Penalty Relief & Exemptions for 3520 & 3520-A

Penalty Relief & Exemptions for 3520 & 3520-A

Penalty Relief & Exemptions for 3520 & 3520-A

Penalty Relief & Exemptions for 3520 & 3520-A: When it comes to foreign trusts, Internal Revenue Service Form 3520 and Form 3520-A are two of the more complicated international information reporting forms. While form 3520 is also used to report a large gift from a foreign person, individual or entity —  the reporting requirements are not as detailed as trust reporting. The main concern with foreign trusts is that the IRS wants to prevent US persons from hiding money overseas in a foreign trust and/or not properly reporting the income to the US government. The failure to timely file these forms may lead to excessively high fines and penalties. While this is unfair in general, it is especially unfair in situations in which the foreign trust is simply a tax deferred investment (similar to an IRA) or a tax deferred foreign pension plan (similar to a 401K).

The IRS recently released a revenue procedure exempting certain reporting of foreign trusts along with providing penalty relief for taxpayers who were already issued penalties.

Tax Deferred Pension &Non-Pension Penalty Relief & Exemptions 

The revenue procedure is IRS Revenue Procedure 2020-17. The goal of the revenue procedure is to eliminate duplicate reporting for taxpayers who may have certain foreign pension or other tax deferred trusts — and are already reporting these trusts as accounts or assets on the FBAR and Form 8938.

There are hundreds of different types a foreign trusts they may fall into one of these two categories (tax deferred pension and tax deferred non-retirement), so before claiming an exemption under the Rev. Proc. — it is important to evaluate the requirements and conditions under the revenue procedure to the specific foreign trust.

Let’s review the new exemptions & penalty relief for form 3520 & 3520-A.

New Exemptions & Penalty Relief

When it comes to the exemptions for reporting, the Rev Proc breaks it down further into:

  • Tax-Favored Foreign Retirement Trust; and
  • Tax-Favored Foreign Non-Retirement Savings Trust

Tax-Favored Foreign Retirement Trust

In order for the Tax-Favored Foreign Retirement Trust, the rules provide the following:

Tax-Favored Foreign Retirement Trust Requirements

      • “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.”

Tax-Favored Foreign Non-Retirement Savings Trust

In order for the Tax-Favored Foreign Non-Retirement Trust, the new exemptions & penalty relief rules provide the following:

Tax-Favored Foreign Non-Retirement Savings Trust Requirements

      • “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.”

Penalty Relief for Forms 3520/3520-A

In addition to exemptions for filing, the IRS also developed a Penalty Relief Procedure for previously issued Form 3520/3520-A Penalties.

As provided by the IRS:

Abatement & Penalty Relief Procedures

      • “In General.
      • 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.”

Be Sure to Evaluate Your Specific Tax Deferred Foreign Trusts

In conclusion, the new revenue procedure makes it easier for certain tax deferred foreign trusts to avoid reporting on Forms 3520 and 3520-A — but not all foreign trusts qualify. As long as the foreign trust is tax deferred — whether it is a foreign pension or not — Taxpayers may qualify for exemptions from filing, and even penalty relief.

Late Filing Form 3520 & Penalty Abatement

Our firm specializes exclusively in international tax, and specifically IRS offshore disclosure, including help clients with applying the new exemptions & penalty relief for form 3520.

Contact our firm today for assistance.


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