Fbar And Life Insurance: What You Need To Declare

Foreign life insurance policies are considered foreign financial accounts and must be reported by US persons to the IRS on an annual basis. This is done through the Report of Foreign Bank and Financial Accounts (FBAR), FinCEN Form 114. The FBAR must be filed by a US person who has a financial interest in any foreign financial account, including foreign life insurance policies, if the aggregate value of the financial account(s) exceeds $10,000 at any time during the calendar year. The reporting requirement applies to the policy owner if they are a US person and does not apply if the policy is owned by a foreign trust. The FBAR rules for reporting foreign life insurance policies are complex and it is important to understand the specific requirements and thresholds for reporting.

Reporting a foreign life insurance policy on FBAR

The rules for reporting foreign life insurance policies on FBAR are complex. The IRS considers foreign life insurance policies as "foreign accounts", which may come as a surprise to most policy owners. The IRS requires US person owners of a foreign life insurance policy to report the policy annually on an FBAR (FinCEN Form 114).

FBAR stands for Foreign Bank and Financial Accounts. It is a report that must be filed by US taxpayers who own foreign accounts, including foreign life insurance policies, which exceed a total value of $10,000 at any time during the calendar year.

The cash or surrender value of the foreign life insurance policy is included on the FBAR each year that the threshold is met. The surrender value is the current "cash" value of the policy, which is the value that the owner of the policy can "surrender" or turn in to the insurance company and receive a value in exchange.

Other forms to report foreign life insurance policies

In addition to FBAR, the owner of a foreign life insurance policy may have to report the policy on Form 8938 (FATCA) and Form 720. If the foreign policy is unit-linked and includes an investment component, it may be designated a PFIC, requiring additional reporting on Form 8621.

Non-compliance

If a foreign life insurance policy is not reported, it may lead to offshore penalties, such as FBAR Penalties. These penalties can be avoided with FBAR Amnesty and other amnesty programs, collectively referred to as voluntary disclosure.

FBAR filing for foreign life insurance

The Foreign Bank and Financial Accounts (FBAR) reporting rules for foreign life insurance policies are complex. The Internal Revenue Service (IRS) considers foreign life insurance policies to be a type of foreign account, and so they must be reported as such.

Who Has to File?

U.S. taxpayers who own foreign life insurance policies may be required to report them to the U.S. government each year. However, not all foreign life insurance policies are reportable. For a foreign life insurance policy to be reportable, it must have a surrender value or cash value. If the foreign insurance policy does not have a surrender or "cash" value, it may not be reportable.

The Surrender Value is the current "cash" value of the life insurance policy. This is the value that the owner of the policy can "surrender" or turn in to the insurance company in exchange for a payout.

Forms

The IRS requires that a Foreign Life Insurance Policy be reported on the FBAR (FinCEN 114) when it meets the threshold reporting requirement. The FBAR Cash Value Accumulation Test can help determine the reporting value of a life insurance policy.

In addition to the FBAR, the owner of foreign life insurance may have to report the policy on:

• Form 8938 (FATCA)
• Form 720 (Excise Tax)
• Form 3520 (Foreign Trust)

Foreign Life Insurance Policies that are "unit-linked" and include an investment component may be designated a PFIC, and additional reporting requirements on Form 8621.

Non-Compliance

If a foreign life insurance policy is not reported, it may lead to offshore penalties, such as FBAR Penalties. These penalties can be avoided with FBAR Amnesty and other amnesty programs, collectively referred to as voluntary disclosure.

Surrender value and FBAR reporting

The Surrender Value is the current "cash" value of the life insurance policy. For example, if Daniel purchased a life insurance policy for $50,000 and then paid premiums each year, with the payout (in 30 years) to be $2,000,000, the surrender value is not the payout amount. Instead, the surrender value is the value that the owner of the policy can "surrender" or turn in the policy to the insurance company and receive a value in exchange for surrendering the policy and the rights associated with it.

The Surrender Value for FBAR Life Insurance Policy Reporting is important because it determines whether a foreign life insurance policy needs to be reported to the IRS. If a foreign insurance policy does not have a surrender or "cash" value, it may not be reportable. However, if a foreign life insurance policy has a surrender value, it is considered a "foreign financial account" and must be reported on the FBAR by a US tax resident. This is true even if the surrender value is below the $10,000 threshold, as long as the person has other foreign financial accounts that in aggregate exceed $10,000.

The FBAR rules for reporting life insurance for foreign policies are complex and it is recommended that taxpayers consult with a Board-Certified Tax Law Specialist to determine their specific reporting requirements. The IRS has taken an aggressive approach to foreign accounts compliance and unreported offshore income, and there can be significant fines and penalties for willful or non-willful failure to file the FBAR.

To determine the Surrender Value of a life insurance policy for FBAR reporting, taxpayers can refer to the IRS Cash Value Accumulation Test for guidance. This test helps to understand the reporting value of a life insurance policy by defining a "life insurance contract" as a contract that meets certain cash value accumulation and guideline premium requirements.

FBAR and FATCA amnesty

FBAR Amnesty Programs are for US taxpayers who own foreign accounts, assets, and investments, and who may be required to report this information to the US government each year on various international information reporting forms. The FBAR (FinCEN Form 114) is one of the most common forms, and it must be filed when a taxpayer has more than $10,000 in annual aggregate total in all foreign accounts combined on any day of the year.

The IRS has developed several amnesty programs to help taxpayers safely get into compliance and avoid penalties. These include:

• Voluntary Disclosure (VDP/OVDP)
• Streamlined Procedures (SFCP/SDOP/SFOP)
• IRS Delinquency Procedures
• Delinquent FBAR Submission Procedures (DFSP)
• Delinquent International Information Return Submission Procedures (DIIRSP)

These programs may reduce or even eliminate international reporting penalties. However, it is important to note that the IRS reserves the right to cancel or modify these programs at any time.

In addition to the FBAR, foreign life insurance policies may also need to be reported on Form 8938 (FATCA) and Form 720. Form 8938 must be filed by US taxpayers who meet certain threshold requirements and have a financial interest in a foreign financial account. Form 720 may also be required, along with a 1% excise tax on the foreign premiums paid.

FBAR reporting requirements

The FBAR reporting rules for foreign life insurance policies are complex. The IRS considers foreign life insurance policies as "foreign accounts", and requires US persons who own such policies to report them annually on an FBAR. This is the case even if the owner does not consider the policy a foreign account.

The FBAR reporting requirements apply when the foreign life insurance policy has a "cash" or "surrender" value. The surrender value is the current "cash" value of the policy—the amount the owner would receive if they were to "surrender" or turn in the policy. If the foreign insurance policy does not have a surrender or "cash" value, it may not need to be reported.

The FBAR must be filed by a US person who has a financial interest in a foreign financial account if the aggregate value of the financial account(s) exceeds $10,000 at any time during the calendar year. The FBAR must be filed electronically and there are no extensions for the deadline.

In addition to the FBAR, the owner of a foreign life insurance policy may also have to report the policy on Form 3520 (Foreign Trust), Form 720 (Excise Tax), and Form 8938 (FATCA). Foreign life insurance policies that include an investment component may also be designated a PFIC, requiring additional reporting on Form 8621.

If a foreign life insurance policy is not reported, it may lead to offshore penalties, such as FBAR Penalties. These penalties can be avoided through FBAR Amnesty and other amnesty programs, which are collectively referred to as voluntary disclosure.

Frequently asked questions