Is your client an American who has lived or worked outside the United States and owns foreign trusts? Has he paid a penalty for late filed Form 3520 or 3520A for 2016, 2017, 2018 or paid an earlier year penalty within the last 2 years?
If so, there may be good news. This week the Internal Revenue Service issued new guidance in Revenue Procedure 2020-17 (the guidance) that may exempt qualifying U.S. citizens and residents with foreign trusts from the onerous reporting requirements. This means that they may not have to file the Form 3520, due April 15, and Form 3520A, due March 16 going forward if they qualify.
Which Foreign Trusts Qualify?
According to the guidance:
"This revenue procedure provides an exemption from the information reporting requirements under section 6048 of the Internal Revenue Code for certain U.S. citizen and resident individuals with respect to their transactions with, and ownership of, certain tax-favored foreign retirement trusts and certain tax-favored foreign nonretirement savings trusts..."
"For purposes of this revenue procedure, a tax-favored foreign non-retirement savings trust means a foreign trust for U.S. tax purposes that is created, organized, or otherwise established under the laws of a foreign jurisdiction (the trust’s jurisdiction) as a trust, plan, fund, scheme, or other arrangement (collectively, a trust) to operate exclusively or almost exclusively to provide, or to earn income for the provision of, medical, disability, or educational benefits, and that meets the following requirements established by the laws of the trust’s jurisdiction."
There are further restrictions in the guidance that apply as well, which vary on a client-to-client basis, based on their specific situation.
Relief from Penalties
But there’s more good news. The new procedures also provide an opportunity to request abatement of penalties imposed and a refund of penalties paid for tax years 2016 – 2018 or earlier years if paid in the last two years. A Form 843 should be used to file for this relief.
To be eligible for such relief, a taxpayer:
• Must be compliant with all requirements for filing a U.S. federal income tax return (or returns) covering the period such individual was a U.S. citizen or resident.
• To the extent required under U.S. tax law, has reported as income any contributions to, earnings of, or distributions from, an applicable tax-favored foreign trust on the applicable return (including on an amended return).