Jane Dotson
If you are a US taxpayer with foreign accounts, assets, and investments, you may be required to report this information to the US government each year. This includes reporting foreign life insurance policies as a foreign financial account on the FBAR (Report of Foreign Bank and Financial Accounts). The FBAR is an annual report, usually due on April 15, with an automatic extension to October 15. It must be filed electronically online through FinCEN's BSA E-Filing System or by requesting an exemption from FinCEN to paper-file. While not all foreign life insurance policies are reportable, those with a surrender or cash value generally need to be disclosed by reporting the cash surrender value, not the face value. Beneficiaries of foreign life insurance policies typically do not need to report the policy on their FBAR since they do not have ownership interests. Failure to file an FBAR when required can result in significant penalties.
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What You'll Learn
Foreign life insurance policies with surrender value
Foreign life insurance policies with a surrender value are generally considered reportable on FBAR. A surrender value is the current "cash" value that the owner of the policy can "surrender" or turn in to the insurance company, receiving a value in exchange for surrendering the policy and the rights associated with it. If the foreign insurance policy does not have a surrender or "cash" value, it may not need to be reported.
The FBAR reporting rules have many components, and the reporting revolves around surrender value. Not all life insurance policies are reported; only certain life insurance policies are reportable once they have what is referred to as a surrender value. The surrender value is the payout that the owner of the policy receives when a triggering event occurs.
If the life insurance policy distributes income, then this income is taxable and reportable on a U.S. tax return, even if the income is generated overseas. It can also depend on whether the income is vested or not. Life insurance income often includes year-over-year growth in the value of the policy, accumulated income, distributions from the policy, and certain bonus payments.
U.S. taxpayers who own foreign accounts, assets, and investments may be required to report this information to the U.S. government each year on various international information reporting forms. Some of the more common forms taxpayers may be familiar with are FBAR and Form 8938. While taxpayers may be aware that they are required to report investments such as bank and investment accounts, many are surprised to learn that they are also required to file less common assets such as foreign life insurance policies.
If taxpayers are non-compliant with the foreign asset and income reporting requirements, they should consider applying to one of the IRS's voluntary disclosure programs. These programs may reduce or even eliminate international reporting penalties.
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Reporting foreign bank accounts
U.S. citizens, Green Card holders, resident aliens, and dual citizens must report foreign bank accounts to the U.S. government each year. This is done by filing a Report of Foreign Bank and Financial Accounts (FBAR) on Financial Crimes Enforcement Network (FinCEN) Form 114. This is required if the combined balance of all the foreign accounts owned or in which there is a financial interest or signature authority is more than $10,000 at any point during the calendar year.
Foreign financial accounts include bank accounts, securities accounts, and certain foreign retirement arrangements. For each account reported on an FBAR, records must be kept, including the maximum value during the year. These records must be kept for five years from the due date of the FBAR. The FBAR is an annual filing, and the deadline is usually April 15, with an automatic extension to October.
It is important to note that not all foreign accounts need to be reported. For example, accounts maintained on a U.S. military banking facility or held in an individual retirement account (IRA) are exempt. Additionally, beneficiaries of foreign life insurance policies generally do not need to report the policy on their FBAR, as they do not have ownership interest and can be removed at any time by the owners. However, if a foreign life insurance policy has a surrender or "cash" value, it may need to be reported, and a Form 720 may also need to be filed with a 1% excise tax paid on the foreign premiums.
There are penalties for filing an FBAR late or not at all, ranging from a few hundred dollars to a few hundred thousand dollars for serious offenders. However, the IRS has developed amnesty programs to assist taxpayers in becoming compliant, which may reduce or eliminate these penalties. Additionally, streamlined compliance procedures allow Americans to catch up on past FBARs without penalties.
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FBAR filing requirements for married taxpayers
The FBAR, or Report of Foreign Bank and Financial Accounts, is an annual report due on April 15, following the calendar year reported. Taxpayers who make payments to foreign life insurance policies for premiums may be required to file a Form 720 to report the premium payments to the IRS and pay a 1% excise tax on the value of the annual premiums.
If you and your spouse only have foreign accounts that are jointly owned, you can file the FBAR form jointly. However, if both spouses own qualifying accounts and the accounts are not jointly owned, you will each need to file a separate FBAR. Additionally, the spouse of an individual who files an FBAR is not required to file a separate FBAR if the following conditions are met:
- All the financial accounts that the non-filing spouse is required to report are jointly owned with the filing spouse.
- The filing spouse reports the jointly owned accounts on a timely-filed FBAR electronically signed.
- The filers have completed and signed Form 114a, "Record of Authorization to Electronically File FBARs" (maintained with the filers' records).
It is important to note that the FBAR reporting threshold is $10,000; this is the combined value of all qualifying foreign accounts. If your qualifying foreign assets had a combined value of $10,000 or more at any time during the tax year, you must file FinCEN 114.
Furthermore, not all foreign life insurance policies are reportable. Only certain life insurance policies are reportable once they have what is referred to as a "surrender value" or "cash value." The surrender value is the current "cash" value of the life insurance policy, or the value that the owner of the policy can "surrender" or turn in to the insurance company in exchange for value.
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Reporting income from foreign insurance policies
Reporting foreign assets and income to the IRS is a complex process, and it is recommended that you consult a tax law specialist for specific reporting requirements. However, here is some general information on reporting income from foreign insurance policies.
Who needs to report?
U.S. taxpayers who own foreign accounts, assets, and investments may need to report this information to the U.S. government each year. This includes foreign life insurance policies, which many taxpayers may not realize. However, not all foreign life insurance policies are reportable. Generally, a policy must have a surrender or "cash" value to be reported. The surrender value is the amount that the owner of the policy can "surrender" or turn in to the insurance company and receive money in exchange for giving up the policy and associated rights.
What forms to use
The FBAR (FinCEN Form 114) is used to report foreign financial accounts, including foreign life insurance policies. Taxpayers may also need to file Form 720 to report premium payments and pay a 1% excise tax on the value of the annual premiums. Additionally, there may be income tax implications for owning foreign life insurance policies, which may require further forms, such as Form 8938.
When to report
The FBAR is an annual report, due on April 15 following the calendar year reported. An automatic extension to October 15 is allowed if the original deadline is missed.
How to report
The FBAR must be filed electronically through FinCEN's BSA E-Filing System. Paper filing is only permitted if an exemption from e-filing is requested and approved by FinCEN.
What to report
When reporting foreign life insurance policies, the policy identifier is reported as an account number on the FBAR. The policy's surrender value, if applicable, is a key component of the reporting. Income associated with an insurance policy, such as bonus payments, is generally taxable and reportable on a U.S. tax return, even if the income is generated overseas.
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FBAR reporting deadlines
The FBAR, or Foreign Bank Account Reporting, is an important tax form that discloses information about certain offshore accounts with a combined value of $10,000 or more. The FBAR must be submitted annually to the Financial Crimes Enforcement Network (FinCEN) by April 15. This deadline is applicable to US citizens, resident aliens, and any domestic legal entity with a financial interest in, signature authority, or other authority over one or more foreign accounts.
It's important to note that the FBAR reporting threshold is $10,000. This means that if your qualifying foreign assets had a combined value of $10,000 or more at any time during the tax year, you are required to file an FBAR. Even if the combined value was above the threshold for a single day, reporting is necessary.
In the context of foreign life insurance policies, the FBAR reporting requirements centre around the concept of surrender value. This refers to the current "cash" value that the owner of the policy can surrender or turn in to the insurance company in exchange for a payout. If a foreign insurance policy does not have a surrender or cash value, it may not need to be reported. However, if it does have a surrender value, it must be reported on the FBAR, and the policy identifier is reported as an account number.
It's worth noting that not all foreign life insurance policies are reportable. Generally, only policies with a surrender value or cash value need to be disclosed on forms like the FBAR and Form 8938. Additionally, while taxpayers may need to report foreign life insurance policies, beneficiaries of such policies typically do not, as they do not have an ownership interest and can be removed at any time by the owners.
For those who fail to file an FBAR when required, there can be significant civil and criminal penalties, including fines and even prison time. However, the IRS will not penalize those who properly report a foreign account on a late-filed FBAR if they determine there was a reasonable cause for the delay. Additionally, the IRS has developed various offshore amnesty programs to assist taxpayers in safely achieving compliance and potentially reducing or eliminating international reporting penalties.
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Frequently asked questions
FBAR stands for Report of Foreign Bank and Financial Accounts. It is a form that must be filled out by US taxpayers who own foreign accounts, assets, and investments.
Foreign life insurance policies are considered "foreign financial accounts" and must be reported on the FBAR if they have a cash surrender value. The amount to be reported is the cash surrender value, not the face value of the policy.
The FBAR is an annual report, usually due on April 15, with an automatic extension to October 15.
No, the FBAR must be filed separately from your federal tax return. It must be filed electronically through FinCEN's BSA E-Filing System, unless you request an exemption from FinCEN to file a paper form.
