FATCA Foreign Life Insurance Policy Rules and Form 8938 Filing.

FATCA Foreign Life Insurance Policy Rules 

In 2011, and in accordance with FATCA, individuals were required to being reporting the surrender value of Foreign Life Insurance Policies on FATCA form 8938. Form 8938 is part of the Tax Return, and unlike the FBAR has different reporting thresholds depending on whether a person is a U.S. Resident or Foreign Resident, and whether the person is filing Single/Married Filing Separate, or Married Filing Jointly.

Do I pay U.S. Tax on the Income?

Yes, if you are a US person who is required to file a US tax return, then you are required to report your worldwide income. It does not matter that the income is being earned overseas, or that either the income is not distributed and/or is not taxable in your country of origin.

Unless a specific exclusion or exemption applies, a US taxpayer (which generally means a US Citizen, Legal Permanent Resident, or Foreign National who meets the substantial presence test, or a long-term green card holder who recently relinquish their green card) US taxes must be paid on worldwide income.

Do I report the Insurance Policy on an FBAR or 8938

Yes. Even though the United States provides little to no guidance, the general rule is that if you have a foreign life insurance policy that contains a surrender value, then you are required to report the information on your annual returns. In other words, if you have the ability to sell the policy now, that means it has a surrender value or value that you can sell the policy for before it reaches maturity. As such, the surrender value of the policy is considered reportable and the failure to report the information can lead to extensive fines and penalties.

I have not reported any of this to the IRS

You are not alone. We have assisted hundreds of taxpayers get back into compliance with US tax law and foreign account/foreign insurance policy reporting, and is very common for individuals to have one or multiple foreign life insurance policies — with an investment component that has never been reported to the IRS.

How do I Get into Compliance?

If your failure to report the information was non-willful (without any intent to avoid or evade tax) your best option is generally offshore disclosure.

FATCA Frequently Asked Questions

The following is a list of 10 common questions/issues we regularly counsel our clients about regarding FATCA:

Why Did I Receive a FATCA Letter?

The most common reason why your Foreign Financial Institution (FFI) sent you a FATCA Letter, is because the institution believes you may have a U.S. status that requires the FFI to send information about your accounts to the IRS, such as if you are a U.S. Citizen, Legal Permanent Resident, or Foreign National who meets the Substantial Presence Test.

Unlike a U.S. institution that provides you an annual 1099 form detailing your income, foreign institutions are not required to provide this information to Account Holders, and therefore the IRS in the dark regarding your foreign income. While you may see this is a good thing…the IRS doesn’t.

What do I do with the FATCA Letter?

Typically, the Foreign Financial Institution will require you to complete the letter and submit it back to them, and/or otherwise take steps to self-certify your status to the Foreign Financial Institution and/or confirm that you are up-to-date with all of your tax and reporting requirements in the United States.

W-8 BEN vs. W-9

These are two very important forms, but as an individual you only complete one. If you are a U.S. person then you usually complete a form W-9. If you are a non-U.S. person, you complete form W-8. The reason it is included with the FATCA Letter, is to put the foreign financial Institution on notice of your status for submission to the IRS if necessary.

Should I Sign and Send it Back to the FFI?

This is a strategy question, which you should discuss in detail with your offshore disclosure lawyer. That is because, depending on what your current U.S. status is, and whether you have any intention of getting into compliance — by submitting the information back to the Foreign Financial Institution, it will start the clock ticking as to when they can actually submit the information to the IRS (which you have proactively signed, usually under penalty perjury).

This is different than the Foreign Financial Institution making is its own presumption of your status to the IRS, which depending on your specific facts and circumstances, may or may not be accurate.

What is FATCA Form 8938?

IRS form 8938 is a form developed to ensure individuals with Specified Foreign Financial Assets get into compliance by disclosing their foreign assets and information to the IRS. The form is “average” when it comes to complexity of IRS forms. It generally only requires an individual to identify, list, and report assets and accounts (under certain scenarios) to the IRS.

Please keep in mind that certain items that may need to be reported on other forms such as a FBAR may not need to be included on form 8938. Likewise, certain items that you did not have to report on the FBAR, will need to be reported on form 8938.

How do I File FATCA Form 8938?

The form is filed along with the tax return. Unlike other forms which may be due at the time a tax return is due, but submitted independently to a different location at the IRS, form 8938 is actually filed with your tax return (making it easier for the IRS to cross reference your foreign income with foreign assets)

Foreign Assets but No Foreign Income

Just because you do not have any foreign income does not mean you are excluded from having to file this form. But, if you are not required to otherwise file a US tax return for any number of reasons, then you are not required to independently file a form 8938, as you would file a form 3520 or 5471 independently, even if no tax return is due.

But, if you are required to filed a Tax Return and meet the threshold requirements for filing, you are required to report and disclose the foreign assets on this form — even if you have no foreign income.

Threshold Requirements and Asset Values

The threshold requirements as to whether you would have to file the form 8938 or not will vary based on whether you are considered a U.S. residents or not, and what your marital status is. For example, if you are a single person residing in the United States (or married filing separately), the baseline threshold requirement is $50,000 on the last day of the year, or if you have less than $50,000 on the last day of the year but more than $75,000 on any other day of the year, you are still required file.

Conversely, if you are married filing jointly and you reside overseas, than the threshold requirement is $400,000 on the last day of the year, or if you have less than $400,000 on the last day of the year, but had more than $600,000 on any given day of the year, you would still have to report the asset(s) on Form 8938.

What is Included vs. Excluded on IRS Form 8938

This question goes beyond this simple summary. It is important to understand that there are two major distinctions between the form 8938 and FBAR that we see often and which can be somewhat confusing:

Assets vs. Accounts

The form 8938 requires reporting of specified foreign assets. Therefore, for example if you own stock directly, you would include the stock ownership on form 8938 — even if it was not in a foreign account. On the other hand, if you are filing a FBAR, you would not include direct stock ownership on that form, and would only reported that the stock was included in an account.

Interest In the Asset

When it comes to the FBAR, a person has to file the form whether or not they have ownership of the money. For example, if they are a joint owner of the account  (with little financial investment in the account) and/or have signature authority, they still have to file and report the account.

With the FBAR, if the individual’s name is identified anywhere with the account, they typically have to file. Alternatively, with the FATCA Form 8938, a person must have an interest in the asset. Therefore, if a person just has signature authority or otherwise has no real interest in the asset, they may not have to file form.

**This is something you should discuss with your international tax lawyer before submitting to the IRS.

Extension of Time to File Form 8938

If you apply for an extension to file your tax return, then you also receive an extension to submit form 8938. That is because form 8938 accompanies your tax return and is not filed independently.

Already Filed a FBAR

We mentioned the FBAR numerous times in this article, because oftentimes if a person has to file one form, they have to file the other. Still, it should be noted that the forms are independent of each other, and many individuals may only have to file one form, but not the other.

Also, if you already filed a FBAR, you may still have to file form 8938.

Foreign Real Estate

Tax rules regarding Foreign real estate are more complex than they need to be. With that said, it is relatively simple when it comes to FATCA Reporting. If you own foreign real estate directly and it does not generate any income, then there is no reporting for FATCA. Likewise, if you own foreign real estate directly – even if it is used to generate income – it does not need to be filed on form 8938.

However, if you do own foreign real estate in a business entity such as a Sociedad Anonima, then the business entity must be reported. Depending on the facts and circumstances of the ownership, it may be reported on form 8938, or it may be required to be reported on a much more comprehensive form such as a 5471 (Foreign Corporations) or 8865 (foreign partnership).

*Penalty Note: if you own foreign real estate that generates income, it is not included on form 8938. But, if you knowingly do not report your offshore assets and decide to enter the traditional OVDP program, the value of the foreign rental property is calculated into the penalty computation.

Duplicate Filing of Form 5471, 8865, or 8621

In any year that you have the file a form 8938 for a particular asset, you do not have the file a form 5471, 8621, or 8865 the same asset, in the same year. Be careful: it is important to note that if you have to file a form 5471 for example for Asset “X” you may still need to file a form 8938 for Asset “Y.”

In addition, many times a person will have to file a form 5471 or 8865 in the year they acquired the asset or business ownership, but not have the file that form in subsequent years – and instead would file form 8938.

Typical Example: Michelle inherited 18% of a foreign partnership in year 1. In year one, she would file a form 8865 . In year two, she did not acquire any additional ownership. Since it is a foreign partnership, and not a controlled foreign partnership, in subsequent years (unless other circumstances apply) Michelle should be able to get by with filing a form 8938 instead of the more detailed 8865.

Form 8938 Penalties

As provided by the IRS: 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.

Prior Year Filings & Offshore Voluntary Disclosure

If you are out of compliance for having not filed the current year and/or prior-year returns and 8938’s, you could be subject to some pretty hefty fines and penalties. With that said, the IRS has approved certain offshore voluntary disclosure programs which can be used to significantly reduce or abate (eliminate) the penalties.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure

We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.

Each case is led by a Board-Certified Tax Law Specialist with 20 years of experience, and the entire matter (tax and legal) is handled by our team, in-house.

*Please beware of copycat tax and law firms misleading the public about their credentials and experience.