Stop losing sleep over your tax situation. I'm Darrin Mish \u2014 a tax attorney in Tampa who's spent 32 years handling exactly this kind of problem. Here's what you need to know.<\/p>\n
Foreign pensions are the most common surprise in international tax compliance. A taxpayer worked in Australia or the U.K. or Canada for a few years, accumulated a pension, moved to the United States, and never gave the foreign account another thought. Then someone says the word “trust” and the whole picture changes.<\/p>\n
The honest answer: some foreign pensions are classified as trusts for U.S. purposes. Others are not. The classification turns on the structure of the plan, not the country.<\/p>\n
The U.S. tax code does not have a single rule for “foreign pension.” Each plan is analyzed under the same trust definition that applies to any arrangement: is there a separate entity holding property for the benefit of someone else, and does that entity meet the court and control tests of IRC Section 7701?<\/p>\n
An employer-sponsored pension where the employer pays directly into a fund administered by trustees – common in the U.K. and Australia – typically meets the trust definition. The fund holds property for the benefit of participants. The participants are beneficiaries. The fund is administered abroad by foreign trustees. Foreign trust classification follows.<\/p>\n
A government-administered social security system – U.K. National Insurance, Australian Age Pension, Canada Pension Plan – is generally treated as a foreign social security equivalent rather than a private trust. These pay-as-you-go systems do not hold individual account balances and do not fit the trust framework.<\/p>\n
Australian superannuation is the foreign pension that creates the most U.S. tax problems. Most super funds are structured as trusts under Australian law. The trustee holds member balances. The member has a beneficial interest. Australian law treats super accounts as taxed-on-the-way-in retirement accounts; U.S. law has no matching treatment.<\/p>\n
The IRS has not issued definitive guidance on super, and practitioners take different positions. The conservative analysis treats super as a foreign trust requiring annual Form 3520-A and Form 3520 reporting. The more aggressive analysis classifies certain super funds as foreign grantor trusts (with the member as owner), employee benefit plans, or PFICs depending on the assets held.<\/p>\n
For self-managed super funds (SMSFs), where the member is also the trustee, the analysis is even more demanding. SMSFs almost certainly hit the foreign trust definition and frequently hold PFIC investments, layering on additional reporting.<\/p>\n
U.K. occupational pensions and SIPPs are typically structured as trusts. Without treaty relief, they would generate Form 3520 and 3520-A obligations every year of accumulation.<\/p>\n
The U.S.-U.K. tax treaty contains a pension article that addresses some of the reporting friction. Treaty positions can be taken to defer U.S. tax on accumulations inside U.K. pension plans (similar to the Canadian RRSP rules), but the underlying foreign trust classification can still trigger reporting absent an applicable exception.<\/p>\n
Rev. Proc. 2020-17 created an exemption from Form 3520 and 3520-A for certain tax-favored foreign retirement trusts and tax-favored foreign non-retirement savings trusts. The exemption applies if specific conditions are met, including limits on annual contributions, tax-favored status in the foreign country, and an information reporting framework in that country.<\/p>\n
Canadian RRSPs and RRIFs had a unique history of reporting friction until the IRS issued Rev. Proc. 2014-55, which eliminated the annual Form 8891 election requirement and provided automatic treaty deferral for U.S. taxpayers with RRSPs.<\/p>\n
The Form 3520 and 3520-A reporting issue for RRSPs was addressed by separate guidance and the Rev. Proc. 2020-17 exemption. For most ordinary RRSP holdings, the U.S. reporting burden has been substantially reduced.<\/p>\n
FBAR reporting still applies to RRSPs that exceed the $10,000 aggregate threshold when combined with other foreign accounts. Form 8938 (Statement of Specified Foreign Financial Assets) may also apply depending on the taxpayer’s filing status and the aggregate value of all specified foreign assets.<\/p>\n
If a foreign pension is classified as a foreign trust and no exemption applies, the U.S. taxpayer faces a stack of reporting:<\/p>\n
FBAR if the aggregate balance of foreign financial accounts exceeded $10,000 at any point during the year.<\/p>\n
Form 8938 if the threshold for specified foreign financial assets is exceeded for the taxpayer’s filing status and residency.<\/p>\n
Form 3520 for any year with a contribution to or distribution from the plan.<\/p>\n
Form 3520-A for any year the plan is treated as a foreign trust with a U.S. owner. A substitute 3520-A may be required when the foreign trustee will not file.<\/p>\n
PFIC reporting (Form 8621) if the plan holds non-U.S. mutual funds, which most foreign pension plans do.<\/p>\n
Treaty election statements if a treaty position is taken to defer U.S. tax on accumulations.<\/p>\n
If you have a foreign pension that should have been reported and never was, the cleanup is the same as any other foreign trust catch-up. The Streamlined Filing Compliance Procedures handle non-willful failures with a 5 percent miscellaneous offshore penalty (for U.S. residents) or zero penalty (for qualifying non-residents).<\/p>\n
The pension value typically gets included in the highest aggregate balance calculation for the Streamlined penalty. That can make the program expensive for high-balance retirement accounts.<\/p>\n
The alternative for non-willful taxpayers with low or no unreported income is the Delinquent International Information Return Submission Procedures, which allow filing the missing forms with a reasonable cause statement and no penalty if accepted.<\/p>\n
First, get the plan documents. The U.S. classification turns on how the plan is structured under foreign law. Without the rules of the plan, the analysis cannot start.<\/p>\n
Second, list the years and the balances. The reporting exposure runs by year. The balance drives the penalty math.<\/p>\n
Third, talk to a U.S. tax attorney before filing anything. The Rev. Proc. 2020-17 exemption, Rev. Proc. 2014-55, treaty positions, and disclosure programs all interact in ways that change the right path.<\/p>\n
After 32 years of handling foreign retirement account issues, I have seen taxpayers pay six-figure penalties on filings that exemptions would have covered, and others walk away clean by picking the right path. Contact the Law Offices of Darrin T. Mish, P.A. at (813) 229-7100<\/a>. We classify the plan, identify available exemptions, and handle the catch-up filings.<\/p>\n","protected":false},"excerpt":{"rendered":" Some foreign pensions are foreign trusts. Others are not. Here is how Australian super, U.K. pensions, and Canadian RRSPs are classified for U.S. reporting.<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"rop_custom_images_group":[],"rop_custom_messages_group":[],"rop_publish_now":"initial","rop_publish_now_accounts":[],"rop_publish_now_history":[],"rop_publish_now_status":"pending","footnotes":""},"categories":[488,457],"tags":[496,495,483,498,497],"class_list":["post-6801","post","type-post","status-publish","format-standard","hentry","category-foreign-trusts","category-international-tax","tag-australian-superannuation","tag-foreign-pension","tag-foreign-trust","tag-rev-proc-2020-17","tag-rrsp"],"_links":{"self":[{"href":"https:\/\/getirshelp.com\/blog\/wp-json\/wp\/v2\/posts\/6801","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/getirshelp.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/getirshelp.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/getirshelp.com\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/getirshelp.com\/blog\/wp-json\/wp\/v2\/comments?post=6801"}],"version-history":[{"count":2,"href":"https:\/\/getirshelp.com\/blog\/wp-json\/wp\/v2\/posts\/6801\/revisions"}],"predecessor-version":[{"id":26714,"href":"https:\/\/getirshelp.com\/blog\/wp-json\/wp\/v2\/posts\/6801\/revisions\/26714"}],"wp:attachment":[{"href":"https:\/\/getirshelp.com\/blog\/wp-json\/wp\/v2\/media?parent=6801"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/getirshelp.com\/blog\/wp-json\/wp\/v2\/categories?post=6801"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/getirshelp.com\/blog\/wp-json\/wp\/v2\/tags?post=6801"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}