The IRS has issued a revenue procedure that exempts from information reporting requirements certain tax-favored foreign trusts that are established and operated exclusively or almost exclusively to provide pension or retirement benefits, or to provide medical, disability, or educational benefits. The procedure also provides guidance on how to request abatement, or a refund, of penalties for failure to comply with these information reporting requirements.
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.
Code Sec. 6048(d)(4) authorizes the IRS to suspend or modify any requirement under Code Sec. 6048 if the IRS has no significant tax interest in obtaining the required information.
Code Sec. 6677 imposes penalties on U.S. persons for failing to comply with the reporting requirements in Code Sec. 6048.
Code Sec. 6511(a) provides generally that no refund or credit is allowed unless the taxpayer, within 3 years from the time the return was filed or 2 years from the time the tax was paid, files a claim for credit or refund.
No information reporting for applicable tax-favored foreign trusts.
The IRS has determined that an “eligible individual’s” transactions with, or ownership of, an “applicable tax-favored foreign trust” is exempt from Code Sec. 6048 information reporting. Thus, the penalties under Code Sec. 6677 do not apply to eligible individuals who fail to report transactions with, or ownership of, these trusts under Code Sec. 6048.
Definitions. For purposes of this revenue procedure:
- An applicable tax-favored foreign trust means a tax-favored foreign retirement trust or a tax-favored foreign non-retirement savings trust (see below). (Rev Proc 2020-7, Sec. 5.01)
- An eligible individual means an individual who is, or at any time was, a U.S. citizen or resident and who is compliant (or comes into compliance) 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, and 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). (Rev Proc 2020-7, Sec. 5.02)
- A tax-favored foreign retirement 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, pension or retirement benefits and ancillary or incidental benefits, and that meets certain requirements established by the laws of the trust’s jurisdiction. (Rev Proc 2020-7, Sec. 5.03)
- 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 to operate exclusively or almost exclusively to provide, or to earn income for the provision of, medical, disability, or educational benefits, and that meets certain requirements established by the laws of the trust’s jurisdiction. (Rev Proc 2020-7, Sec. 5.04)
Procedures for requesting abatement or refund of Code Sec. 6677 penalties . Since the Code Sec. 6677 penalties no longer apply to eligible individuals who fail to report applicable tax-favored foreign trusts, the IRS has provided such individuals who have been assessed or paid Code Sec. 6677 penalties within the Code Sec. 6511(a) limitations period, with procedures for requesting abatement of penalties assessed or refund of penalties paid. (Rev Proc 2020-7, Sec. 6)
An eligible individual who wishes to request abatement or refund of penalties may do so by filing Form 843, Claim for Refund and Request for Abatement within the Code Sec. 6511(a) limitations period. (Rev Proc 2020-7, Sec. 6.01)
Eligible individuals should complete Form 843 and write the statement “Relief pursuant to Revenue Procedure 2020-7” on Line 7 of the form.
In addition, Line 7 should include an explanation of how the individual meets the definition of “eligible individual” in Sec. 5.02 (see Definitions above) and how the foreign trust meets the definition of “applicable foreign trust” in Sec. 5.03 or Sec. 5.04 (see Definitions above). (Rev Proc 2020-7, Sec. 6.03)
A Form 843 requesting relief under this procedure should be mailed to Internal Revenue Service, Ogden, UT 84201-0027. (Rev Proc 2020-7, Sec. 6.02)
This procedure is effective on March 16, 2020 and applies to all prior open tax years, subject to the limitations period in Code Sec. 6511. (Rev Proc 2020-7, Sec. 7)
To continue your research on Information reporting with respect to the creation of, or transfers to, foreign trusts, see FTC 2d/FIN ¶S-3644; United States Tax Reporter ¶60,484.
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