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IRS International Reporting of Foreign Retirement Accounts

Many people in the United States have a foreign retirement plan. The reason for their having this account differs. For instance, United States citizens residing overseas may work for a foreign company with an employer retirement plan covering them.

Alternatively, a foreign citizen and resident working for a foreign firm may be assigned to work in the United States while remaining eligible for the foreign company's retirement plan. Another prevalent scenario is a United States resident immigrant working for a United States firm who arrived in the United States with an existing retirement plan from a previous job in another nation.

"Life gets simpler when we do the needful; the same applies to financial reporting," says attorney John Pontius of Pontius Tax Law. As a result, the foreign retirement accounts are subject to the United States taxation and reporting. Even if the person residing in the United States does not contribute to the foreign retirement account or get any distributions, the international information reporting laws apply to foreign retirement accounts.

IRS Forms For Reporting Foreign Retirement Plans

Residents in the United States may be required to record a foreign retirement plan on one or more IRS reporting forms. Some of the foreign asset reporting forms include:

FBAR (FinCEN FORM 114)

When most people think of "foreign bank and financial accounts," they probably don't think of their overseas retirement or pension account as something that needs disclosing on the FBAR. The FBAR is a computerized form of reporting foreign bank and financial Accounts to the Financial Crimes Enforcement Network (FinCEN). The FBAR form also includes Pension accounts deposited at overseas financial institutions.

For instance, if a total reporting requirement of $10,000 is met an individual with a foreign retirement account must declare the highest balance in the retirement account at any time during the tax year. However, neither a foreign employer-created pension (which is only a right to receive payments upon retirement) nor a foreign version of Social Security would be eligible for reporting on an FBAR because there is no foreign account to declare in both cases.

Form 8938 (FATCA)

The IRS Form 8938 was created in compliance with FATCA (Foreign Account Tax Compliance Act). Form 8938 is more thorough than the yearly FBAR file, but the general reporting obligations are the same (maximum value). Form 8938 requires U.S. residents to disclose foreign pension plans.

Form 8938, unlike FBAR, mandates the reporting of all overseas assets if the necessary monetary reporting criteria are in place. Whether it's part of a segregated foreign retirement account or just a foreign pension, a foreign retirement plan must reflect on Form 8938. Form 8938, on the other hand, is not required to be filed if you have a foreign counterpart of Social Security.

When the plan in consideration is a foreign retirement plan, there is also the factor of "which monetary amounts must be reported" on Form 8938. If the plan is in the form of a foreign retirement account, the taxpayers should get periodic statements specifying the account's value, which they can use to calculate the maximum value on Form 8938. In the case of a foreign pension, the individual must disclose the fair market value of her beneficial interest in the pension plan on Form 8938 as of the last day of the tax year.

Form 8621 (PFIC)

Passive Foreign Investment Companies (PFIC) form, also known as Form 8621, is for U.S. residents who possess PFIC. Form 8621 relates to overseas mutual funds and other equity funds. Unlike the FBAR and Form 8938, Form 8621 reporting necessitates more information.

Various forms of investment funds are common in international pension schemes. Some may contain international investments, while others may include funds like VTSAX and VOO.

Taxpayers should contact a board-certified tax law practitioner to examine the type of pension fund and decide whether PFIC filing is required. Other ancillary tax considerations influence Form 8621 reporting. Considerations are made for investment arising from a treaty country or distributions from the beneficiary's plan.

Form 3520/3520-A (Reporting Ownership Or Distributions From Foreign Trusts)

3520 and 3520-A forms include Foreign trust ownership and trust payouts to U.S. persons. Typically, Form 3520/3520-A is the most difficult of all the forms and differs from FBAR and Form 8938.

If the taxpayer is regarded as the U.S. owner of a foreign trust (foreign pension), they may be required to complete a more comprehensive balance sheet. Also, the taxpayer may need to designate several sorts of income sources and categories for reporting purposes on Form 3520.

Other more sophisticated tax/reporting considerations, such as the throwback tax rule (DNI versus UNI), whether or not the person was a U.S. person during the trust establishment, and whether or not a treaty country is in addition, complicate the situation. 3520 has a few exceptions, such as:

  • Revenue Procedure 2014-55: When a taxpayer owns a foreign Canadian Registered Retirement Savings Plan (RRSP) or Registered Retired Income Fund (RRIF), Revenue Procedure 2014-55 exempts reporting on Forms 3520, while reporting on other forms such as the FBAR and Form 8938 is still needed.
  • Revenue Procedure 2020-17: Certain tax-deferred overseas retirement and non-retirement trusts are exempt from this. The issue with Revenue Procedure 2020-17 is that it does not name any specific foreign retirement plan by name, necessitating a thorough investigation to ascertain the reporting obligations and whether the exemption applies to a particular foreign retirement plan.

Penalties

If an individual fails to timely file a necessary information reporting form connected to foreign assets, monetary penalties may apply. Failure to register an FBAR carries a fine of $10,000 for non-willful violations and the greater of $100,000 or 50% of the account value for willful violations.

Failing to file a necessary Form 8938 results in a $10,000 penalty for every 30 days not filed, with a maximum ongoing failure-to-file of $50,000. Any tax deficits linked to overseas assets not correctly reported on Form 8938 are subject to a 40% underpayment penalty.

Conclusion

It is preferable to be cautious when it comes to taxes. Consult a tax counselor if you are confused about which forms to file. Furthermore, dealing with an IRS penalty is time-consuming and stressful, which is why we advise you to avoid doing anything that will result in a fine.

About The Authors

Alberto Thompson

Alberto Thompson - I live in Vancouver, Canada, and work as a web developer and graphic designer. Back end programming (PHP, Django/Python, Ruby on Rails) to front end engineering (HTML, CSS, and jQuery/Javascript), digital usability, user interface, and graphic design are all areas of web development where I spend my days. I'm a huge fan of web creation and design in all of its forms, as well as assisting small businesses and artisans with their online presence.

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