Is Pillar 2 Foreign Retirement Filed on US Tax Return, FBAR & FATCA

Pillar 2 Foreign Retirement for US Tax, FBAR & FATCA

Many foreign countries utilize a pillar pension and retirement system that follows either a three-pillar or five-pillar retirement/social security system. The pillar foreign pension system does not necessarily bode with IRS tax and reporting rules — which can end up causing unnecessary duplicative reporting and taxation — especially when there is no tax treaty with the United States. Generally, the different pension pillars represent different aspects of an overall pension, such as old age, employment, and personal savings. When a foreign country utilizes the three-pillar system (most common), the three main pillars are:

• Pillar One: similar to US Social Security;
• Pillar Two: employment/occupation pension, similar to a 401(k) equivalent type of pension, and
• Pillar Three: individual pension not necessarily related to any employment – similar to an IRA.

For US persons who still have ownership or interest of a pillar two overseas employment pension — a common question is how is that type of account reported for US purposes? Let’s go to the basics of reporting a pillar two foreign pension plan.

Foreign Pensions Reporting in General (Worldwide)

In general, foreign pension plans and foreign retirement plans are considered foreign accounts/assets and reportable to the US government for international information reporting purposes. This is true, even if the taxpayer does not have any income distributions or contributions to their foreign pension plan. The following are some of the more common IRS foreign account reporting forms a taxpayer may have to file to report their foreign retirement/pension plans to the US Government:

FBAR for Pillar 2

FBAR refers to Foreign Bank and Financial Account Reporting (aka FinCEN Form 114). Each year, taxpayers have to report the total value of their foreign bank and financial accounts to the US government when they meet the threshold for reporting. A pillar two type of account would be the type of foreign pension account that would have to be disclosed on the annual FBAR.

FATCA Form 8938 for Pillar 2

Similar to the FBAR is Form 8938 — which was developed in accordance with FATCA (Foreign Account Tax Compliance Act). A pillar two retirement plan/account would be reported for Form 8938 purposes as well. There is additional reporting for form 8938 beyond what the FBAR requires — depending on whether or not any income was generated from the foreign pension plan.

Form 3520/3520-A For Pillar 2

Form 3520 is used to report foreign trusts. In general, a foreign pension plan can be considered a foreign employment trust — and typically not the type of foreign pension plan that is qualified under the US tax code. While there is no specific exception to reporting for an employment trust on Form 3520 as there are for certain form types of pension plans such as a Registered Retirement Savings Plan from Canada, there is a recent Revenue Procedure 2020-17, that eliminate the duplicative reporting for certain tax-deferred retirement and non-retirement foreign pension — and something you should consider discussing with an experienced Board-Certified Tax Law Specialist.

Form 8621 for Pillar 2

Form 8621 is used to report Passive Foreign Investment Companies (PFIC). Many Pillar 2 investments include assets such as mutual funds, ETFs, and SICAVs as part of their underlying asset base. As a result, some taxpayers may want to consider reporting the individual funds supporting pillar 2 investment on Form 8621 –, but this is also something you should discuss with a specialist before making any proactive representation to the IRS.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them. *Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or 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. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

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.