Pillar 3 Pension Reporting for U.S. Tax, FBAR and FATCA

When it comes to U.S. persons who previously worked in a foreign country and accumulated a pension, determining which assets are reportable for U.S. tax purposes can become very complicated and daunting. Making matters worse, is that the IRS had previously published some ambiguous guidance that failed to discern between reporting U.S. pensions and reporting foreign pensions. In general, the U.S. government requires the reporting of foreign pension plans on a U.S. tax return, FBAR, and FATCA Form 8938. This includes Pillar 3, which is typically a personal investment in countries that utilize the Pillar 3 system. Let’s briefly look at how the Pillar 3 pension tax and reporting works.

*The prior IRS publication failed to clarify that while certain U.S. pensions with foreign accounts may not be reportable (a 401K with foreign investments for example), foreign pensions are reportable.

The (3) Different Pillars Explained

First, it is important to note the distinctions between the three different pillars. This is just a general principle, noting that it may be different depending on the specific country and whether the country has adopted the five-pillar system.

- - Pillar 1 is typically equivalent to US Social Security — and U.S. Social Security equivalent accounts are typically not reportable for FBAR and FATCA.
  - Pillar 2 is an occupational type of pension which is somewhat similar to a 401K. This type of pension is reportable for FBAR and FATCA Form 8938 purposes. Whether or not the accumulated income is taxable it depends on various factors such as the status of the U.S. person, whether there is a treaty in place with the country where the pension is held, and whether any elections have been made.
  - Pillar 3 is essentially a personal investment similar to an IRA.

The Pillar 3 Retirement Scheme

One common country in which many U.S. persons have worked and invested in Pillar 3 is Switzerland — where Pillar 3 can be broken down further into Pillar 3a and Pillar 3b. Unlike Pillar 1 (and sometimes Pillar 2), Pillar 3 is a voluntary pension plan. Therefore, employees and other taxpayers in the country offering the Pillar 3 are not required to invest. Some taxpayers choose to invest in a Pillar 3 to supplement their pension, similar to how U.S. persons may invest in a traditional or Roth IRA to supplement their pensions. While Pillar 3 may receive tax benefits in the foreign country, those tax benefits do not tend to apply for U.S. tax purposes, so income generated in Pillar 3 may be taxable even if it is not distributed.

Pillar 3 FBAR and FATCA

The IRS makes it clear in their recent publications, such as Publication 5569, that foreign pension plans are reportable. Since Pillar 3 is a type of personal investment or pension plan, it is reportable for FBAR and Form 8938 purposes. Thus, even Taxpayers who may not have received any sort of distribution yet are still required to report this investment on their FBAR and Form 8938. The failure to report a Pillar 3 may result in fines and penalties, although the IRS does offer various amnesty programs to assist taxpayers with getting into compliance.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them. *Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or 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.