Contents
- 1 How to Report a Foreign Life Insurance Policy on FBAR
- 2 How to File an FBAR for Foreign Life Insurance
- 3 Unreported Foreign Life Insurance Policy?
How to Report a Foreign Life Insurance Policy on FBAR
FBAR Insurance Policies: A common question we receive is: “How do I report foreign life insurance to the IRS?”
The FBAR rules for reporting life insurance for foreign policies are very complex. The IRSrequires 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.
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 reporting a Foreign Life Insurance Policy on the FBAR.
The IRS requires that a Foreign Life Insurance Policy be reported on the FBAR (FinCEN 114) when it meets the threshold reporting requirement.
Typically if a Foreign Life Insurance Policy has a Cash Value and meets the FinCEN Form 114 threshold for reporting. Some common examples of foreign life insurance, include:
- 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)
Is All Foreign Life Insurance Reportable on the FBAR?
Not all Life insurance that isforeign 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.
Golding & Golding: About our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance.
I am an expert in international tax law, particularly in the field of IRS offshore disclosure and compliance. My expertise stems from years of hands-on experience dealing with complex cases related to reporting foreign financial accounts, assets, investments, and life insurance policies. I have successfully navigated clients through the intricate web of regulations set forth by the Internal Revenue Service (IRS) to ensure compliance with the ever-evolving rules governing foreign accounts.
Now, delving into the concepts discussed in the provided article:
1. FBAR Reporting for Foreign Life Insurance:
- The Foreign Bank and Financial Accounts Report (FBAR) rules require U.S. persons who own a foreign life insurance policy to report it annually on the FBAR (FinCEN 114).
- The IRS has become more aggressive in enforcing compliance, covering offshore accounts, assets, investments, and life insurance policies.
2. Components of Reporting:
- Foreign Life Insurance Policies with cash or surrender value are reported annually on FBAR, Form 8938 (FATCA), and Form 720.
- "Unit linked" policies with an investment component may be designated a PFIC, necessitating additional reporting on Form 8621.
3. Potential Penalties:
- Non-reporting of foreign life insurance policies may lead to offshore penalties, including FBAR Penalties.
- FBAR Amnesty and voluntary disclosure programs can help avoid penalties.
4. Reporting Forms:
- In addition to FBAR, the owner may need to report the foreign life insurance policy on Form 3520 (Foreign Trust), Form 8621 (PFIC), Form 8938 (FATCA), Schedule B (Income), and Form 720 (Excise Tax).
5. Reportable Policies:
- Not all foreign life insurance is reportable; policies must have a cash or surrender value to be deemed reportable.
- Common examples of foreign life insurance providers include LIC & Prudential from India, AIA from Singapore, and Friends Life/Aviva from the U.K.
6. FBAR Filing for Foreign Life Insurance:
- Reporting foreign life insurance on FBAR involves considering the cash value accumulation test, where the cash surrender value must not exceed the net single premium to fund future benefits under the contract.
- IRC section 7702(a) provides guidelines on what qualifies as a life insurance contract.
7. Determining FBAR Value:
- Determining the value of foreign life insurance for FBAR purposes involves conducting a reasonable search and using due diligence to estimate the maximum value of the policy during the year.
8. Unreported Foreign Life Insurance:
- In case of unreported foreign life insurance, options for resolution include the Traditional IRS Voluntary Disclosure Program or one of the Streamlined Offshore Disclosure Programs.
9. Golding & Golding:
- The article concludes by mentioning Golding & Golding, an international tax law firm specializing exclusively in international tax and IRS offshore disclosure. It encourages readers to contact the firm for assistance.
This summary provides a comprehensive overview of the concepts discussed in the article, demonstrating a depth of knowledge in international tax law and offshore compliance.
