kodokan

This is a very sensible and reassuring point, JAJ. I agree that there should be, and hopefully is, a differentiation in IRS approach to people like us, who have foreign pensions and accounts because we're foreign nationals/ USers who spent part of their adult life overseas, doing normal things like banking and saving for our retirements, and to those people who've made a conscious choice to offshore money for... less obviously explicable reasons.

The fact that the IRS has added retirement account filing exemptions, and that
major tax prep firms almost appear to have been instructed to ignore small pensions* for their multinational clients, seems to support your view.

*larger ones being, of course, still reportable on 8938

nun

Mmmm....I'm not convinced by your "one rule for the small, another for the large" rule. I would be conservative on FBAR and 8938 because the possible (not probable) penalties. When the treaty is applicable I tend to apply it at face value. So if you have a recognized retirement account in the UK it is covered by the treaty.

kodokan

But it's not my rule, nun - it seems the most reasonable explanation based on the current evidence: what the Big Four are telling their clients, what the Treasury and/ IRS are telling people who phone them individually, and on the FBAR filing exemption list given by the IRS on their website.

All the evidence appears to lead to a conclusion that foreign pensions - with no documented, evidenced differentiation for DB or DC - are not FBAR-reportable, but are 8938-reportable. Given the different filing thresholds (and I know it varies a lot by location and married status) the message roughly comes across that if you have a foreign pension in 5-figures, no one really cares; once you get into the 6-figure range, the IRS want to know about it presumably to make sure you declare the income in later life, hence 8938.

But even then they don't seem THAT fussed - here are the instructions for 8938:

'Q12. I have an interest in a foreign pension or deferred compensation plan. Do I need to report it on Form 8938?
If you have an interest in a foreign pension or deferred compensation plan, you have to report this interest on Form 8938 if the value of your specified foreign financial assets is greater than the reporting threshold that applies to you.

Q13. How do I value my interest in a foreign pension or deferred compensation plan for purposes of reporting this on Form 8938?
In general, the value of your interest in the foreign pension plan or deferred compensation plan is the fair market value of your beneficial interest in the plan on the last day of the year. However, if you do not know or have reason to know based on readily accessible information the fair market value of your beneficial interest in the pension or deferred compensation plan on the last day of the year, the maximum value is the value of the cash and/or other property distributed to you during the year. This same value is used in determining whether you have met your reporting threshold.
If you do not know or have reason to know based on readily accessible information the fair market value of your beneficial interest in the pension plan or deferred compensation plan on the last day of the year and you did not receive any distributions from the plan, the value of your interest in the plan is zero. In this circumstance, you should also use a value of zero for the plan in determining whether you have met your reporting threshold. If you have met the reporting threshold and are required to file Form 8938, you should report the plan and indicate that its maximum is zero.'

So 'yes, your foreign pension is 8938 reportable, subject to filing thresholds. But if you don't realistically know what it's worth on the last day of the year, and you're not taking distributions from it, just call it $0 - and oh, that same $0 is fine to then use as the 'do I even need to report this?' value, so unless you have other foreign accounts that trigger a need to file, you're good'.

Our tax prep firm said it was perfectly ok and expected to not know the value of our UK pensions on 31 Dec, given the difference in the tax years and statement timescale calculations, and that some of them are final salary anyway; they put $0/ Value not known for them. My impression was that the whole pension reporting thing for accounts that are genuinely pensions, that you've picked up along the course of your life, that you're no longer paying into, that you can't access in any way, and that aren't yet in payment = total non-issue for the IRS, who are out to catch proper evaders, not criminalize millions of ordinary people who just happen to have led slightly more interesting lives than the normals.

What evidence is there to the contrary, other than 'gut feeling from when the internet got a bit paranoid a few years ago, when that whole Swiss UBS thing all blew up'. On what are you basing your approach?

kodokan

I admit I have a huge bias here. I don't want pensions to be FBAR-reportable; we have no other UK accounts that'll push us over the limit, so if I can exclude pensions, then we don't have to bother with and remember to do FBAR annually for the next 20+ years.

On the other hand, I'm boringly law-abiding and conservative. If there is a legal requirement to do so, then I will of course comply. (And just annually grumble about the pointlessness.)

But so far, I've seen nothing at all that's actually verifiable; all of what's on the internet is just lay people like us discussing it, doing our best to find our way through, and basically guessing from often outdated and irrelevant information. If anyone knows otherwise, and has some recent links from reputable third-party sources - newspaper articles covering an actual prosecution; copy of an advisory letter from the IRS; heck, even a forum poster saying that yes, they actually DID get audited and punished for this very thing - I'd love to see them.

nun

In fact it's not a rule at all so you should comply with IRS regulations whatever the size and nature of the foreign account. The exemption in the FBAR is only for qualified plans......and foreign plans are not qualified. So any foreign pension that you have signature authority over is FBAR reportable. That would mean DC pensions are reportable but DBs are not.

Splitting hairs on the FBAR is really more trouble than it's worth. I don't agree with the Big Four on this one, but if I'm wrong it would probably only cost a couple of minutes in extra FBAR filing time while to downside for omitting something from FBAR is potentially a lot more.....again I say potentially, not probably.

If you are happy with the way you are filing FBAR then that's ok. Are you going to bother filing an 8833 for the UK pensions or take that as implied? or do something else for US tax purposes?

MidAtlantic

In the end we all make our own decisions on this based on a combination of personal research, blogs like this, reading instructions and
professional advice.

I agree with your approach re 8938.

For FBAR I do report my defined contribution policies on the basis of the FBAR instructions. They are accounts in my name, with financial institutions and I do have signature authority over them. I can also clearly identify their value. I have to complete an FBAR anyway so adding them is no great chore.

I do not report my defined benefit schemes on my FBAR because they are not in my name. They are under my ex-employers' auspices.

I also agree with Nun that the extra filing time is insignificant so why not do it.

theOAP

@kodokan

I'll offer my amateurish, no basis opinions on some of the issues you have raised.

When a US Treasury/IRS document refers to a 'qualified' retirement plan they are speaking only of a plan that conforms to US regulations. Foreign plans normally do not conform to US regulations. You've raised an interesting question, why have that definition on a document dealing only with foreign accounts. I can only assume some foreign companies, etc., do go to the lengths to register their foreign plan with the Treasury/IRS and make it compliant with US regulations for the benefit of US Person members. I can think of some instances where this may be advantageous.

You've also included the following quote in one post:
''...the Bank Secrecy Act may require you to report the account yearly to the Internal Revenue Service by filing electronically a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR).'' Form 114 is a Treasury document. In the past, The Treasury decided that it did not want to be involved in the administrative side of FBARs. It therefore 'farmed out' the enforcement of FBARs to the IRS (yes, I know, it's the same organisation. This is the US government after all!). Form 114 is not an IRS document, but I think you already know that. The IRS only enforces FBAR reporting.

I agree with nun and JAJ. Technically, a defined contribution pension plan is reportable on FBAR since the member may have the ability to redirect the funds to another account (another fund, or withdraw the funds) by their signature authority. Are you able to do this with your particular pension? If so, my opinion is it's reportable. If not, then it's up to you whether you include it or not (especially if you have written evidence from your accounting firm).

It's decision time. You've entered into another of the many grey areas of US regulations regarding foreign pensions that have never been fully defined. I suspect many accounting firms will proceed in one particular direction based on the purchased opinion of a qualified legal advisor. Others, such as myself, are flying by the seat of our pants. Unfortunately, Congress, Treasury, and the IRS have chosen to remain silent.

kodokan

But that make even less sense then the IRS usually does! The FBAR is ONLY for foreign plans... but foreign plans are not tax-qualified... so your theory is that they're essentially saying that 'there's a filing exemption for a tax-qualified foreign retirement plan, but tough luck, your foreign pension is NEVER going to be an exempted tax-qualified retirement plan. Ignore the bit about IRAs too; we're now just doing this to mess with you'.

Not agreeing with the Big Four seems a pretty bold statement - again, links and evidence that led you to your conclusions would be helpful. We can all just state 'my opinion is...' but it's more helpful for people researching this and needing to come to their own decisions, if we then follow it up 'because of this document I read here, and this legal argument I read here, and this clause on the IRS website here'.

Honestly, my Big Four spent a lot more time double-checking FBAR reportability with their cross-border legal teams and confirming it all back to me, than it would've taken to just include the pension info they already had, 'just in case'. Getting it right seemed more important to them than covering their a***es for a hypothetical, even though it used considerably more resources to do so.

I bothered my Big Four about this too, you won't be at all surprised to hear . They said that it's not necessary to physically file 8833 to take a Treaty position for a UK pension; this wording from Publication 519 backs them up:

'Exceptions. You do not have to file Form 8833 for any of the following situations.

1. You claim a reduced rate of withholding tax under a treaty on interest, dividends, rent, royalties, or other fixed or determinable annual or periodic income ordinarily subject to the 30% rate.

2. You claim a treaty reduces or modifies the taxation of income from dependent personal services, pensions, annuities, social security and other public pensions, or income of artists, athletes, students, trainees, or teachers. This includes taxable scholarship and fellowship grants.'

Since we were happy to go along with the default position of the pension being taxable on the way out, and didn't want to do any complicated mark to market stuff (and I think it helped that was no money either contributed or disbursed from the pensions during the tax year) no 8833 was required.

nun

I agree with your tax advisors approach to the pensions and treaty claims....the IRS in London also agree with that approach.....but I might just file the 8833 for completeness.

My interpretation of FBAR comes from reading the FBAR regulations and numerous discussion with folks like theOAP, JAJ and others. Now we might be just reinforcing our own prejudices, but whatever the foolishness of excluding only qualifying pensions when most foreign pensions are non-qualified, my reading of the regulations makes me believe that foreign DC pensions should be included on FBAR.

kodokan

Thanks OAP, helpful measured 'advice'.

Yes, I could move the money within the pension from one fund to another, ie, from a UK FTSE index tracker fund, to a bond fund, to cash, to a Pacific Rim index tracker, or wherever. But that's not redirecting the funds to another account - the account number, the unique identifying reference code for that account that the IRS or whoever would ask for, would remain exactly the same. So on paper, in terms of balance in the account, nothing changes regardless of the underlying investment. And of course it can't be withdrawn.

I think I'll stick with my 'it doesn't need reporting' stance. It's what we were unambiguously advised to do; the IRS/ Treasury is telling others to do it (at least over the phone); the IRS identifies pension plans/ IRAs as not being reportable on a form that deals ONLY with foreign accounts; they give a ton of wriggle room about valuing and reporting them even on the 8938; UK pensions are clearly recognized as acceptable, US-equivalent retirement accounts under the Tax Treaty.

I'm comfortable that (genuine) pensions are a non-issue in their tax evasion crackdown, and that as long as I pay my taxes correctly on the way out of the pensions, in the meantime no one cares that a decade before I even moved to the US, I put a few thou into a pension pot.

kodokan

'For completeness...' when global tax advisors, and all the IRS around the world and even nun all say it's not necessary! Well, Turbo Tax didn't spit it out, so that's a no. At what point does taking reasonable care just become paranoia?

'Reading the FBAR regulations' - that's my point, the FBAR information (and perhaps the whole feeling on normal honest people reporting their normal run-of-the-mill accounts) has changed. That clear list of exemptions, about retirement plans, IRAs, etc, was DEFINITELY not on the FBAR IRS advice page when I looked 12 months or so ago.

Which is why I'm trying to shake this up a little, and say that us forumites just discussing this amongst ourselves and never acknowledging any new information as valid is only ever going to come to the same vague conclusions that we all reached some years ago, when there was a huge climate of fear about overseas tax evasion. Are we simply going to ignore all the recent evidence from very reputable sources that suggests a different conclusion is okay for the vast majority of people with accounts created in JAJ's excellently-phrased 'normal course of life', and just spend the next 10 years terrifying newbies by saying they should continue to report their Oyster cards and Tesco Clubcard points 'just in case'?

durham_lad

Interested by-stander here. (I have DB plans not DC plans in the UK).

Do you think the new rules announced in the budget this last week on DC pensions will change the discussion here? From April 2015 if you meet the age requirements (55?) then you can withdraw as much money from your DC pension pot as you wish.

Also, from this April you can withdraw some of your money (up to 25%?) tax free, if you meet the minimum age.

In other words, your signature authority now gives you a lot more authority over your money, not just moving it around within the account.

kodokan

I don't thiiiiiink so - after all, all the new rules will do is make a UK DC pension just look more like a 401(k) or IRA. As long as the correct tax is paid on the way out, who cares whether they choose to withdraw it all and buy a yacht?

And the UK 25% tax free thing; everything I've read on this is that no, for US taxpayers, any lump sum withdrawn from a pension is not tax free, so no change there, then.

I do like the new rules though, because it means that in 12 years when I hit 55, this FBAR problem will go away! I can simply withdraw my few thou, pay the tax, and put it in my Vanguard account with everything else.

nun

When it comes to international tax, Turbotax is not authoritative. I feel that it's good to file the 8833 if for the only reason that it actively tells the IRS how you are treating your UK pensions and I don't like to leave things to chance or interpretation on my tax return.

durham_lad

I was really thinking about the relevance to FBAR since from April on, even if you don't take any money out, you will have the signature authority to do so.