Why is this Topic Important to Wealth Managers? Many US expats who do not work for a US headquartered company are failing to report pensions they are accruing from the companies they are working for overseas.  These clients may incur large reporting penalties.

Submission by Thomas Carden, IRS Enrolled Agent

Many expats that do not work for a US based company are failing to report pensions they are accruing from the overseas companies they are working for. They often disregard the pension because they incorrectly assume that it is not taxable in the US.

However, the vast majority of foreign pension plans are not considered to be qualified by the IRS.  Consequently, these foreign pension plans do not enjoy any tax mitigation – the plans are taxable.

The IRS has very rigorous regulations for plan reporting and for the criteria to be a qualified plan, and thus foreign employers rarely seek such plan qualification.   Compounding the problem is that most financial professionals are rarely asking their clients with foreign employers “Do you have a foreign pension that contributions are being made to?”

Because of this mistaken belief that such foreign pension plans are to be treated like those in the US, many expats are incorrectly reporting their income net of any pension contributions.

Before FATCA (the  Foreign Account Tax Compliance Act of 2010) the pension contributions were generally not being reported to the IRS, thus they were incorrectly escaping taxation on US returns.  The goal of FATCA is to substantially capture information on the number of these accounts and many other foreign account types turning that information over to the IRS.  The act puts onerous penalties on financial institutions that do not report accounts that are in the names of US citizens and other US taxable persons.

Any foreign institution that does not agree will be subject to a thirty percent withholding rate on payments made to it.  Because of the penalties and the general move toward cross border reporting in financial transactions, the IRS will be receiving a large amount of information on these previously unreported accounts.   The act also requires individuals to disclose any foreign accounts with a balance that exceeds $50,000.  Failure to do so may result in an initial fine of $10,000 plus additional penalties.

The good news is that the acts reporting requirements are set to begin on January 2nd of 2012.  Thus, expats have time to address the issue of unreported foreign pensions. The problem for expats with these unreported accounts is that the contributions are counted as taxable income in the US for the year they were made to the pension.  If the IRS receives information about such an account, it is highly probable that it will send a “deficiency letter” stating that tax is due on the unreported amount.  At worst, finding an unreported account may trigger an arduous audit.

The solution for the problem is for expats with any unreported pension accounts to amend the returns and restate the income received, for any years that contributions were made to the accounts.  Such disclosures for past non-reporting should probably be handled by a expert in this area to avoid any unnecessary penalties.

Submission by Thomas Carden, a IRS Enrolled Agent and Expatriate Tax Specialist with 15 years of Tax and Financial Services Experience.  He is currently enrolled in the Diamond Program at Thomas Jefferson School of Law while also studying to sit for the ATT tax designation in the UK.  You may contact him via his email – tmcarden@yahoo.com.