# Experience in filing foreign life insurance?



## Taxmyass (May 4, 2020)

I made a post about not knowing about having these life insurance policies since my parents got them for me when I was small. Now that I am aware of the filing requirement, I want to become compliant with the IRS. I took my case to two licensed CPAs both of which gave me different answers and I have concluded that they are not very knowledgeable on this. 

So I am taking matters into my own hand and back file these MF myself. But I am really confused about a couple things. 

Do I need to file form 720 for excise tax? But I don’t have an EIN to file 720 is that something I need to get? 
When I report interests and dividends from these insurances do I report it just like I would for bank interests on 1040? And on schedule B? Or do I need to file it as a foreign trust? 

Hope someone have some insight on this 🙏🏼🙏🏼🙏🏼


----------



## Moulard (Feb 3, 2017)

TL: DR --Ignore the excise tax that you could potentially owe on foreign insurance policies -- if audited let them bring it up.. accept the risk.


Technically §4371 through 77 requires an excise tax to be paid to the IRS on an insurance policy on a united states risk.

A life insurance, sickness and accident insurance, or annuity contracts that covers the life or hazards to the person of a citizen or resident of the United States is covered by those sections.

That said.. I suspect it is near impossible for you to determine if you owe the excise.

For starters.. under I.R.C. § 4374 the tax may be imposed tax on any one of..


The insured
The beneficiary,
The policyholder, if that person is someone other than the insured,
The insurance company, or 
The broker obtaining the insurance.
 
Only one party needs to pay the excise tax... you have no way of knowing if it was already paid as part of the premiums. So basically the rule seems to be.. if no one else has paid it you are liable for it.. which I would interpret as don't pay it unless forced to do so.

If you feel inclined you can look at the income tax treaty between the US and the country where the policy was created. If it allows an exemption for excise taxes I believe Rev. Proc. 2003-78, would then exempt all liable parties from the tax.

There are a host of other things to consider if you really want to deep dive into the nitty-gritty of closing agreements, but for an ordinary human with a standard life insurance policy... I wouldn't loose any sleep over it..

But if you are... this document will surely see you counting sheep in minutes

https://www.irs.gov/pub/irs-mssp/foreign_insurance.pdf


----------



## Taxmyass (May 4, 2020)

Hi Moulard, thank you for your advice! This definitely eases some of my worries 

You seem very well informed about this may I ask what is your profession? Are you an accountant? 

Another important question I want to ask, if I have to file an amendment and add these missing life insurances on my tax return how would I report my interests and dividends accruing in these contracts? Do I report them on taxable interests/dividends in 1040 along with a schedule B? 
I just have no idea how to determine if these life insurances are actually a foreign trust or not, I am just afraid the IRS treat them as one and penalize me for it. 
The two CPAs I went to told me they have never treated a life insurance as PFICs but I am betting it is because PFICs are too complicated for them to waste time on. So is that another concern I could just forget? I also read that if I have no direct access/control to the funds as a shareholder within its insurance policy its not a PFICs (Actually I don't even know if my insurance policy involves in any kind of fund investment directly (its not like I have a profile of funds) as they are vague about how we get our interests & dividends from. They just tell us the amount of interests and dividends we get each year is determined by how much profit the company makes in investment that year)

Any ideas would help a lot and much appreciated! Cheers


----------



## Moulard (Feb 3, 2017)

I am sorry to say that I am just a guy who gets perverse pleasure in reading the IRC and Treasury regulations and makes a hobby of recording the ways the US tax system penalizes those who live overseas. 

I have to admit, my deep dives into the code are mostly driven out of self interest, except where a topic piques my intellectual curiosity.

As it happens, I came across the application of an excise tax on foreign insurance policies that cover US assets or people by accident. It seemed so odd, so that intellectual curiosity kicked in and I did a bit of digging and filed it away for future refence.

Not having a vested interest in understanding the treatment of life insurance policies (as I do not have one) what I say below is probably not worth much... but I will give it a go...

On the PFIC front, I suspect your CPAs are right.

Don't quote my numbers, I have not double checked them, but I believe to be a PFIC a corporation must make 75% of its income from passive investments, and 50% of the value of its assets must also be passive.

I would assume that an insurance company very well may make that definition, as I would expect premiums would be less than 25% of it annual income.

However, for you to have a PFIC filing requirement, you would have to be a shareholder. I haven't read in detail on any of this at all, so with that caveat, It is possible that you are just a beneficiary of a policy and not a shareholder.
Particularly if it was established by your parents.. for example they could be the shareholders... You may want to look at policy documents to be sure.

I have a niggling thought in the back of my mind that there is another requirement for PFIC definition is being the primary business purpose rather that a secondary business function which it would be for an insurance company.. 

On the Trusts question.. 

I have little doubt that there will be a trust structure in place somewhere. The premiums will have been put in trust to be able to payout policy claims to the beneficiaries of those policies.

That said, that does not mean you have a trust reporting requirement. You are unlikely to be either the owner or grantor of the trust. At most you are the beneficiary of the trust.

On reporting interest and dividends.

I believe that you are right, report on Schedule B as interest and/or dividends as required. You may also have FinCen and/or Form 8938 reporting requirements depending on the total value of your foreign financial assets.


----------



## Taxmyass (May 4, 2020)

Moulard said:


> Particularly if it was established by your parents.. for example they could be the shareholders... You may want to look at policy documents to be sure.


Thanks for the information Moulard!

I want to clarify that although my parents established these life insurance policies for me, when I turned 18 they are automatically switched under my name so I am the policy holder now and not a beneficiary. 

Now that I am digging a little deeper, it looks like many insurance companies may well be off the PFICs hook for now

'The exception to the PFIC rules for insurance companies as modified by the 2017 tax reform provisions, commonly referred to as the Tax Cuts and Jobs Act, requires that an insurance company be characterized as a qualifying insurance corporation (QIC) and that its income be derived in the active conduct of an insurance business.'

'In order to be a qualifying insurance corporation for a taxable year, the following requirements must be met: (i) the corporation would be subject to tax under subchapter L if it were it a US domestic corporation, and (ii) its "applicable insurance liabilities" as reported on the corporation's "applicable financial statements" constitute more than 25 percent of its total assets (or meet an alternative facts and circumstances test). For these purposes, "applicable insurance liabilities" include loss and loss adjustment expenses and reserves (other than deficiency, contingency, or unearned premium reserves) for life and health insurance risks.'

So I guess right now my main focus should be on the foreign trust concern and whether I need or should file the 3520 A form


----------



## Moulard (Feb 3, 2017)

Taxmyass said:


> So I guess right now my main focus should be on the foreign trust concern and whether I need or should file the 3520 A form


You want to avoid that if you can.. just look up all the $10k USD penalties being issued related to 3520/A filing obligations that have been handed out like confetti.

Unless you are the grantor / owner of a trust you don't have that filing requirement.

You are not a grantor/transferor unless you transfer property to the trust. 

You are likely not the owner of the trust unless you have substantial dominion and control over the property of the trust.

You will be getting yourself into a world of pain.

So unless you transferred more than 50% of the basis in the trust, just step slow away and don't look back.


----------



## Taxmyass (May 4, 2020)

Moulard said:


> You want to avoid that if you can.. just look up all the $10k USD penalties being issued related to 3520/A filing obligations that have been handed out like confetti.
> 
> Unless you are the grantor / owner of a trust you don't have that filing requirement.
> 
> ...


Woah! Thank you for the heads up!  Honestly I still don't fully grasp the concept of a trust and whether or not foreign life insurances are among them. Sometimes I hear people say the IRS treat foreign life insurance as a foreign trust I guess I will have to just let it go and stay away!


----------



## Nononymous (Jul 12, 2011)

Why are you filing, by the way? If you are a dual citizen without any US assets or plans to move to the US, you are far better off ignoring the whole silly mess.


----------



## Taxmyass (May 4, 2020)

Nononymous said:


> Why are you filing, by the way? If you are a dual citizen without any US assets or plans to move to the US, you are far better off ignoring the whole silly mess.


 I do plan on living in the states in the near future, and I have some money in the bank back in the states, not a lot but enough to not want to lose it!


----------



## Jca1 (Aug 7, 2019)

Moulard said:


> You want to avoid that if you can.. just look up all the $10k USD penalties being issued related to 3520/A filing obligations that have been handed out like confetti.
> 
> Unless you are the grantor / owner of a trust you don't have that filing requirement.
> 
> ...


I agree with the recommendation to not file 3520 or 3520-A in cases where it's unclear whether there is a requirement. The surest way (in practice, almost the only way) to get a 3520/3520-A penalty is to file form 3520 or 3520-A. $10k is just the floor and there may be multiple penalties. I know of one case of a multi-million dollar penalty and one for for $200-300k.


----------



## shuttermurgh (May 12, 2021)

Hello, I am in a similar position. I had a foreign life insurance investment since 2018 in India. This is commonly known as a ULIP policy. The amount of premiums paid every year was $1000. I filed my 2019 taxes and filed FBAR and form 8631 where I reported this. SHould I have filed FOrm 720 as well? Is there a criminal penalty if this comes to light? Whats the probability that IRS finds out?

Should I now file for Form 720 in tax year 2020? Please let me know



Moulard said:


> TL: DR --Ignore the excise tax that you could potentially owe on foreign insurance policies -- if audited let them bring it up.. accept the risk.
> 
> 
> Technically §4371 through 77 requires an excise tax to be paid to the IRS on an insurance policy on a united states risk.
> ...


----------

