Reporting Foreign Trusts Form 3520-A
Reporting Foreign Trusts: The IRS Form 3520-A reporting foreign trusts rules & requirements are complex. But, new Rev. Proc. 2020-17 provides some (limited) exemptions to duplicate reporting in accordance with IRC 6048 for Retirement & Non-Retirement Tax Favored Trusts.
While, the IRS works to reduce the complexities of certain reporting for U.S. Persons who own foreign trusts — reporting is still required, even if it is ambiguous.
What makes foreign trust reporting especially hard, is that there are so many different types of overseas trusts, depending on which foreign country the trust originates and/or is managed and subject to tax in.
And, each country has its own set of rules and definition(s) of what a trust is.
In addition, the offshore penalties for not reporting can be very bad.
Reporting Foreign Trusts & the IRS
When it comes to reporting foreign trusts, there are two main types of Trusts: Grantor Trusts & Non-Grantor Trust,
For example, in the U.S., many people are familiar with a revocable grantor trust.
In the most common scenario, a person will place their personal residence into a revocable for estate planning purposes. With the revocable trust, the trust is not a separate entity, and any income attributable to the trust is generally attributed to the grantor.
The grantor still technically can “control” the asset.
Other times, a person may have an irrevocable trust in which the grantor transfers property to entrust and then loses the right to control the asset. These have a separate identity, and are much more complex. The trust files an annual IRS Form 1041.
IRS Offshore Trust Requirements
In the realm of the Internal Revenue Service and offshore reporting of foreign trusts, it gets much more complicated.
Employment Retirement Trusts
For example, if an employee works in Australia they will have a Superannuation — which is a form of mandatory retirement similar to a 401(k).
Technically, a “super” considered a trust.
Likewise, if a person works for Singaporean employer they may have a CPF – which is also similar to a 401(k) and is also considered a trust.
Tax Deferred Non-Retirement Trust
Moreover, if you reside in United Kingdom you may having minor’s trust for your child, and in Canada you may have a RESP (for education savings). These are technically considered trusts.
Reporting Foreign Trusts & Form 3520-A
The main complication with many of the trusts identified in the paragraph above is form 3520-A. This form was developed in order for U.S. persons to report foreign trusts.
What does the IRS mean by a foreign trust?
The Form 3520-A was developed for the reporting of trusts.
The form is fairly complicated and complex. But then again, so are most for trusts to the degree that the tax and reporting rules in the source country maybe significantly different. And, when this is coupled with treaty rules and other exemptions, exclusions and limitation, you can see how it will become very complicated.
The 3520-A Form was not developed to duplicate the reporting of an employment or children’s trust as identified above, but rather the typical grantor trust. The latter is sufficiently reportable on the FBAR and Form 8938.
For example, a Foreign Trust (absent a trust account) would not necessarily be reported on the FBAR – because it is not a foreign account.
Likewise, and argument can be made that it is not an asset per se and therefore not required to be reported on form 8938 (8938 came into existence after form 3520, but we are referencing it for comparison purposes only).
Moreover, since a foreign trust is not the same type of entity as a foreign partnership or foreign corporation per se, it may also escape 5471 & 8865 reporting.
Therefore, the form 3520-A is necessary specifically for “Foreign Trust” reporting.
FBAR & Form 8398 for Foreign Trusts
When a person has a foreign bank account(s) and meets the threshold requirements for reporting, they will generally report on the FBAR.
In addition, they may also have to report on FATCA form 8938.
These forms are used to report the basic information about the account.
IRS Revenue Procedure 2020-17
IRS Revenue Procedure 2020–17 was developed to try to provide some consistency in reporting foreign trusts.
Different tax firms operate differently, right?
At our firm, it has always been our position that foreign retirement plans and deferred tax “trusts,” probably do not need to be reported on form 3520-A. Yes, technically these are trusts, but no, it was probably not what the IRS meant by reporting a foreign trust.
As to the retirement plans, since they have an account number, they are typically reported on the FBAR.
And, since they are a retirement plan, they fall squarely into the reporting requirements form 8938 FATCA Recording for individuals.
So, what does Rev. Proc. 2020-17 provide?
Rev. Proc. 2020-17
The Rev. Proc. 2020-17 refers to foreign trust reporting rules and requirements:
As provided by the IRS:
“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 (U.S. individuals) with respect to their transactions with, and ownership of, certain tax-favored foreign retirement trusts and certain tax-favored foreign nonretirement savings trusts, as described in sections 5.03 and 5.04 of this revenue procedure (collectively, applicable tax-favored foreign trusts).
Only eligible individuals described in section 5.02 of this revenue procedure (generally U.S. individuals who have been compliant with respect to their income tax obligations related to such trusts) may rely on this revenue procedure.
In addition, this revenue procedure establishes procedures for eligible individuals to request abatement of penalties that have been assessed or a refund of penalties that have been paid pursuant to section 6677 for the individuals’ failure to comply with the information reporting requirements of section 6048 with respect to an applicable tax-favored foreign trust.
Eligible individuals may request relief from section 6677 penalties, subject to the limitations of sections 6402 and 6511, in accordance with section 6 of this revenue procedure.”
What does Rev. Proc 2020-17 Mean?
Rev. Proc. 2020-17 means that the IRS is going to reel in some of the reporting requirements of foreign trusts, which oftentimes results in duplicate reporting for Taxpayers. The emphasis on the exception will be certain tax-favored foreign retirement trusts and tax favored foreign nonretirement savings trusts.
Notice of certain events:
(1) General rule
On or before the 90th day (or such later day as the Secretary may prescribe) after any reportable event, the responsible party shall provide written notice of such event to the Secretary in accordance with paragraph (2).
(2) Contents of notice
The notice required by paragraph
(1) shall contain such information as the Secretary may prescribe, including—
(A) the amount of money or other property (if any) transferred to the trust in connection with the reportable event, and
(B) the identity of the trust and of each trustee and beneficiary (or class of beneficiaries) of the trust.
(3) Reportable event
For purposes of this subsection —
(A) In general
The term “reportable event” means—
(i) the creation of any foreign trust by a United States person,
(ii) the transfer of any money or property (directly or indirectly) to a foreign trust by a United States person, including a transfer by reason of death, and
(iii) the death of a citizen or resident of the United States if—
(I) the decedent was treated as the owner of any portion of a foreign trust under the rules of subpart E of part I of subchapter J of chapter 1, or
(II) any portion of a foreign trust was included in the gross estate of the decedent.
Purpose the New Rule
- 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 (U.S. individuals) with respect to their transactions with, and ownership of, certain tax-favored foreign retirement trusts and certain tax-favored foreign nonretirement savings trusts, as described in sections 5.03 and 5.04 of this revenue procedure (collectively, applicable tax-favored foreign trusts).
- Only eligible individuals described in section 5.02 of this revenue procedure (generally U.S. individuals who have been compliant with respect to their income tax obligations related to such trusts) may rely on this revenue procedure.
- Accordingly, pursuant to the authority granted under section 6048(d)(4), 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.
- For purposes of this revenue procedure, an applicable tax-favored foreign trust means a tax-favored foreign retirement trust as defined under section 5.03 of this revenue procedure or a tax-favored foreign nonretirement savings trust as defined under section 5.04 of this revenue procedure.
What is a Retirement Trust?
If you have a Superannuation in Australia – this is a retirement trust. If you have a CPF in Singapore, this is also a retirement trust.
But, how are they reported?
A foreign employment trust is not really what the IRS means by foreign trust. Whether it is a Superannuation in Australian, CPF in Singapore or other trust – these are employment/retirement trusts. And, if they were U.S. trusts would probably meet the requirements of a 401K – which receives tax deferred treatment in the U.S.
We generally recommended reporting limited these foreign retirement plans on the FBAR and Form 8938, but also reporting the form on 3520 (absent a +50% ownership stake by the employee) because anything more seems like duplicate or over-reproting.
Many foreign based practitioners tended to report on 8938 and 3520, which was not necessarily incorrect —
Here is what the New Rev Procedure 2020-17 says:
Tax-Favored Foreign Retirement Trust
For purposes of this revenue procedure, 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 the following requirements established by the laws of the trust’s jurisdiction.
(1) The trust is generally exempt from income tax or is otherwise tax-favored under the laws of the trust’s jurisdiction.
For purposes of this revenue procedure, a trust is tax-favored if it meets any one or more of the following conditions:
(i) contributions to the trust that would otherwise be subject to tax are deductible or excluded from income, are taxed at a reduced rate, give rise to a tax credit, or are otherwise eligible for another tax benefit (such as a government subsidy or contribution); and
(ii) taxation of investment income earned by the trust is deferred until distribution or the investment income is taxed at a reduced rate.
(2) Annual information reporting with respect to the trust (or of its participants or beneficiaries) is provided, or is otherwise available, to the relevant tax authorities in the trust’s jurisdiction.
(3) Only contributions with respect to income earned from the performance of personal services are permitted.
(4) 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. These contribution limits are determined using the U.S. Treasury Bureau of Fiscal Service foreign currency conversion rate on the last day of the tax year (available at https://www.fiscal.treasury.gov/reports-statements/treasury-reporting-rates-exchange).
(5) 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. A trust that otherwise meets the requirements of this section 5.03(5), but that allows withdrawals, distributions, or payments for in-service loans or for reasons such as hardship, educational purposes, or the purchase of a primary residence, will be treated as meeting the requirements of this section 5.03(5).
(6) In the case of an employer-maintained trust,
(i) the trust is nondiscriminatory insofar as a wide range of employees, including rank and file employees, must be eligible to make or receive contributions or accrue benefits under the terms of the trust (alone or in combination with other comparable plans),
(ii) the trust (alone or in combination with other comparable plans) actually provides significant benefits for a substantial majority of eligible employees, and
(iii) the benefits actually provided under the trust to eligible employees are nondiscriminatory.
A trust that otherwise meets the requirements of this section 5.03 will not fail to be treated as a tax-favored foreign retirement trust within the meaning of this section solely because it may receive a rollover of assets or funds transferred from another tax favored foreign retirement trust established and operated under the laws of the same jurisdiction, provided that the trust transferring assets or funds also meets the requirements of this section 5.03.”
What is a Tax-Favored Foreign Non-Retirement Savings Trust?
The new revenue procedure is not limited to Foreign Retirement Savings Trusts. Rather, it also includes Tax-Favored Foreign Non-Retirement Savings Trusts.
Here is what the Rev Procedure Says about the Tax-Favored Foreign Non-Retirement Savings Trust.
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.
“(1) The trust is generally exempt from income tax or is otherwise tax-favored under the laws of the trust’s jurisdiction as defined in section 5.03(1) of this revenue procedure.
(2) Annual information reporting with respect to the trust (or about the beneficiary or participant) is provided, or is otherwise available, to the relevant tax authorities in the trust’s jurisdiction.
(3) Contributions to the trust are limited to $10,000 or less annually or $200,000 or less on a lifetime basis, determined using the U.S. Treasury Bureau of Fiscal Service foreign currency conversion rate on the last day of the tax year (available at https://www.fiscal.treasury.gov/reports-statements/treasury-reporting-rates-exchange).
(4) 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. A trust that otherwise meets the requirements of this section 5.04 will not fail to be treated as a tax-favored foreign non-retirement savings trust within the meaning of this section 5.04 solely because it may receive a rollover of assets or funds transferred from another tax-favored foreign non-retirement savings trust established and operated under the laws of the same jurisdiction, provided that the trust transferring assets or funds also meets the requirements of this section 5.04.”
FBAR Reporting is Still Required
As further provided by the Revenue Procedure:
“This revenue procedure does not affect any reporting obligations under section 6038D or under any other provision of U.S. law, including the requirement to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), imposed by 31 U.S.C. section 5314 and the regulations thereunder.
This revenue procedure does not affect previously issued guidance providing an exception from section 6048 reporting with respect to distributions from certain foreign compensatory trusts under Section V of Notice 97-34, and an exception from all information reporting requirements under section 6048 with respect to certain Canadian retirement plans under Revenue Procedure 2014-55.
See also section 6048(a)(3)(B)(ii) (providing an exception from reporting with respect to transfers to foreign compensatory trusts described in section 402(b), 404(a)(4), or 404A).”
FATCA (Form 8938) Reporting is Still Required
As further provided by the Revenue Procedure:
Section 6038D, enacted in 2010, and the regulations thereunder generally require a specified person, which includes a U.S. citizen or resident alien, to report any interest in a specified foreign financial asset provided that the aggregate value of all such assets exceeds certain thresholds. See §1.6038D-2(a).
Section 6038D(d) imposes a penalty for failing to comply. A specified foreign financial asset includes interests in certain foreign retirement, pension, and non-retirement savings funds or accounts. See §§1.6038D-3.
Section 6038D information reporting is provided on Form 8938, Statement of Specified Foreign Financial Assets. A specified person who is required to report information under section 6038D on Form 8938 may also be required to report similar identifying information under section 6048 on Form 3520 or Form 3520-A.
Abatement or Refund of IRC 6677 Penalties
If you were recently assessed penalties, and/or paid the penalty – you may be able to obtain relief, or abate the penalties.
As provided in the new Revenue Procedure 2020-17
“Subject to the limitations of sections 6402 and 6511, eligible individuals who have been assessed a penalty under section 6677 for failing to comply with section 6048 with respect to an applicable tax-favored foreign trust (without regard to whether such failure was due to reasonable cause under section 6677(d)) and who wish to obtain relief under this revenue procedure may request an abatement of the penalty assessed, or a refund of the penalty paid, under section 6677 by filing Form 843, Claim for Refund and Request for Abatement.
Eligible individuals are not precluded from requesting relief under any other applicable relief provisions. Under section 6402(a), the Secretary is authorized to credit, within the applicable period of limitations, an overpayment against any liability in respect of an internal revenue tax of the person who made the overpayment, and must generally refund any balance to that person, subject to the requirements of section 6402(c), (d), (e), and (f) (providing for offset for past-due support and certain debts to federal and state governments). Section 6511(b)(1) provides that no credit or refund shall be allowed or made after the expiration of the period of limitation prescribed in section 6511(a), unless the taxpayer filed a claim for credit or refund within that period. .02 Where to File.
A Form 843 requesting relief under this revenue procedure should be mailed to Internal Revenue Service, Ogden, UT 84201-0027. .03 Filing Requirements for Form 843. 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 under section 5.02 of this revenue procedure and how the foreign trust meets each relevant requirement under section 5.03 or 5.04 of this revenue procedure.”
The Full Text of the Revenue Procedure 2020-17 can be found here (subscription may be required).
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