Tax Lawyers for Foreign Retirement Plans: Unlike an IRA or 401K, there are no automatic tax benefits and tax deferral rules for most foreign retirement trusts and accounts (excluding Canadian RRSP and RRIF accounts). Whether or not a foreign retirement plan receives deferred tax benefits is determined on a case-by-case analysis, involving the particular country(s) issue, the type and class of retirement fund, and whether there is a tax treaty in place.
The U.S Taxation of Foreign Retirement Accounts by the Internal Revenue Service is a very complex analysis. There are various factors that will determine whether a person’s foreign retirement will be subject to US tax, such as whether:
- the foreign retirement account is comprised of pre-tax or post-tax dollars;
- the foreign retirement fund is part of a government public fund or private fund;
- there been any distributions to the taxpayer;
- there is a tax treaty a place; and
- have Foreign Taxes already been paid
The United States has entered into income tax treaties with several different countries (more than 50). The purpose of the tax treaty is to both establish tax rules and boundaries between certain countries, and to avoid double taxation. The United States has certain specific rules that have been written into code, such as the tax treatment of Canadian Registered Retirement Savings Plans (RRSP) and Canadian Registered (RRIF) income funds, as well as general double tax avoidance rules (Foreign Tax Credit and Foreign Earned Income Exclusion).
For example, In years past the owner of foreign registered retirement accounts would have to make an annual election on a form 8891 but this requirement has been abolished. Thus, if a person resides in the United States and has an RRSP and/or RRIF in Canada and they automatically qualify the deferral tax just as a U.S. 401(k) receives tax deferral treatment.
Since there are many different countries that each have their own version of a retirement plan, there is not an IRS specific rule for each fund. For example, if someone has a superannuation fund in Australia, there are several factors that will help determine whether the person should be taxed or not taxed on current earnings in the retirement fund – which requires a case-by-case; in other words, there is not one uniform rule to be applied to the retirement fund analysis.
Foreign Tax Credit
The United States has a foreign tax credit rule which generally provides that if a person pays tax on earnings in a foreign country, then the person will get a credit for those earnings within the United States. Whether a person can use the full amount of the credit or not is determined by the amount of their US income, as well as the foreign tax rate as compared to the US tax rate.
If you reside in the United States and are required to file a 1040, it is important that you discuss these matters with an experienced international tax lawyer to determine whether a full analysis is required and what steps you should follow when filing your tax return, in order to facilitate preferential tax treatment.
The way that many individuals are getting into some trouble with foreign retirement funds is due to FATCA (Foreign Account Tax Compliance Act). In accordance with FATCA, individuals and businesses are required to report and disclose their worldwide income.
Depending on what type of retirement fund a person has and in which particular country they have the fund, there are reporting issues depending on whether it is considered an employment benefit trust or a grantor trusts. Each of these trusts have different reporting rules depending on the amount of ownership of the fund, structure of the trust trust, and whether the owner received any distributions.
In accordance with FATCA, a person may also been required to file FBARs disclosing their foreign accounts – failing to do so can have serious consequences.
FBAR Filing Requirements
Not everyone who has foreign accounts is required to file an FBAR. Rather, it is required to be filed by all U.S. Taxpayers with accounts overseas that reach an “annual aggregate total” that is more than $10,000. That means if a U.S. Taxpayer (including Legal Permanent Residents “aka Green Card Holders”) maintain foreign accounts, including banks accounts, financial accounts, income-producing property, or insurance policies that have a combined value of more than $10,000, then that person is required to file an FBAR statement
What are the Penalties for Failing to File an FBAR
Recently, the Internal Revenue Service issued a memorandum which details how the IRS believes agents should penalize individuals in accordance with their authority. Essentially, there are two sets of penalty structures and their are based on whether the taxpayer was willful or non-willful. As you can imagine, dealing with the Internal Revenue Service is not easy to begin with and then trying to determine whether the facts and circumstances of a particular situation is considered willful or non- willful is a whole another ball of wax.
FBAR Penalty – Willful
Essentially, somebody’s willful they intentionally invaded taxes. In other words, they willfully or knowingly “knew” about the requirement to disclose and report overseas assets, accounts, and income but chose not. In these situations, the Internal Revenue Service has the authority to penalize the taxpayer upwards of 50% of the value of the assets per audit year.
Generally, audits last three years and the Internal Revenue Service has made it known that they will not penalize the individual beyond the value of the Accounts for the audit periods at issue. Thus, if you had $1 million in your form bank account and you knowingly did not report this information to the IRS and the audit you for three years and they can take all of your $1 million.
FBAR Penalty – Non-Willful
When a person is not willful, it generally means they were unaware of the requirement to file an FBAR. In this situation, the IRS takes mercy – but nowhere near as much mercy as you can imagine certain people deserve (example: individuals who relocated from overseas and have foreign accounts that they simply did not use or earn much income on or individuals for inherit overseas money.)
In these situations, the ever-powerful IRS has four options in terms of penalizing the taxpayer:
- The IRS agent can simply issue a warning letter instead of a monetary penalty to the taxpayer. This will rarely happen (although Golding and Golding has achieved this results are multiple occasions for individuals who have been audited and did not follow or statements and otherwise do not qualify for one of the IRS offshore voluntary disclosure program).
- The IRS agent could penalize the taxpayer $10,000 for all of the yearsthat the taxpayer did not file FBAR statements. For example, if you are audited for three years and did not file FBARs for those three years, the IRS to penalize you $10,000 for the total amount of the audit.
- The IRS Agent could penalize the taxpayer $10,000 for each year that the FBAR was not filed.So using the example above, if the taxpayer is audited three years and did not file an FBAR for three years, then the IRS could penalize the taxpayer $30,000 – usually not beyond the value of the account
- The IRS agent could penalize the taxpayer $10,000 per account per year. In other words, if the taxpayer has four different bank accounts and was audited for three years – the IRS could penalize taxpayer $120,000.
One very important thing to remember is that the penalty scheme listed above is for non-willful. In other words, even though the IRS knows the taxpayer did not intentionally attempt to evade tax, the IRS has the power to still issue tens, if not hundreds of thousands of dollars of penalties in a non-willful situation. Think about that the next time you want to go in yourself and negotiate with the IRS and see how serious they kick you without representation.
Whether a person is willful or non-willful is a complex evaluation which requires a comprehensive factual analysis by an experienced FBAR lawyer to ensure you are informed before making any representation to the IRS.