The Internal Revenue Code (IRC) requires taxpayers to provide information to the IRS about a wide variety of foreign transactions. This includes the creation of a trust in a foreign country or the transfer of money to that trust. In early March 2020, the IRS issued Rev. Proc. 2020-17, which exempts certain foreign trusts from the usual reporting requirements. It also allows taxpayers who are covered by the exemption to request abatements or refunds of penalties for failure to file the required reports.
Foreign Trusts Defined
A trust, according to the IRS, is an entity formed under state law that “holds title to property, subject to an obligation to keep or use the property for the benefit of another.” Under the IRC, any trust that is within the jurisdiction of a U.S. court, or which is primarily controlled by a U.S. citizen or resident, is considered to be a “U.S. person.” A “foreign trust” is any trust that does not meet either of those criteria, meaning trusts organized in other countries, subject to those countries’ laws, and which are controlled by non-U.S. citizens or residents.
Section 6048 of the IRC requires taxpayers to make a report to the IRS within ninety days of a “reportable event” involving a foreign trust. Reportable events include:
– The creation of a foreign trust by a U.S. person, which could include individuals as well as business entities and organizations;
– Transfer of property, including money, to a foreign trust by a U.S. person; and
– The death of an individual U.S. person who owned a foreign trust, or whose estate included all or part of a foreign trust.