Foreign Pension Reporting on IRS International Forms (New) 2022

Foreign Pension Reporting on IRS International Forms (New) 2023

Reporting Foreign Pension Income to the IRS

The United States requires individuals who are U.S. persons for tax purposes to report their worldwide income on their U.S. tax return. For tax purposes, a US person individual typically includes a U.S. Citizen, Lawful Permanent Resident, or Foreign National who meets the Substantial Presence Test.  Even though this is referred to as citizenship-based taxation, it is not limited to just citizens. And, with the globalization of the US economy, it is not uncommon for US persons to have foreign pension plan income. Under the worldwide income tax rules, U.S. persons are required to include their foreign pension income on Form 1040. While this can get very complicated, let’s take a step back and look at the basics of including a foreign pension income on Form 1040.

First, Treaty or Non-Treaty Country?

One very important preliminary factor to consider is whether the pension is in a treaty country or a non-treaty country — since this can significantly impact the tax rules. If the pension is in a non-treaty country then the general rule is that the pension is taxable even during all phases of contribution, growth, and distribution because there is no specific rule that exempts foreign pension income in a non-treaty country from U.S. taxation. This is a common scenario in countries that have Provident Funds such as the CPF in Singapore.

Contributions vs. Growth vs. Distributions

Presuming that the pension is in a treaty country so that it is not automatically taxable even if it is not being distributed, there are three main components to a foreign pension plan. There are the contributions that are made to the plan, the growth within the plan, and distributions out of the plan.

Pension Contributions

Many countries offer pension funds that are similar to a U.S. 401K, in that contributions are made to the pension plan pre-tax and are only taxed when distributions are made down the line. From a U.S. tax perspective if the pension is in a treaty country and the specific treaty provides that contributions are exempt from U.S. tax (such as the US/UK treaty and usually only up to the same amount that is allowable under U.S. tax law) then the U.S. person may be able to exclude the pension contributions from their U.S. tax return.

Pension Growth

Most tax practitioners take the position that the growth within the foreign pension plan is not taxable when the pension is in a treaty country because the growth is not being distributed and has not been received by the Taxpayer. With that said, different tax practitioners may take different positions as to whether the growth is taxable, but from a baseline perspective if the pension is in a treaty country and that income within the pension is not being distributed then many taxpayers would take the position that it is not taxable until it is distributed and thus not included in their U.S. tax return.

Pension Distributions

Distributions are taxable since the individual is receiving income. This is where it can get a bit complicated.

Public vs Private Pension

A distinction is typically made between public and private pensions. A private pension is still typically taxable by the United States — even in treaty countries — due to the saving clause. Conversely, public pension is typically only taxed at source. Thus, for public pension and Form 1040, the amount of public pension is included on the tax return but then on the next line, the amount is subtracted with reference to the treaty section. This type of distribution does not usually require Form 8833 as it is one of the exceptions listed in the instructions to Form 8833.

Distributions and Foreign Tax Credits

If a distribution is made to the individual and then foreign taxes are paid by the individual, then the individual can typically claim foreign tax credits on their Form 1040 by integrating Form 1116. If instead, the taxes are withheld directly from the pension before being distributed to the taxpayer — so that the taxpayer is not technically paying any tax but only receiving the net distribution — then generally these types of distributions cannot apply for foreign tax credits — noting, exceptions, exclusions, and limitations may apply.

Treaty Exception

For taxpayers who reside in a treaty country and receive distributions, depending on the specific treaty and the type of pension, the taxpayer may take a position that either the pension is not taxable by the US or that the taxpayer is a foreign person under the treaty and not subject to U.S. tax on their worldwide income only on their US sourced income– which would exclude the foreign pension.

Closer Connection and Other SPT Exceptions

For taxpayers who are only subject to U.S. tax on their worldwide income because they meet the Substantial Presence Test (SPT), they may be able to qualify for an exception to substantial presence such as the closer connection exception or other exclusions found in Form 8840 or 8843. If the taxpayer qualifies for the exception or exclusion, then this would eliminate having to report their worldwide income such as their foreign pension.

Foreign Tax Credits

As mentioned above, some taxpayers may qualify to apply foreign tax credits that to their U.S. tax liability stemming from the foreign pension income that was distributed to them.

International Reporting Forms

In addition to having to include the foreign pension on a tax return for tax purposes, there is also the international information reporting component which can be very complicated. Below please find some of the more common international information reporting forms to consider when determining whether the foreign pension should be reported for U.S. tax purposes.

FBAR Due Date and Extension

The FBAR is used to report foreign bank and financial accounts to the US Government. The Form is due on April 15, but is currently on automatic extension. Therefore, if you did not file the FBAR (FinCEN Form 114) by April 15, you still have until October to file it. And, you do not have to file an extension form such as Form 4868 or 7004 to obtain the FBAR extension — because the extension is automatically granted.

Form 8938 Due Date and Extension

Form 8938 is used to report foreign assets to the IRS in accordance with FATCA (Foreign Account Tax Compliance Act). It is similar (but not identical) to the FBAR. Form 8938 is filed with your tax return and is due when your tax return is due. If you are an individual filing a Form 1040, then the form 8938 would be due in April along with your 1040 tax return — but if you extend the time to file your tax return, then your Form 8938 will go on extension as well.

Form 3520 Due Date and Extension

Form 3520 is used to report foreign gifts and foreign trust information. The due date for Form 3520 is generally April 15, but taxpayers can obtain an extension to file Form 3520 by filing an extension to file their tax return for that year. Similar to Form 8938, there is no specific Form 3520 extension form required beyond requesting an extension of the underlying tax return.

Form 3520-A Due Date and Extension

Form 3520-A is used to report US ownership of a Foreign Trust. Unlike Form 3520, Form 3520–A is usually due in March and not April. In addition, the rules for filing an extension for Form 3520-A are different as well (subject to the substitute filing rules). In order to extend the due date to file Form 3520-A, the taxpayer must file a separate Form 7004 extension form.

Form 5471 Due Date and Extension

Form 5471 is used to report the ownership of certain foreign corporations. The filing date is the same as when a person’s tax return is due — and if the taxpayer files an extension for the underlying tax return, Form 5471 will go on extension as well. In recent years, Form 5471 has become infinitely more complex — so taxpayers should be cognizant of the different filing requirements and plan accordingly.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file or report their income and file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure

Contact our firm today for assistance.

Schedule a Confidential Reduced-Fee Initial Consultation with a Board-Certified Tax Attorney Specialist


930 Roosevelt Avenue, Suite 321, Irvine, CA 92620