San Francisco Tax Preparation / CPA: Reporting Relief for U.S. Individuals’ Transactions With Certain Foreign Trusts
The IRS has issued guidance that:
- exempts certain U.S. citizens and residents from Code Sec. 6048 information reporting requirements for their transactions with, and ownership of, certain tax-favored foreign retirement trusts and foreign nonretirement savings trusts; and
- establishes procedures for these individuals to request abatement or refund of penalties assessed or paid under Code Sec. 6677 for failing to comply with the information reporting requirements.
The guidance is effective as of the date the revenue procedure is published in the Internal Revenue Bulletin, and applies to all prior open tax years, subject to the limitations under Code Sec. 6511.
Reporting on Foreign Trusts
Code Sec. 6048 generally requires annual information reporting of a U.S. person’s transfers of money or other property to, ownership of, and distributions from, foreign trusts. Reporting is not required, however, for transactions with foreign compensatory trusts described in Code Secs. 402(b), 404(a)(4), or 404A. Further, the IRS is authorized to suspend or modify any Code Sec. 6048 reporting requirement if the United States has no significant tax interest in obtaining the required information.
The Treasury and IRS have determined that U.S. individuals should be exempt from the Code Sec. 6048 reporting requirement for certain tax-favored foreign trusts because:
- the trusts are generally subject to written restrictions (e.g., contribution limitations, conditions for withdrawal, and information reporting) by the laws of the country where the trust is established; and
- U.S. individuals with an interest in these trusts may be required by Code Sec. 6038D to separately report information about their interests in accounts held by or through the trusts.
A foreign trust covered by this guidance is a trust established under a foreign jurisdiction’s law to operate exclusively or almost exclusively to provide, or earn income for the provision of, either pension or retirement benefits and ancillary or incidental benefits, or medical, disability, or educational benefits. To be eligible for coverage, the foreign trust must meet other requirements listed in the guidance that have been established by the laws of the trust’s jurisdiction.
An eligible individual:
- must be compliant with all requirements for filing a U.S. federal income tax return for the period he or she was a U.S. citizen or resident; and
- to the extent required by U.S. tax law, must have reported as income any contributions to, earnings of, or distributions from, an applicable tax-favored foreign trust on the return or an amended return.
Eligible individuals who have been assessed a penalty for failing to comply with Code Sec. 6048 for an applicable tax-favored foreign trust and want relief must complete Form 843, Claim for Refund and Request for Abatement. The individual must write “Relief pursuant to Revenue Procedure 2020-17” on Line 7 of the form, and explain how the individual and the foreign trust meet the requirements in the guidance. The form should be mailed to Internal Revenue Service, Ogden, UT 84201-0027.
This guidance does not affect:
- any reporting obligations under Code Sec. 6038D or any other provision of U.S. law, including the requirement to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR);
- the exception from reporting for distributions from certain foreign compensatory trusts (Section V of Notice 97-34, 1997-1 C.B. 422); or
- the exception from information reporting requirements for certain Canadian retirement plans ( Rev. Proc. 2014-55, I.R.B. 2014-44, 753).
The Treasury and IRS intend to issue proposed regulations that would modify the information reporting requirements to exclude eligible individuals’ transactions with, or ownership of, applicable tax-favored foreign trusts. The Treasury and IRS request comments about these and other similar types of foreign trusts that should be considered for an exemption from Code Sec. 6048 reporting.