When is Foreign Pension Reporting Required on Form 3520 or 3520-A

Foreign Pension & Form 3520

Is Foreign Pension Reported on Forms 3520 & 3520-A?

One of the most complicated areas of international tax law involves the reporting of foreign pension plans on a US tax return. That is because oftentimes, a Taxpayer who may have a Foreign Pension, such as a CPF in Singapore, Superannuation (Super) in Australia, or SIPP in the UK considers their pension as a Trust. But technically, a foreign pension plan typically has an Owner, Trustee, and Beneficiary — meaning it would qualify as a Foreign Trust. The next question then becomes whether or now a foreign pension plan trust is required to be disclosed on IRS Form 3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts) and Form 3520-A (Annual Information Return of Foreign Trust With a U.S. Owner) — in accordance with Internal Revenue Code section 6048 and 6677. In all actuality, it doesn’t appear that the IRS necessarily intended to make foreign pension reporting this complicated. One of the most common types of foreign pension trusts — the Canadian RRSP — is specifically exempt from reporting on 3520-A in accordance with Rev. Proc. 2014-55. Even if Form 3520/3520-A does not apply to all foreign pensions, they are still reported on the FBAR and Form 8938.  Let’s review why foreign pension has to be reported on Form 3520 and 3520-A — and if an exemption or penalty relief may apply.

Form 3520 Foreign Pension as a Trust 

The biggest problem with reporting foreign pensions on Forms 3520/3520-A derives from the fact that while technically a foreign pension plan is considered a foreign trust — it is not intuitive to consider a foreign pension plan as a foreign trust (especially with all the negative implications surrounding owning a foreign or offshore trust). Compounding the complexities of foreign trusts is the fact that overall, foreign trusts are notoriously difficult to report. In March 2020, the IRS released Revenue Procedure 2020-17, which serves to minimize the reporting of certain tax-deferred retirement and non-retirement trusts. The problem is there are very specific requirements to meet these 2020-17 exemptions — and some of the more common foreign pension trusts may not qualify.

There are a few common situations in which a U.S. person may have to file a Form 3520 in relation to a foreign trust.

• • • “You are the responsible party for reporting a reportable event that occurred during the current tax year, or you are a U.S. person who transferred property (including cash) to a related foreign trust (or a person related to the trust) in exchange for an obligation or you hold a qualified obligation from that trust that is currently outstanding. Responsible party, reportable event, qualified obligation, and person related to a foreign trust are defined later.

    • You are a U.S. person who, during the current tax year, is treated as the owner of any part of the assets of a foreign trust under the rules of sections 671 through 679.

    • 3. You are a U.S. person (including a U.S. owner) or an executor of the estate of a U.S. person who received (directly or indirectly) a distribution (defined later) from a foreign trust during the current tax year; or you are a U.S. person who is a U.S. owner or beneficiary of a foreign trust and in the current tax year, you or a U.S. person related to you received

    • (1) a loan of cash or marketable securities (including an extension of credit) directly or indirectly from such foreign trust, or

    • (2) the uncompensated use of trust property; or you are a U.S. person who is a U.S. owner or beneficiary of a foreign trust and in the current tax year such foreign trust holds an outstanding qualified obligation of yours or a U.S. person related to you. U.S. person, owner, beneficiary, and related person are defined later.”

Is Foreign Pension a Trust?

Technically, a Foreign Pension is a trust and may be required to be reported on Form 3520.  But when the IRS promulgated this rule, presumably they did not intend to require foreign pension plans to be reported. This is because in general, the IRS’ disdain for foreign trusts stems from the fact that oftentimes foreign trusts are used to hide or manipulate income. Obviously, that is not the purpose of a pension trust which is typically used to save for retirement. And, under most treaties, unless the recipient or beneficiary (e.g., employee) receives distributions then the income within the foreign pension plan is not taxed at the current time.

Tax Complications of Foreign Pensions

A foreign pension can go from a relatively simple reporting exercise to extremely complex — depending on what phase of the career the employee is in, and whether or not the employer is receiving any distributions.  For example, if a person has a foreign pension in a treaty country and is not receiving distributions, then generally the income within the trust is not taxable. Evaluating it from a foreign trust perspective — the beneficiary is not receiving any income and it is not a US grantor trust — so it is typically not taxable during the growth phase. Fast-forward 15 years later and as the employee comes closer to retirement (congratulations!). At this point, the beneficiary/employee may have contributed more to the trust/foreign pension plan than the employer has contributed — especially if it is his self-managed pension plan. Therefore, the employee owns more of the trust than the employer. As a result, the foreign trust takes on the characteristics of a grantor trust instead of an employment trust  — which can have some seriously negative tax consequences for the employee.

This gets even more complicated when it is a self-employed person, who works for their own business. When combining the contributions from the employer and their own employee deferrals, it is essentially a trust that they own — and oftentimes they own more than 50% of the trust.

Does the Foreign Trust Qualify For Any Exceptions (Rev. Proc. 2020-17)

Unfortunately, foreign pension/retirement plans also get stuck in the foreign trust reporting matrix. That is because, from a technical standpoint, a foreign pension plan would be considered a foreign trust — as it has all the necessary cast of characters that would then require a Form 3520 to be filed. However, the purpose of Form 3520 and 3520-A was not to require onerous reporting of foreign pension plans. This could be seen more than ten years ago when the IRS first issued Revenue Procedure 2014-55 which excluded Canadian RRSPs from having to report on Forms 3520 and 3520-A — although the FBAR and Form 8938 are still required for the RRSP.

With the globalization of the U.S. economy, it is not as if the Internal Revenue Service has the time or resources to issue revenue procedures for each and every foreign pension plan. So instead, the IRS issued Revenue Procedure 2020-17 which attempts to provide a roadmap on how certain retirement and non-retirement deferred trusts may avoid form 3520 and 3520-A reporting, noting that similar to Revenue Procedure 2014-55, the FBAR and form 8938 are still required.

Proposed Foreign Trust Regulations

Recently, in 2024, the U.S. Government released proposed regulations for foreign trusts — which may impact who has to report, when reporting is required, and when taxpayers (or the trusts themselves) may be exempt from reporting. We have a separate article summarizing the proposed foreign trust regulations.

Late Filing Form 3520-A Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their Form 3520-A and 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.