Page 1 - The New Exemption from Required Information Reporting: Revenue Procedure 2020-17 Provides Relief for Certain Tax-Favored Foreign Trusts

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COLUMNS I Tax Practice & Procedure

The New Exemption from

Required Information Reporting

Revenue Procedure 2020-17 Provides Relief for Certain Tax-Favored Foreign Trusts

By Nicholas S. Bahnsen
n March 2020, the IRS announced an exemption to the information is reported on Forms 3520, Annual Return to Report
information reporting requirements applicable to foreign Transactions With Foreign Trusts and Receipt of Certain Foreign
Itrusts. Under this exemption, qualified individuals no Gifts, and 3520-A, Annual Information Return of Foreign Trust
longer need to report transactions with or ownership of appli- With a U.S. Owner [under Section 6048(b)].
cable tax-favored foreign trusts on Forms 3520 and 3520-A. A taxpayer who fails to comply with the reporting requirements
This article outlines the new exemption and the special pro- may be liable for significant civil penalties. Indeed, the penalty
cedures for requesting an abatement or refund of penalties pre- for failing to make a required report is the greater of $10,000 or
viously assessed with respect to these tax-favored foreign trusts, 35% of the gross value of the property that should have been
and serves as a reminder that taxpayers may have still other reported. A taxpayer failing to report an ownership interest in a
filing and reporting requirements related to these trusts that foreign trust may be liable for the greater of $10,000 or 5% of
remain unaffected by the exemption. the gross value of the taxpayer’s proportional interest in the trust
assets as of the end of the year.
Background The Treasury Department has determined that certain tax-
Taxpayers are generally required to report, on an annual basis, favored foreign trusts are appropriately exempted from these
information related to transfers of money or other property to or annual information reporting requirements and the penalties that
from, ownership of, or distributions from foreign trusts. This accompany noncompliance. One reason is that such tax-favored
foreign trusts are already subject to written restrictions, including
contribution limitations, conditions for withdrawal, and informa-
tion reporting requirements under the laws of the foreign country
in which the trust was established. In addition, individuals with
an interest in these trusts may have an independent obligation to
disclose that interest to U.S. authorities on Form 8938 as an inter-
est in a specified foreign financial asset or on a Report of Foreign
Bank and Financial Accounts (FBAR, FinCEN Form 114).
Revenue Procedure 2020-17, effective as of March 16, 2020,
provides an exemption to the information reporting requirements
for qualified individuals who would otherwise have a reporting
obligation under Internal Revenue Code (IRC) section 6048 with
respect to an applicable tax-favored foreign trust. Accordingly,
the penalties under IRC section 6677 for failing to comply with
the reporting obligations of section 6048 will not apply to a qual-
ified individual’s failure to report transactions involving, or an
ownership interest in, an applicable tax-favored foreign trust.

Qualified Individuals
Only qualified individuals may take advantage of the exemp-
tion. Revenue Procedure 2020-17 defines a qualified individual
as a U.S. citizen or resident who is compliant with, or comes
into compliance with, all U.S. federal income tax return filing
requirements for all open tax periods, and who has, to the extent
required, reported as income the contributions to, earnings of, or

58 APRIL 2020 / THE CPA JOURNAL