On March 2, 2020, the IRS passed new guidance making tax filings easier for certain US taxpayers with foreign pensions, retirement accounts, and savings trusts outside the US (see Rev. Proc. 2020-17). Specifically, it created two new “safe harbors.” Taxpayers whose retirement or other accounts meet the safe harbor requirements can:
• Obtain more favorable US tax treatments for their foreign retirement and savings trust accounts,
• Skip certain time-consuming annual informational filings, and
• Seek forgiveness of past penalties.
Previously, in Part 1 of our three-part series, we explained why this new development was such a big deal for US taxpayers who have foreign pensions and retirement accounts. We explained why US tax law is so problematic for owners of foreign retirement accounts. We also explained how the new safe harbor can reduce taxpayers’ annual tax and reporting requirements, saving them time and money.
Then, in Part 2 of our series, we covered the eligibility requirements for taxpayers to claim the new Section 5.03 safe harbor, which applies to pensions and retirement accounts held outside the US.
Now, in this, Part 3 of our series, we explore the penalty relief that the IRS is now offering to taxpayers who haven’t appropriately filed certain forms to report their foreign retirement accounts.
Part 3 – Refund of penalties related to Forms 3520 and 3520-A
As explained in Parts 1 and 2 of our series:
- Most foreign pensions and retirement accounts will be considered foreign trusts under US tax law.
- Generally, owners of foreign trusts must file Forms 3520 and 3520-A each year to report their ownership in a foreign trust, as well as related tax, income, and informational items.
- The penalties for late-filing or non-filing of Forms 3520 and 3520-A are significant. They start at $10,000 per form per year for small accounts and can rise much higher depending on various factors.
- If you meet the eligibility requirements to claim the safe harbors, you will not be required to file IRS forms 3520 and 3520-A.
These developments are great news for owners of certain foreign pensions, trusts, and retirement accounts.
But what if you already paid large penalties for problems filing Forms 3520 and 3520-A in the past? Can you get those penalties back?
The short answer is yes, if certain requirements are met. Per the new guidance issued in March (Rev. Proc. 2020-17), if you can show that your foreign pension or retirement plan meets the Section 5.03 safe harbor or your foreign savings plan meets the Section 5.04 safe harbor, then you can qualify for penalty relief. (See Part 2 for eligibility requirements for the safe harbors.)
The penalty relief only applies to penalties assessed under IRC Section 6677. (This is the Tax Code section that applies to foreign pensions, retirement plans, and saving plans that are considered foreign grantor trusts under US tax law and must be reported annually on IRS Forms 3520 and 3520-A.) Fortunately, this relief is available even when failure to file the forms was due to reasonable cause under Section 6677(d)).
But what happens if the penalties have been assessed, but you haven’t paid them yet? Can you get them waived? The answer here is also yes, if your foreign account meets the requirements for either safe harbor.
What is the process for getting penalties refunded or abated?
To obtain a refund or abatement:
- Ensure that you are still within the timeframe to get the penalties refunded. To do so, use IRS Form 2848 to designate a tax practitioner to represent you, or call the IRS directly to obtain the “Refund Statute of Limitations” or RSED date for the penalty. You must still be within the RSED date to obtain relief.
- Complete IRS Form 843.
- On Line 7 of Form 843, include the statement “Relief pursuant to Revenue Procedure 2020-17.”
- Provide an attached explanation, along with documented proof, that shows how you meet the eligibility requirements (see our earlier article in Part 2 for these eligibility details). You must demonstrate that you are current on your tax filings (Section 5.02) and meet the safe harbor either under Section 5.03 or Section 5.04. Note that if you request penalty relief under Rev. Proc. 2020-17, you are not precluded from requesting relief under any other applicable relief provisions.
This last step poses the biggest challenge. It’s important to provide the right documentation to make the case that you qualify for the safe harbors under all of the appropriate sections of Rev. Proc. 2020-17. It is generally advisable to obtain the services of a competent tax professional who is well versed in the US tax treatment of foreign assets to conduct the Section 5.02, 5.03, and 5.04 analyses. In addition, the tax professional should be familiar with the style and presentation of documented evidence needed to obtain relief.
Do you have further questions or need tax help? Contact us.
The Wolf Group has 37 years of International Tax experience, including audit defense and penalty abatement representation. Our firm has represented taxpayers in a wide variety of international tax-based audits including but not limited to FBAR examinations, Streamlined Filing audits, foreign tax credit redeterminations, and IRS “wealth squad” audits/examinations. We are well versed in all the fundamental rules and regulations related to the classification, reporting, and taxation of foreign pension, retirement, and savings plans.