How FATCA provisions will affect the expats with foreign pensions

I have often noticed that the expats who come to work in US do not believe that their foreign pension accruals are taxable in US. Below article points out the traps for such expatriates who fail to report them to IRS particularly after the enactment of FATCA under the HIRE Act:

“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.” –

Seek professional advice as soon as possible if you have foreign pension as the law is becoming effective in 2012.


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