Foreign Pension Income & U.S. Taxes (IRS Guide to Retirement Money) - Golding & Golding- Golding & Golding

Foreign Pension Income & U.S. Taxes (IRS Guide to Retirement Money) – Golding & Golding

Foreign Pension Income & U.S. Taxes (IRS Guide to Retirement Money)

Some of the most common questions we receive about foreign income involves tax issues surrounding the taxation and reporting of foreign pensions. Unfortunately, issues involving foreign pensions are tough, because there are so many variables.

For example:

  • Has the foreign pension plan vested?
  • Have you paid tax abroad on the contributions?
  • Where were you residing when the pension was accumulating?
  • Is there a treaty with a foreign country?
  • Which foreign country was the pension earned in?
  • Were you a person a U.S. person at the time the pension was accumulating?
  • Is it the type of foreign pension plan which the IRS excludes from taxation?

Foreign Pension Income from Abroad

The purpose of this summary is to give you the broad strokes on what you have to keep an eye out for when analyzing foreign pensions — and questions to consider when beginning your analysis.  

Of course, it always helps to retain an experienced attorney to assist you, but it may not be cost-effective, or maybe you really dislike attorneys – so here’s to you:

Is There A Bilateral Income Tax Treaty?

When the U.S. has a treaty with a foreign country, it is generally because the United States is in good relations (or at least was in good relations) with the foreign country when the treaty was entered into.

When there is a tax treaty, generally it will provide (remembering of course, that there is a savings clause which basically allows the US to tax you despite what the treaty says) that the foreign pension is not taxed until it’s distributed.

And, depending on whether it is a private pension, or public pension — and whether it is an actual pension or social security — will impact the US’s ability to tax.

** it is important to note, even though the growth within the fund may not be taxable until it is distributed, generally any contributions by or on behalf of the employee from while working is taxable.

What If There Is No Bilateral Income Tax Treaty?

If there is no bilateral tax treaty, then they are generally no specific exceptions or exclusions to the U.S. taxing the foreign pension’s growth. An example of these specific exclusions are RRSP & RRIF in Canada.

In a more recent memo (recent as within the last 20 years), even in Singapore where the U.S. has good relations, and the retirement is mandatory (aka Singaporean CPF, Central Provident Fund) – the IRS found that not only are the deferral/contributions taxable but so is the growth within the fund, even before it is distributed.

Were You a U.S. Person at the Time it was Earned?

Here is work as an infinitely more complicated.  Let’s say for example you are a non-US person until the young age of 55. 

Your son moved to the United States and you and your wife decided to follow him to the U.S. because that’s what parents do.

You end up becoming a green card holder because it’s just easier that way to travel back and forth. 

You make the United States your more or less permanent home so that you do not have a closer connection with the foreign country.

You start taking distributions from your pension – how is it taxed?

This usually takes the assistance of either a forensic accountant for a very friendly foreign pension company. That is because if the majority of the basis was earned prior to you becoming a US person, then you would not have been subject to tax on the contributions at that time (when your non-US person), and the growth occurring during that time before you were none us person would of course not be subject to US tax.

But since you resided in the United States as a green card holder for 10 years before you started taking distributions, some of the growth upon growth was earned while you were US person.

So, when you are taking distributions it is generally broken down into three categories:

  • Return of Investment (non-US person deferred salary)
  • Growth within the fund while you were a non-US person
  • Growth within the fund while you were us person

If you come to the United States later in life with a foreign pension you earned earlier in life before you were non-US person, you should start by speaking with your pension company to see if they can break it down for you.

If they are no help, you may have to speak with a CPA in the US — although generally they will refer you to a forensic accountant to assess how much of your pension may be taxable.

Is it the Type Of Foreign Pension Excluded From U.S. Tax?

Generally, if you start receiving distributions while you are residing in the US or even as a US person residing outside of the United States, there may be some tax liability to the US.

Some tax treaties will give power to the country you reside in order to tax you on receiving pension distributions (keeping in mind the savings clause). But, if the IRS wants to tax you as well, then at least you can claim foreign tax credits on the income tax you already paid overseas.

In some instances, the pension (or at least portions of it may not be taxed by the U.S.) this is true with some portions of retirement accounted for in the US -UK tax treaty, which is several pages long on the singular issue of retirement/pension.

Has the Foreign Pension Vested?

This is also an important question, especially in countries in which there is no tax treaty. For example, let’s say you are a U.S. Person and you have a foreign pension in a foreign country in which there is no tax treaty.

And, although the foreign pension is under your name, and has accumulated nearly $1,000,000 — it doesn’t actually vest (or at least the majority of it) under the foreign countries’ laws for another 20 years.

Now, if you start paying tax in the US on the growth and then it never vests, you may have significantly overpaid taxes – which may be impossible to refund (due to the strict time limits on claiming a refund from the U.S. Government)

Have You Paid Foreign Taxes Already?

If you are earning foreign pension and you have already paid taxes in that country on the distributions, you may be entitled to a tax credit for those distributions.

Likewise, if you were a U.S. person at the time your contributions were being made to the foreign pension, but the foreign country was already taxing you on those contributions – you may be able to claim foreign tax credits as well.

In Summary

Foreign pensions are hard, and determining whether or not you are subject to tax on them can be even more difficult.

Complicating matters even further, is that if you were out of compliance for not reporting the foreign pensions (even if it is not subject to tax right now in the U.S.) on any number of different international tax forms, including 3520-A, FBAR, Form 8938, 8621, etc. – you may be subject to extensive fines and penalties.

What if I am Out of IRS Compliance?

When you have not met your prior year IRS foreign trust, asset or account compliance obligations, your best options are either the traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs.

What Type of Attorney Should I Hire?

IRS Voluntary Disclosure is a specialized area of law. An IRS Voluntary Disclosure is a complex undertaking. It requires the coordination of several moving parts, including strategy development, Tax Preparation, Legal Analysis, Negotiation and more.

You should hire a Tax Attorney who has the following credentials:

  • ~20 Years of Private Practice experience representing his/her own clients
  • Experienced in Criminal and Civil Tax Litigation
  • Experienced representing clients in Eggshell and Reverse Eggshell Audits.
  • Advanced Tax Degree (LL.M.)
  • EA (Enrolled Agent) or CPA (Certified Public Accountant)
  • Preferably a Board Certified Tax Law Specialist

We Specialize in Safely Disclosing Foreign Money

We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe (In over 65 countries!)

Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

Examples of areas of tax we handle

Who Decides to Disclose Unreported Money?

What Types of Clients Do we Represent?

We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, Former/Current IRS Agents and more.

You are not alone, and you are not the only one to find himself or herself in this situation.

Sean M. Golding, JD, LL.M., EA (Board Certified Tax Law Specialist)

Our Managing Partner, Sean M. Golding, JD, LLM, EA  earned an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS, and authorizes him to represent clients nationwide.)

Mr. Golding and his team have successfully handled several hundred IRS Offshore/Voluntary Disclosure Procedure cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.

Less than 1% of Tax Attorneys Nationwide are Board Certified Tax Law Specialists 

The Board Certified Tax Law Specialist exam is offered in many states, and is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. Certification also requires the completion of significant ethics and experience requirements.

In California alone, out of more than 200,000 practicing attorneys (with thousands of attorneys practicing in some area of tax law), less than 350 attorneys are Board Certified Tax Law Specialists.

Beware of Copycat Law Firms

Unlike other attorneys who call themselves specialists or experts in Voluntary Disclosure but are not “Board Certified,” handle 5-10 different areas of tax law, purchase multiple keyword specific domain names, and even practice outside of tax, we are absolutely dedicated to Offshore Voluntary Disclosure.

*Click here to learn the benefits of retaining a Board Certified Tax Law Specialist with advanced tax credentials.

IRS Penalty List

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:

Failure to File

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Failure to Pay

f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.

However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Civil Tax Fraud

If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

A Penalty for failing to file FBARs

The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.

A Penalty for failing to file Form 8938

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 3520

The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

A Penalty for failing to file Form 3520-A

The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.

A Penalty for failing to file Form 5471

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 5472

The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.

A Penalty for failing to file Form 926

The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

A Penalty for failing to file Form 8865

Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Fraud penalties imposed under IRC §§ 6651(f) or 6663

Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.

A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)

Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.

A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)

If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.

An Accuracy-Related Penalty on underpayments imposed under IRC § 6662

Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty

Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)

Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.  Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).

A person convicted of tax evasion

Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.  A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000.  A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.

What Should You Do?

Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.

Be Careful of the IRS

With the introduction and enforcement of FATCA for both Civil and Criminal Penalties, renewed interest in the IRS issuing FBAR Penalties, crackdown on Cryptocurrency (and IRS joining J5), the termination of OVDP, and recent foreign bank settlements with the IRS…there are not many places left to hide.

4 Types of IRS Voluntary Disclosure Programs

There are typically four types of IRS Voluntary Disclosure programs, and they include:

Contact Us Today; Let us Help You.