New guidance for reporting tax-favored foreign savings trusts

New guidance exempts some taxpayers from filing Form 3520 to report tax-favored foreign savings trusts (most commonly foreign retirement savings trusts).

March 20, 2020

Ordinarily, income and other transactions involving foreign trusts must be reported on Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts and/or Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner. Under Rev. Proc. 2020-17, eligible individuals no longer have to report information about certain tax-favored foreign savings trusts on these forms. The foreign trusts impacted by the change are tax-favored trusts established to:

  • fund pension or retirement savings
  • fund medical, disability, or educational benefits

FBAR and FATCA and income reporting requirements continue to apply even if taxpayers are eligible for Form 3520 relief under the new guidance. Taxpayers should continue to file FinCEN Form 114 and IRS Form 8938 as applicable.

To qualify, a taxpayer must meet the definition of an eligible individual and the foreign trust must meet requirements laid out in the guidance. Taxpayers should work with their tax preparers to determine if they qualify.

Definition of eligible individuals

To be eligible for reporting relief, an individual must meet these requirements:

  • Be a U.S. citizen or U.S. resident (for tax purposes)
  • Be compliant with all requirements for filing a federal income tax return for all periods during which they were a U.S. citizen or U.S. resident (for tax purposes)
  • Have reported as income any contributions to, earnings of, or distributions from, an applicable tax-favored foreign trust on the appropriate tax return (including on an amended return).

Definition of a tax-favored foreign retirement savings trust

Under the new guidance, a tax-favored foreign retirement savings trust is a foreign trust that is created, organized, or otherwise established under the laws of a foreign country as a trust, plan, fund, scheme, or other arrangement. The arrangement does not have to be specifically called a trust to meet this requirement. The trust must operate exclusively or almost exclusively to provide (or earn income to provide for) pension or retirement benefits and ancillary or incidental benefits. The trust must meet the following requirements established by the laws of the foreign country:

  1. The trust is exempt from income tax or is otherwise tax-favored in the foreign country. This requirement is met if either of the following apply:
    • Contributions to the trust that would otherwise be subject to tax are deductible or excluded from income, are taxed at a reduced rate, generate a tax credit, or are otherwise eligible for a tax benefit such as a government subsidy or contribution)
    • Taxation of the 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 is provided to the tax authority in the foreign country.
  3. Contributions are permitted only from earned income from the performance of personal services, such as wages or .
  4. Contributions to the trust are:
    • Limited to a percentage of the participant’s earned income
    • Subject to an annual limit of $50,000* or less to the trust
    • Subject to a lifetime limit of $1,000,000* or less to the trust
  5. Withdrawals, distributions, or payments from the trust are conditioned upon reaching a specified retirement age, disability, or death. Penalties apply to withdrawals, distributions, or payments made before the conditions are met. A trust that otherwise meets this requirement but allows withdrawals or in-service loans for hardship, educational purposes, or the purchase of a primary residence is treated as meeting this requirement.
  6. If an employer maintains the trust, the trust must be nondiscriminatory, provide significant benefits to a substantial majority of employees, and the benefits actually provided must be nondiscriminatory.

Definition of a tax-favored foreign medical, disability, or education trust

Under the new guidance, a tax-favored foreign non-retirement savings trust is a foreign trust that is created, organized, or otherwise established under the laws of a foreign country as a trust, plan, fund, scheme, or other arrangement. The arrangement does not have to be specifically called a trust to meet this requirement. The trust must operate exclusively or almost exclusively to provide (or earn income to provide for) medical, disability, or educational benefits. The trust must meet the following requirements established by the laws of the foreign country:

  1. The trust is exempt from income tax or is otherwise tax-favored in the foreign country.
  2. Annual information reporting with respect to the trust (or the beneficiary or participant) is provided to the tax authority in the foreign country.
  3. Contributions to the trust are limited to $10,000* or less annually or $200,000* on a lifetime basis.
  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.

*Determine if the dollar thresholds are met annually by using the U.S. Treasury Bureau of Fiscal Service foreign currency conversion rate on the last day of the year. The foreign currency rates are available at Treasury Reporting Rates of Exchange.

Abatement of previously assessed penalties

Rev. Proc. 2020-17 provides instructions allowing taxpayers who failed to comply with Form 3520 or Form 3520-A reporting requirements to request an abatement of penalties by filing Form 843, Claim for Refund and Request for Abatement. Taxpayers are also allowed to request relief under other relief provisions as well.

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