Reporting Requirements Triggered by Foreign Life Insurance
Apart from having to pay tax on your foreign life insurance policy, you will also have to report that you have to pay tax on it and report your ownership of it. That means submitting:
Form 720 for the excise tax described above - filed quarterly
Form 8833 for when Form 720 does not apply, thanks to a treaty-based exemption
Form 8621 for each PFICs associated with the policy
Form 8938 for “specified foreign financial accounts” such as the policy
FinCen Form 114 for foreign financial accounts, such as the policy
When it comes to the IRS there are five (5) main considerations involving foreign life insurance, U.S. taxation, and reporting.
Taxation – Income Generated by the Policy
There is no particular exemption from U.S. tax for foreign life insurance policies. In other words, if your foreign life insurance policy generates income, then you are required to report the income on your U.S. tax return. This holds true, even if the income is accrued but not distributed (in other words, it is growing with in the fund).
* If your foreign life insurance policy is considered a PFIC, there may be far more complex tax factors to consider.
The IRS levies a 1% excise tax on the foreign life insurance premiums that you pay each year. The tax is submitted along with a form 720, and is submitted quarterly to the IRS. Therefore, for each year that you pay foreign life insurance premiums, you would submit four (4) form 720s (one for each quarter).
FinCEN114 (FBAR) required to be filed annually by any U.S. person if the person has more than $10,000 in annual aggregate total in their foreign accounts. Unfortunately, foreign life insurance policies are considered foreign accounts. Therefore, you have to include the surrender value of your foreign life insurance policy in your calculation. And, if your foreign life insurance policy surrender value (either alone or when combined with your other accounts) exceeds $10,000 in annual aggregate total – you have to file.
FATCA Reporting (Form 8938)
FATCA is the Foreign Account Tax Compliance Act. It is similar to the FBAR, but has higher threshold requirements for filing, depending on a person’s marital status and whether they are considered a U.S. Resident or Foreign Resident.
Failure to Report a Foreign Life Insurance Policy
If you have not properly disclosed your foreign life insurance policy to the IRS of FinCEN, you may be subject to fines and penalties. With that said, there are various tax amnesty programs that you can use to safely get yourself into compliance.
Are You Out of Offshore Compliance?
If you are out of compliance, you should speak with an Attorney before making any affirmative representations or statements to the IRS.
Different Options for Amnesty
At the current time, there are 4 main options for IRS Foreign Amnesty/Voluntary Disclosure:
• IRM (Internal Revenue Manual) Voluntary Disclosure
• Streamlined Domestic Offshore Procedures
• Streamline Foreign Offshore Procedures
• Reasonable Cause/Delinquency Filings
Speak with Experienced Counsel
IRS Voluntary Disclosure law is a specialty. It is important that you speak with an experienced State Bar Board Certified Tax Law Specialist. In IRS offshore disclosure.
