FBAR Insurance Policy & How to Report to IRS (Summary 2020)
FBAR Insurance Policy and how to report foreign life insurance to the IRS: The IRS FBAR Insurance rules for reporting life insurance for foreign policies are very complex. The IRS requires U.S. person owners of a foreign life insurance policy to report the policy annually, on an FBAR. In recent years, the Internal Revenue Service has taken an aggressive approach to foreign accounts compliance. This includes reporting offshore accounts, assets, investments and life insurance policies.
FBAR Insurance Policy
With a a foreign life insurance policy, the cash or surrender value is included on the FBAR each year that the threshold is met. In addition, the policy is also reported on Form 8938 (FATCA) and Form 720. Foreign Life Insurance Policies that are “unit linked” and include an investment component may be designated a PFIC, and additional reporting requirements on Form 8621.
If the foreign policy is not reported, it may lead to offshore penalties, such as FBAR Penalties. These penalties can be avoided with FBAR Amnesty and other amnesty programs, collectively referred to as voluntary disclosure.
How to Report Foreign Life Insurance (FBAR, FATCA, Schedule B, Form 720)
There are many components to IRS Foreign Life Insurance Policy FBAR reporting. The IRS requires that a Foreign Life Insurance Policy be reported on the FBAR (FinCEN 114) when it meets the threshold reporting requirement. Foreign life insurance is governed by IRC §4371.
Typically if a Foreign Life Insurance Policy has a Cash Value and meets the FinCEN Form 114 threshold for reporting. We will summarize how to report common foreign life insurance policies, such as:
- LIC & Prudential from India
- AIA from Singapore,
- Friends Life/Aviva from the U.K.
In addition to the FBAR, the owner of foreign life insurance may have to report the policy on:
- Form 3520 (Foreign Trust)
- Form 8621 (PFIC)
- Form 8938 (FATCA)
- Schedule B (Income)
- Form 720 (Excise Tax)
U.S. Person owners of Foreign Life Insurance may have a Foreign Life Insurance Policy FBAR requirement. FBAR is the Foreign Bank Account Reporting Form. In order for Foreign Life Insurance to be reportable on the FBAR as a Foreign Account, it must have a “Cash” or “Surrender” Value, and meet the threshold reporting requirements.
Is All Foreign Life Insurance Reportable on the FBAR?
Not all Life insurance that is foreign is considered reportable. Rather, the policy must have certain attributes that would deem it reportable. Primarily, it must have a Cash or Surrender value.
In a nutshell, almost all foreign bank and financial accounts are reportable on the FBAR. While There are various other international forms you may have to learn about and file with the IRS in your quest to become compliant, but when it comes to reporting, the key issue is the FBAR.
How to File an FBAR for Foreign Life Insurance
We will focus exclusively on the FBAR, due to the sheer magnitude of the potential penalties for non reporting the form.
Life insurance outside of United States works a bit different than it does for US-based policies — mainly because the IRS clarifies it as a “Foreign Account.” Therefore, the reporting requirements are different.
We have a separate article for those seeking information on Foreign Life Insurance PFIC, FATCA, Foreign Trusts and Form 720.
FBAR includes Foreign Bank & Financial Accounts
It is important to note that for reporting, it is more than just bank accounts. It Includes Financial accounts as well. Here is why you have to report Foreign Life Insurance on the FBAR:
- It is foreign
- It has a policy or account number
- It has a cash value so it it is cash equivalent
Cash Value or Surrender Value
Not all foreign life insurance policies have to be reported. Generally, you only have to report the form in a year in which your Foreign Policy:
- Has a “Cash Value” or “Surrender Value,” and
- You meet the threshold.
FBAR Cash Value Accumulation Test
In order to understand the reporting value of a life insurance policy for FBAR, it is important to understand what a Life Insurance Contract is.
Referring to IRC section 7702
(a) General rule For purposes of this title, the term “life insurance contract” means any contract which is a life insurance contract under the applicable law, but only if such contract:
– (1) meets the cash value accumulation test of subsection (b), or
– (2) (A) meets the guideline premium requirements of subsection (c), and (B) falls within the cash value corridor of subsection (d).
(b) Cash Value Accumulation Test for subsection (a)(1) (1) In general A contract meets the cash value accumulation test of this subsection if, by the terms of the contract, the cash surrender value of such contract may not at any time exceed the net single premium which would have to be paid at such time to fund future benefits under the contract.
(c) Guideline premium requirementsFor purposes of this section—
– (1) In general A contract meets the guideline premium requirements of this subsection if the sum of the premiums paid under such contract does not at any time exceed the guideline premium limitation as of such time.
– (2) Guideline premium limitationThe term “guideline premium limitation” means, as of any date, the greater of— (A) the guideline single premium, or (B) the sum of the guideline level premiums to such date.
– (3) Guideline single premium (A) In general The term “guideline single premium” means the premium at issue with respect to future benefits under the contract. (B) Basis on which determination is made.
How to Determine Life Insurance FBAR Value?
Trying to determine the value of your foreign life insurance for FBAR purposes is not a perfect science. You don’t have to get the number right on the dot.
You just have to make sure you conducted a reasonable search and used due diligence in trying to determine what the maximum value of the policy was during the year.
Unreported Foreign Life Insurance Policy?
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.
Offshore Tax Lawyer Specialist Team – Golding & Golding
Golding & Golding represents clients worldwide in over 70-countries exclusively in Streamlined, Offshore and IRS Voluntary Disclosure matters. We have successfully completed more than 1,000 streamlined and voluntary disclosure submissions.
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How to Hire Experienced Foreign Life Insurance Reporting Counsel?
Generally, experienced attorneys in this field will have the following credentials/experience:
- Board Certified Tax Law Specialist credential
- Master’s of Tax Law (LL.M.)
- Dually Licensed as an EA (Enrolled Agent) or CPA
- 20-years experience as a practicing attorney
- Extensive litigation, high-stakes audit and trial experience
No matter where in the world you reside, our international tax team can get you IRS offshore compliant.
Golding & Golding specializes in Streamlined Domestic Offshore Procedures. Contact our firm today for assistance with getting compliant.
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.