is exempt from income tax or is otherwise tax-favored in the trust’s jurisdiction. A trust is tax-favored if:
    • Contributions to the trust are tax-deductible, excluded from income, or taxed at a reduce rate. Or if the contributions give rise to a tax credit, or are otherwise eligible for another tax benefit; and
    • taxation of investment income earned by the trust is deferred until distribution or the investment income is taxed at a reduced rate.
  • Annual information reporting with respect to the trust, its participants, or beneficiaries is available to the relevant tax authorities in the trust’s jurisdiction.
  • Only contributions with respect to income earned from the performance of personal services are permitted.
  • Contributions to the trust are limited by a percentage of earned income of the participant, are subject to an annual limit of $50,000 or less to the trust, or are subject to a lifetime limit of $1,000,000 or less to the trust.
  • Withdrawals, distributions, or payments from the trust are conditioned upon reaching a specified retirement age, disability, or death, or penalties apply to withdrawals, distributions, or payments made before such conditions are met.
  • In the case of an employer-maintained trust, the trust is nondiscriminatory.

Rollovers: If a a trust which meets these requirements receives a rollover from another asset or fund, that asset or fund must also meet the requirements of a tax-favored foreign retirement trust.

Tax-favored foreign non-retirement savings trust

A tax-favored foreign non-retirement savings trust is a foreign trust that is established under the laws of a foreign jurisdiction as a trust to provide or to earn income to provide for medical, disability, or educational benefits. It must meet all of 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 in the trust’s jurisdiction. A trust is tax-favored if:
    • Contributions to the trust are tax-deductible, excluded from income, or taxed at a reduce rate. Or if the contributions give rise to a tax credit, or are otherwise eligible for another tax benefit; and
    • taxation of investment income earned by the trust is deferred until distribution or the investment income is taxed at a reduced rate.
  • Annual information reporting with respect to the trust, its participants, or beneficiaries is available to the relevant tax authorities in the trust’s jurisdiction.
  • Contributions to the trust are limited to $10,000 or less annually or $200,000 or less on a lifetime basis.
  • Withdrawals, distributions, or payments from the trust are conditioned upon the provision of medical, disability, or educational benefits, or apply penalties to withdrawals, distributions, or payments made before such conditions are met.

Rollovers: If a a trust which meets these requirements receives a rollover from another asset or fund, that asset or fund must also meet the requirements of a tax-favored foreign non-retirement savings trust.

Requesting penalty abatement

For taxpayers that have now-exempted tax-favored foreign retirement trusts or non-retirement savings trust and who have been assessed penalties under Section 6677 may request an abatement of penalty (or refund if penalty was paid) by filing Form 843, Claim for Refund and Request for Abatement.

A Form 843 requesting relief under this revenue procedure should be mailed to Internal Revenue Service, Ogden, UT 84201-0027.

Eligible individuals should complete the form and write the statement “Relief pursuant to Revenue Procedure 2020-17” on Line 7 of the form. In addition, Line 7 should include an explanation of how the eligible individual meets each relevant requirement of the revenue procedure.

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