A Beginner’s Guide to Foreign Pension Reporting Requirements

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Confused About Including Foreign Retirement on Your Taxes?

Confused about Including Foreign Retirement on your taxes?

Foreign Pension Reporting on Taxes and FBAR

When a U.S. Person has foreign accounts, assets, and investments, the U.S. government requires the person to report that information to the IRS and FinCEN on multiple international information reporting forms each year depending on the value and category of assets. While many Taxpayers are aware that they are required to report investments such as foreign accounts and rental property, many Taxpayers are understandably unaware that they are also required to report other types of investments, such as investment funds, life insurance policies with a surrender value, and even foreign pension. With foreign pensions, the IRS previously published some ambiguous information that led Taxpayers to believe that the IRS does not require the reporting of foreign pensions on international reporting forms such as the FBAR and Form 8938 — but those IRS publications were referring to U.S. retirement accounts that may contain foreign investments (such as a 401K) and not foreign pension plans per se. Let’s go through the basics of reporting foreign pensions to the U.S. government.

U.S. Pension vs Foreign Pension

To clarify, if a person has a 401K  and within that 401K they may have some foreign investment funds, then typically the Taxpayer is not required to report that information to the U.S. government on an FBAR or Form 8938. Conversely, if the Taxpayer has a foreign pension plan such as an Australian Superannuation, a Canadian RRSP, or Singaporean CPF — the foreign pension plans are reportable to the U.S. government. Further explanation is contained in IRS Publication 5569.

Foreign Retirement Income

In addition to the reporting component, Taxpayers may have to pay U.S. income taxes on income related to the foreign pension plans. When foreign retirement income is distributed to the Taxpayer, it is generally taxable. But what about accrued, non-distributed foreign retirement income? Typically, the two key issues to help determine whether or not a Taxpayer reports foreign retirement income on their taxes, are whether it is an employment pension plan or an individual pension plan and whether the pension is held in a treaty country or a non-treaty country. For example, when a Taxpayer has a pension plan in a non-treaty country, they typically must report the growth as income even if that income has not been distributed — because there is no treaty to defer the taxes.

FBAR (FinCEN Form 114)

The FBAR is used to report foreign bank and financial accounts (FinCEN Form 114) and it is one of the most common types of international information reporting forms a Taxpayer may have to file. The Taxpayer is required to include the foreign pension plans on the FBAR form. Noting, that the FBAR is separate from the tax return. The FBAR is an electronic form that is filed in addition to a tax return and directly on the FinCEN website.

Form 8938 (FATCA)

Unlike the FBAR, Form 8938 is an IRS form that is part of a U.S. person’s tax return. If the Taxpayer meets the threshold requirements for having to file Form 8938, then Form 8938 is filed with the tax return — and the form is available with most commercial software tax programs. Unlike the FBAR, there are different threshold requirements to determine if a person has to file Form 8938 — which is based on the filing status of the Taxpayer and whether the Taxpayer is considered a U.S. resident or not.

Form 3520/3520-A

Technically, a foreign pension plan may also be considered a foreign trust, and so sometimes the Taxpayer may have to file Form 3520 and 3520-A to report the foreign pension as a foreign trust. However, there are several exceptions and exclusions that many Taxpayers will qualify for to avoid filing Forms 3520/3520-A for a foreign retirement trust — so while the Taxpayer may have to report the foreign pension on the FBAR and Form 8938, they may be able to circumvent filing Forms 3520/3520-A.

Rev. Proc. 2020-17 and Proposed Regulations

Revenue Procedure 2020-17 and the subsequent proposed regulations for foreign trust reporting limit the amount of reporting a Taxpayer may have for their foreign trust — including foreign pension plans. There are various requirements the Taxpayer must meet depending on whether it is a retirement or non-retirement deferred tax savings plan. The Taxpayer should evaluate the different elements of each exception to determine whether they qualify or not. It is also important to reiterate that while the Taxpayer may avoid having to file forms such as Form 3520 and 3520-A, they are typically still required to file the FBAR and Form 8938.

Late Filing Penalties May Be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.  *This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.  Contact our firm today for assistance.

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