IRS Provides Reporting and Penalty Relief for US Individuals with Tax-Favoured Foreign Trusts
By Ladidas Lumpkins, Prager Metis International LLC
Amidst the worldwide COVID-19 crisis, many US citizens who have worked abroad and paid into pension trusts may have missed a significant change made by the US Internal Revenue Service (IRS) on 02 March 2020. It is a change that will not only alleviate much of the tax-paperwork burden for those who have worked, or are working overseas, it eliminates the possibility of a minimum USD 10,000 fine for untimely or inaccurate reporting.
Until this past March, an individual who paid into a pension trust while working a handful of years overseas was subject to the same reporting requirements as foreign trusts created primarily to leverage any overseas angle that might hide taxable money from the IRS. Realising this inequity, on 02 March, the IRS issued Revenue Procedure 2020-17.
This IRS move exempts “US individuals” – that is, certain US citizens and resident individuals — who hold designated “tax-favoured foreign trusts”, from the informationreporting requirements applicable to certain foreign trusts – that is, Form 3520 and/or Form 3520-A.
Prior to the issuance of IRS Revenue Procedure 2020-17, US individuals who failed to file these forms in a timely manner or provided incomplete or incorrect information on these extensive forms, were subject to a minimum penalty of USD 10,000.
According to the IRS, “tax-favoured foreign trusts” include foreign retirement trusts and certain taxfavoured foreign non-retirement savings trusts. Also important to know: Taxfavoured foreign retirement trusts, which are akin to US retirement plans, are generally exempt from income tax under the laws of the trust’s jurisdiction.
One final benefit of the new IRS Revenue Procedure: Eligible individuals who have been assessed a penalty for failure to comply with the informationreporting requirements with respect to an applicable tax-favoured foreign trust may request an abatement under this revenue procedure.
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Prager Metis International LLC is a top accounting firm providing a full range of accounting, audit, tax, and advisory services to domestic and international clientele in a wide range of industries. With 17 offices worldwide, they have a level of expertise and a unique global presence that makes their clients’ world worth more.
Ladidas Lumpkins is a partner in the Trusts & Estates department of Prager Metis. She provides strategic tax planning, compliance, and consulting to high-net-worth families and their closely held businesses. She specialises in the US taxation of individuals and trusts in multi-national family groups.
Published: Trust & Estate Planning Newsletter, No. 06, Autumn 2020 l Photo: Margaret - stock.adobe.com