Reporting of Foreign Retirement Plans
When it comes to the IRS reporting of foreign retirement plans, some less experienced counsel try to make it appear as if it is so incredibly complicated and shrouded in some sort of mystery and suspense that mere mortal clients could not possibly understand it (when the real reason is simply to justify their exorbitant attorney’s fees). In actuality, reporting foreign retirement plans to the IRS is not that big a deal for US persons. From a United States tax perspective, the key questions will involve whether there is a tax treaty in place or not and whether the plan is considered a qualified plan or not. When it comes specifically to the reporting of foreign retirement plans, the key issue is exactly which international information reporting forms are required to be filed. The focus of this article will be on the reporting (not the tax) aspect — and hopefully, you will come away with the relief that it is simply not that bad. Even if you have not filed in prior years and are seeking to get into compliance, the US government has developed several international tax amnesty programs (aka Offshore Voluntary Disclosure) designed to assist taxpayers both willful and non-willful alike.
FBAR for Foreign Retirement
The FBAR refers to foreign bank and financial account reporting a.k.a. FinCEN Form 114. Technically, the FBAR is not even a tax form — but since 2003 the Internal Revenue Service has been tasked with compliance and assessment/enforcement of FBAR penalties. The Internal Revenue Service is known to issue foreign account penalties for the failure to report for retirement accounts on the FBAR – so it is something to be cognizant of, but even if you missed it in prior years, you can usually resolve the issue without much headache. Part of the confusion in reporting foreign retirement plans on the FBAR was due to a prior version of the FBAR reference guide, in which there was some ambiguity as to whether foreign retirement plans are reportable. They are, but the distinction is that if you have a US retirement plan such as a 401(k) and within it, you hold foreign investment accounts or pooled funds (foreign ETF or mutual funds), you do not need to file the FBAR in that situation, for those funds/accounts.
As provided by the recent FBAR Guide:
Example: Canadian Registered Retirement Savings Plan (RRSP), Canadian Tax-Free Savings Account (TFSA), Mexican individual retirement accounts (Fondos para el Retiro) and Mexican Administradoras de Fondos para el Retiro (AFORE) are foreign financial accounts reportable on the FBAR.
FATCA for Foreign Retirement
FATCA refers to the Foreign Account Tax Compliance Act. As part of this act, US taxpayers are required to report their Foreign Financial Accounts and Assets to the Internal Revenue Service directly on their tax return using Form 8938. Foreign Retirement is also reported on the Form 8938
As provided by the FATCA Form 8938 instructions:
If you are required to file Form 8938, in addition to reporting retirement and pension accounts and nonretirement savings accounts described in Regulations section 1.1471-5(b)(2)(i), you must report retirement and pension accounts, nonretirement savings accounts, and accounts satisfying conditions similar to those described in Regulations section 1.1471-5(b)(2)(i) that are otherwise excluded from the definition of a financial account by an applicable Model 1 IGA or Model 2 IGA. Thus, such accounts are subject to uniform reporting rules and must be reported without regard to whether the account is maintained in a jurisdiction with an IGA.
PFIC for Foreign Retirement
PFIC refers to Passive Foreign Investment Companies – and is much more complicated than FBAR or FATCA. Whether or not a foreign retirement plan that contains PFIC is required to be reported on Form 8621 is determined by whether or not the PFIC treaty exception applies. If the treaty exception applies, then generally form 8621 is not required, although sometimes it is still reported and something to discuss with the Board-Certified Tax Law Specialist you are working with – to discuss the potential pros and cons.
Form 3520/3520 & Rev Proc. 2020-17
This is where it gets a bit confusing for some taxpayers — and understandably so. From a baseline perspective, Forms 3520 and 3520 were developed as a means for US persons to report foreign trusts to the IRS. From a technical standpoint, a foreign retirement plan would be considered a trust. Most of the time, foreign pension plans are not considered qualified employment trusts — and therefore not automatically exempt from form 3520 reporting. Presumably, when the Internal Revenue Service developed forms 3520 and 3520-A it was not with the primary intention of requiring foreign pension plans to be reported. In addition, in 2020 the Internal Revenue Service released Revenue Procedure 2020–17 which exempts certain reporting of a foreign retirement and non-retirement deferred tax plan from Form 3520/3520-A. The ambiguity comes from the fact that the Revenue Procedure does not identify specifically which retirement plans are reportable, and which plans are exempt.
Missed Reporting Foreign Retirement
If you missed reporting foreign retirement plans in prior years try not to get too overwhelmed by all the ridiculous fear-mongering, you will undoubtedly find in your research quest. The Internal Revenue Service has developed various international tax amnesty programs to safely assist you with getting into compliance.
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