For years, the IRS has required that expats report foreign retirement trusts, despite offering little guidance on mandated reporting. This year, the rules have changed. Here’s what expats need to know about tax-favored foreign retirement trusts, reporting requirements and exemptions.
Foreign Trust Reporting Rules
Under IRS Revenue Procedure 2020-17, eligible U.S. citizens and residents are exempt from the reporting requirements for transferring money to tax-favored foreign retirement trusts or for owning such assets.
Exempt assets are those that are only or almost exclusively for the purposes of the following:
- Retirement benefits
- Disability benefits
- Medical benefits
- Educational benefits
Assets that are for income-generating purposes are still subject to reporting requirements.
This is important because for years, the IRS has cracked down on expats with foreign pension plans and trusts held offshore — even when those assets were legitimate, such as employee benefit programs for international workers.
Not only will the IRS be more lenient under these new rules, taxpayers who had paid IRS penalties in the past are able to get their money back. Taxpayers who were assessed penalties but have not yet paid can get their liability waived, too.
This rule change is a pivot for the IRS. Now, the IRS is treating foreign retirement trusts and the like differently than other types of foreign trusts.
The IRS lists requirements to help citizens determine whether or not a foreign trust meets the exemption. Generally, trusts that no longer need to be reported are income-tax exempt or tax advantaged, meet another tax benefit (such as a government subsidy), or are taxed on investment income at a reduced rate.
To be exempt from reporting requirements, employer-maintained foreign trusts must include a large number of employees (including “rank and file” workers), provide benefits to a majority of employees who are eligible, and avoid discriminatory practices.
These exemptions allow individuals to reduce their tax liability and keep more of the money they have put away for retirement purposes.
While the exemptions cover a lot of circumstances, there are cases in which income held in a foreign trust still needs to be reported. The information presented here is intended as general guidance, and there may be other considerations. Expats should always speak with a CPA that understands how to handle foreign-earned income and foreign trusts to make sure they file their taxes correctly.
Why Expats Should Work With a CPA
The IRS is notorious for penalizing expats who did not file their taxes correctly. Even expats who made an honest mistake, such as not declaring income because they didn’t know they needed to, have received financial penalties. “Not filing taxes” is not a way to avoid these penalties, as the IRS can assess penalties for back taxes, as well.
Keeping up with tax laws is confusing, especially for expats who no longer live in the U.S. The easiest way to meet tax obligations (and file correctly) is to work with a CPA that specializes in expat tax filings and understands complex issues including foreign trust reporting.
Expat CPA has provided tax services to the expat community since 1994. The team at Expat CPA is knowledgeable about complicated tax issues and keeps abreast of all changes related to expat tax obligations and foreign-earned income. When it comes to meeting tax obligations and safeguarding foreign-earned income, it is critical that expats choose a CPA that understands their circumstances and can provide accurate and timely advice as well as tax services.
Expat CPA offers comprehensive tax services for expats. From state and federal tax filing to FATCA reporting or foreign bank account filing, Expat CPA helps expats file accurately and on time to meet obligations with less stress. To talk about your circumstances and how we can help, contact us today.