TaxConnections is posting this thoughtfully written comment on an article titled “Treasury Exempts Applicable “Tax-Favored Foreign Trusts” From The Form 3520… And Therefore Form 3520A Requirement” written by John Richardson. Here is a recommendation for Treasury to consider as posted by a David Johnstone.
Excellent post. Based on my reading of the Revenue Procedure, as well as feedback from practitioners in the UK or Australia, I have grave reservations about the claim that this Revenue Procedure will help “many” Americans abroad. Perhaps this is an example of an attempt to simplify things from a legal perspective that in practice – once one does the math – may lead to greater complexity and help a very small number of people at best.
First, initial feedback from the UK and Australia indicate that professionals believe that, as currently drafted, those countries’ private retirement savings plans (UK SIPP’s and Australian Superannuation) will not be covered by this Revenue Procedure. Given that these countries account for a large percentage of Americans abroad, returning expats, and resident aliens, the fact that this “relief” does not seem to apply to them appears to amount to a shocking oversight. Surely the Treasury can at least take into consideration the main retirement plans offered in the English speaking countries, in which cases there is no language difficulty. I would go further and argue that the Treasury should look at the main retirement plans in the 10 countries in which the most Americans abroad live, based on State Department or FVAP estimates, for example, and then draft a ruling that will exempt the plans in those countries.
Second, as drafted, the conditions for foreign retirement savings plans are clearly designed to be based on and more restrictive than US-based plan contribution limits. For instance, the UK and Australia (and other countries too) do not limit yearly or lifetime contributions as described in this Revenue Procedure, nor do the contributions in those countries always need to come from income earned from personal services performed. These two points alone appear to suffice to exclude them from any benefit from this Revenue Procedure. In fact, United States retirement plans would not qualify for this exemption, because amongst other reasons, the United States does not apply a lifetime contribution limit, as far as I am aware, and the yearly contribution limit stands at $57,000, which is significantly higher than the $50,000 limit proposed! While it is arguably laudable for Treasury to seek to preemptively prevent US-based tax optimization advisors from looking to create new foreign tax-advantaged retirement savings accounts in friendly jurisdictions for their US-resident clients, this inward-looking US focus leads to a situation in which no relief may actually be applicable to current or former foreign residents, who are or have often been required by local laws to contribute to local retirement savings plans. Further, far from reducing the number of forms 3520 or 3520A that are required to be filed, I believe that in practice the current drafting may actually expand the number of foreign retirement savings plans that fall under these reporting rules, without any change to the underlying tax owed, even though the intention clearly appears to be to clarify things and reduce the number of preventive filings.
Third, I have reservations regarding section 5.04 regarding non-retirement savings accounts. The indicative list of what constitutes a trust for the purposes of this section appears to be far wider than the statutory definition. Although the statutory definition should take precedence, to the extent that the Treasury or the IRS will rely upon the definitive version of this Revenue Procedure, I believe that the risk exists that foreign medical, disability, or education savings plans or accounts that were not heretofore considered to be trusts could now be considered to be reportable trusts. For instance, many insurance contracts appear to be considered as trusts based on the indicative list. In addition, as with the retirement savings plans, foreign savings plans such as those described in this section are highly unlikely to impose the thresholds or fulfill the reporting requirements mentioned in this Revenue Procedure.
In summary, this Revenue Procedure appears to not be applicable to a significant percentage of Americans abroad, and appears to assume that foreign countries base their laws for their retirement and non-retirement tax advantages savings plans or accounts for local residents on US law, and in a more restrictive manner than the US, which is clearly not the case for the large countries where most Americans abroad live or from which US resident aliens originate.
Given the above, surely it would be much simpler for the Treasury to state that retirement savings plans established under the legislation of countries with which the US has an income tax treaty will automatically be considered to be exempt from reporting under forms 3520 and 3520A. If the Treasury is concerned about countries that are small enough to change their legislation to offer US residents the ability to participate in local retirement savings accounts, thus siphoning off savings from the US, then Karen Alpert’s suggestion for the Treasury to maintain a list of foreign qualifying plans may be practicable. I personally believe that basing the list on income tax treaties would require the least amount of time and effort for the Treasury: agents could just monitor foreign developments and maintain a smaller list of new foreign plans that do not qualify for the reporting exemption. For countries that do not have income tax treaties with the US, the current draft of the Revenue Procedure may constitute a good starting point, as long as the conditions for exemption are not more restrictive than equivalent US-based plans.
Hence I would propose the addition of a new section X.X, as follows: “Except as provided below, all retirement and non-retirement savings plans established under the laws of any country with which the United States has signed or ratified an income tax treaty will be exempt from foreign trust information reporting requirements. A list of non-qualifying foreign plans will be updated annually. This list will be made available to taxpayers on the IRS website.” I should specify that this information should be on the IRS website so that it is easily accessible and not buried in some document which only tax professionals are likely to access.
Ultimately the best relief for those living abroad who are considered to be US Persons by the US tax code remains a move to Residence Based Taxation, in line with what is practiced by every other country except for Eritrea, as well as every one of the 50 states. The Treasury certainly has enough talented and experienced staff members who can gather the best practices from those jurisdictions and come up with a world-leading tax policy for expats, former expats, and resident aliens. For those returnees, naturalized citizens or resident aliens currently in the US, the proposed Revenue Procedure may be a good first draft and starting point, but for Americans currently residing abroad, it is hard to see how this Revenue Procedure provides any relief in practice.
Have a question or comment on John Richardson’s post or David Johnstone’s commentary? We welcome your thoughts!