- 1 Foreign Life Insurance – PFIC, FATCA, Foreign Trust, 720 & Cash Value
- 2 Foreign Life Insurance FATCA (Form 8938)
- 3 Foreign Life Insurance PFIC (Form 8621)
- 4 Expat Life Insurance Policies
- 5 PFIC & Foreign Life Insurance with Investment Component
- 6 Foreign Life Insurance Foreign Trust (Form 3520-A)
- 7 Foreign Life Insurance Form 720
- 8 Foreign Life Insurance Policy Non-Reporting Penalties
- 9 What Can You Do If You are Out of Compliance?
- 10 Golding & Golding, A PLC
Foreign Life Insurance – PFIC, FATCA, Foreign Trust, 720 & Cash Value
Foreign Life Insurance – PFIC, FATCA, Foreign Trust, 720 & Cash Value : If you own a foreign life insurance policy, you may have a Reporting Foreign Life Insurance Policy requirement beyond FinCEN Form 114. These additional IRS requirements may include FATCA Form 8938, PFIC Form 8621, and Foreign Trust Form 3520-A.
Foreign Life Insurance – PFIC, FATCA, Foreign Trust, 720 & Cash Value
So, just when you think you’ve finally wrapped your head around the fact that you will be reporting you foreign life insurance policy for years to come — you realize it may just be the tip of the iceberg.
Not only does the IRS classify your foreign life insurance policy as a foreign financial financial account (and requires you file an annual FinCEN Form 114), but you realize there’s more to the equation — and possibly significant more reporting requirements.
In addition to foreign account reporting, you may also have to include it on both:
- Form 8938 FATCA: Specified Foreign Financial Assets
- Form 8621 PFIC: Passive Foreign Investment Company
- Form 3520-A: Foreign Trust Reporting
Let’s take a look:
Foreign Life Insurance FATCA (Form 8938)
Form 8938 refers to FATCA.
FATCA refers to the Foreign Account Tax Compliance Act. We have written numerous articles on FATCA, but at the end of the day it is basically this:
If you have a foreign financial asset that qualifies as a “specified” foreign financial asset and you meet the threshold for filing, then you must include the policy on FATCA Form 8938 in addition to FInCEN Form 114.
The Foreign Life Insurance Policy will be reported using the cash or surrender value for each year you are required to report it on form 8938.
In addition you also have to include any type of income that may have been generated from the life insurance policy come along with the source of the income.
There are different 8938 threshold requirements, depending on whether a person is Married Filing Jointly (MFJ) or Married Filing Separate (MFS)/Single, and whether a person resides in the United States or outside of the United States.
Common types of foreign life insurance policy income:
- Interest income
- Dividend income
- Capital gains
Beyond Form 8938 for Foreign Life Insurance
Different foreign life insurance policies may have more complex reporting requirements as well. Especially, if it is a Unit Linked Life Insurance Policy.
Without getting too technical, if it is a linked policy, then there is an investment component to it beyond mere life insurance – and that leads us to the next section which is form 8621.
Resource: Form 8938 Guide
Foreign Life Insurance PFIC (Form 8621)
Form 8621 is used to report passive foreign investment companies (PFIC). A PFIC can be incredibly complicated, and beyond the scope of this introductory article.
When it involves foreign life insurance, it is most common with Unit Linked Life Insurance.
Unit Linked Foreign Life Insurance
Unit Linked Insurance Plans combine the investment component, with the life insurance component. As with most insurance policies, the “pay-in” is via premiums.
But, unlike pure insurance policies — there is a second “investment component” as well, which is then commingled with the investment, to provide an investment component along with the life insurance coverage.
Common Examples of Unit Linked Insurance Plans
Some common examples, include:
Friends Life (aka Aviva)
Personal Pension in the UK or UK Offshore, such as Guernsey.
It generally will contain funds and shares, so at the end of the day, this may be considered a PFIC.
These are common life insurance policies, but they are not necessarily linked to an investment per se. There many flavors (linked and non-liked) and while some tend to take the shape more of “Life insurance” with some accrued interest — others are more investment focused linked insurance policies.
India LIC or Prudential
These may or may not have an investment component to it. They can vary greatly depending on the type of policy.
When a U.S. Person is invested in these types of policies, and subject to U.S. Tax, they are referred to as “Expat Life Insurance.”
Expat Life Insurance Policies
There are many different types of policies, but some of the more common policies for U.S. Person Expats.
- Friends Life
Some of the more common countries in which U.S. Person expats purchase overseas life insurance, include:
- The United Kingdom
- Hong Kong
PFIC & Foreign Life Insurance with Investment Component
Form 8621 is an IRS Form used by Taxpayers to report Foreign Investments — more specifically Passive Foreign Investment Companies. Foreign Life Insurance may be reported as a Passive Foreign Investment Company on Form 8621. This is especially true, if your policy is Unit linked.
The reason the United States penalized this type of investment is because it cannot oversee the growth of the investment and income it generates. In other words, if a U.S. person invests overseas in a Foreign Mutual Fund or Foreign Holding Company — the assets grows and generates income outside of IRS and U.S. Government income rules and regulations.
Resource: Form 8621 Guide
Foreign Life Insurance Foreign Trust (Form 3520-A)
Form 3520-A is how U.S. Taxpayers report foreign trusts, Foreign Life Insurance may be reported as a Foreign Trust on Form 3520-A, but generally your foreign life insurance policy is not a foreign trust (but is not common)
A Foreign Trust is another type of Foreign Investment that is frowned upon by the IRS. From the IRS’ perspective, the only purpose behind a Foreign Trust is to illegally avoid US reporting and income tax requirements by moving money offshore.
Resource: Form 3520-A Reporting
FinCEN 114 (Foreign Account aka FBAR)
Foreign Life Insurance FInCEN 114: The FinCEN Form 114 is the Foreign Bank and Financial Account Form. It is used to report foreign bank and financial accounts. Foreign Life Insurance Policies are considered “accounts” for this purpose. Therefore, your Foreign Life Insurance may have to be reported on the FinCEN 114 form, if you meet certain threshold requirements for reporting.
*If you are a U.S. Person, it does not matter whether or not you have to actually file a US tax return to determine if you have to file a FinCEN 114. The threshold question is whether you have an annual aggregate total of foreign/offshore bank accounts, financial accounts, retirement accounts, etc. that when combined, exceed $10,000. If so, you are required to file the FinCEN Form and report all of the accounts.
Foreign Life Insurance Form 720
Foreign Life Insurance may be reported with respect to Excise Tax on Form 720. This is a relatively simpler form, with no monster penalties attached to it.
Foreign Life Insurance Policy Non-Reporting Penalties
The IRS has the right to issue excessive fines and penalties against you for failing to report. We have provided a summary of those penalties for you below as provided by the IRS:
A penalty for failing to file FBARs. United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year. 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.
Beginning with the 2011 tax year, a penalty for failing to file Form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities, and interests in foreign entities, as required by IRC § 6038D. 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, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under IRC § 6048. This return also reports the receipt of gifts from foreign entities under IRC § 6039F. 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, Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b). 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, Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046. 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, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C. 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, Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. 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, Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A. 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.
Underpayment & Fraud Penalties
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.
Even Criminal Charges are Possible…
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 is subject to a prison term of up to five years and a fine of up to $250,000. 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 Can You Do If You are Out of Compliance?
Presuming the money was from legal sources, your best options are either the Traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs.
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.