New tax guidelines for Foreign Trusts
Are you an American who has lived or worked in the UK or elsewhere overseas and owns Foreign Trusts? Have you paid a penalty for late filed Form 3520 or 3520A for 2016,2017,2018 or paid an earlier year penalty within the last 2 years or have clients that did?
If so, there may be good news for you, according to Mary Beth Lougen, President of American Expat Tax Service. This week the IRS issued new guidance in Rev. Proc. 2020-17 that may exempt qualifying U.S. citizens and residents with Foreign Trusts from the onerous reporting requirements. This means that you may not have to file the Form 3520, due April 15th, and Form 3520A, due March 16th going forward if you qualify.
What Foreign Trusts Qualify?
What Foreign Trust qualifies according to the IRS? According to Lougen, the IRS states in the guidance; “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 with respect to their transactions with, and ownership of, certain tax-favored foreign retirement trusts and certain tax-favored foreign nonretirement savings trusts.”
The guidance continues: “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”. There are further restrictions in the guidance that apply as well. She recommends speaking to an experienced expat tax advisor to determine how the new regulations may apply to your specific situation.
But there is more good news. The new procedures provide an opportunity to request abatement of penalties has imposed and a refund of penalties paid for tax years 2016 – 2018 or earlier years if paid in the last two years. A Form 843 should be used to file for this relief.
To be eligible a taxpayer:
- Must be compliant 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.
- 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).
More information can be found on the IRS website.
Mary Beth Lougen is President of American Expat Tax Services which is an income tax preparation firm that specializes in all areas of US Income Tax Preparation, Compliance, and IRS Problem Resolution for American Expats. She has over 30 years of US Income Tax experience including cross-border and expat taxes. Mary Beth has a Master’s in Law and taxation, is an Enrolled Agent, a U.S. Tax Court Practitioner (USTCP), and is also a respected writer and instructor in cross-border taxation. Connect with her by e-mail: [email protected]