Page 2 - The New Exemption from Required Information Reporting: Revenue Procedure 2020-17 Provides Relief for Certain Tax-Favored Foreign Trusts

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distributions from an applicable tax- employer-maintained trust must be open Penalty Abatement
favored foreign trust. Notably, a qualified to a wide range of employees, must actu- Revenue Procedure 2020-17 also pro-
individual does not include a partnership, ally provide significant benefits to a sub- vides that eligible individuals who have
corporation, estate, or other trust. To the stantial majority of eligible employees, and been assessed a penalty under IRC section
extent such an entity has reportable trans- must have nondiscriminatory benefits. 6677 for failing to comply with the infor-
actions or an ownership interest in an oth- Withdrawals and distributions from qual- mation reporting requirements with respect
erwise applicable tax-favored foreign trust, ifying retirement trusts must be condi- to an applicable tax-favored foreign trust
it must continue to comply with the infor- tioned upon reaching a specified retirement may seek relief in the form of an abate-
mation reporting requirements and file the age, disability, or death, and premature ment of penalties assessed or a refund of
appropriate information return. withdrawals must be subject to penalties. penalties already paid. This relief is avail-
A trust that permits loans for hardship, able to all prior open taxable years, subject
Applicable Tax-Favored Foreign Trusts educational purposes, or the purchase of a to the limitations on refunds and overpay-
The exemption is only applicable to primary residence will not violate the with- ments in IRC section 6511.
certain tax-favored foreign trusts. drawal requirements. To seek penalty relief, an individual
Specifically, the revenue procedure iden- must file Form 843, Claim for Refund and
tifies tax-favored foreign retirement trusts Request for Abatement, with the IRS’s
and tax-favored nonretirement savings Ogden, Utah campus (84201-0027). The
trusts. In addition, a trust must feature taxpayer should be sure to write in Line
certain limitations on its purpose, contri- While the exemption 7 of Form 843 “Relief pursuant to
butions made to it, and distributions or Revenue Procedure 2020-17” and include
withdrawals from it. Annual information established by Revenue an explanation as to why both the individ-
reporting with respect to the trust, its par- ual and the foreign trust qualify for the
ticipants, or its beneficiaries must also be Procedure 2020-17 may exemption under the terms of the revenue
provided or available under the law of provide some relief to procedure.
the trust’s jurisdiction. Penalty relief is subject to the Treasury
A retirement or savings trust will be taxpayers, it is important Secretary’s authority to credit any over-
considered tax-favored if it is generally payment due to a taxpayer against any lia-
exempt from income tax or receives some to note that it is bility owed. Any balance remaining may
form of tax-favored treatment under the be refunded to the taxpayer.
law of the trust’s jurisdiction. Tax-favored limited in scope.
treatment must include— No Relief from Other Filing Requirements
n a deduction or exclusion from income While the exemption established by
for contributions to the trust; Revenue Procedure 2020-17 may provide
n a reduced tax rate applicable to contri- some relief to taxpayers, it is important to
butions; A qualifying nonretirement trust must note that it is limited in scope. It does not
n eligibility for a tax credit or other tax operate exclusively, or nearly exclusively, extend to any other return filing or infor-
benefit related to contributions; to provide medical, disability, or educa- mation reporting requirement that may
n deferred taxation of trust-earned invest- tional benefits. Contributions to a nonre- apply with respect to the tax-favored for-
ment income until distribution; or tirement trust must be limited to $10,000 eign trust. Crucially, taxpayers may still
n taxation of trust-earned investment or less annually, or $200,000 on a lifetime have a reporting requirement under IRC
income at a reduced rate. basis. Withdrawals and distributions must section 6038D (related to an interest in a
A qualifying retirement trust must oper- be conditioned upon the provision of med- specified foreign financial asset) and may
ate exclusively, or nearly exclusively, to ical, disability, or educational benefits, or still have an obligation to file an FBAR
provide pension or retirement benefits and else be subject to penalty. There is no under 31 USC 5314 and the related reg-
ancillary or incidental benefits. allowance for loans related to the purchase ulations. These obligations arise indepen-
Contributions to retirement trusts may only of a primary residence. dently and are unaffected by the provi-
be made from income earned from the per- Otherwise qualifying retirement and sions of Revenue Procedure 2020-17.q
formance of personal services, and are fur- savings trusts that receive rollovers from
ther limited to a percentage of earned another tax-favored foreign trust will not Nicholas S. Bahnsen, JD, is an associ-
income, up to an annual limit of $50,000 be disqualified from recognition as a tax- ate at Kostelanetz and Fink LLP,
or a lifetime limit of $1,000,000. An favored foreign trust due to this feature. Washington. D.C.

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