960 / Are employer contributions to a foreign retirement account on behalf of a U.S. individual exempt from U.S. reporting requirements?

U.S. individuals residing abroad may become subject to both the FBAR and FACTA reporting rules, and the corresponding penalties for noncompliance, based upon their participation in foreign retirement plans.

Generally, a U.S. individual who has an interest in any “foreign account” is required to file an FBAR (Form TD F90-22.1) if the aggregate value of foreign accounts exceeds $10,000 at any time during the calendar year.¹ The IRS has issued regulations that specifically exempt certain accounts, including plans that qualify under IRC Section 401 and IRA accounts, but these regulations do not provide a similar exemption for foreign retirement accounts.² Therefore, whether FBAR reporting will be required for a U.S. individual’s foreign retirement accounts will likely turn upon whether the individual has a “financial interest” or “signature authority” over the foreign account.

Penalties for failure to file an FBAR can be steep—for willful violations, the civil penalty can equal the greater of $100,000 or 50 percent of the account assets, and the IRS may be entitled to file criminal charges.³ For non-willful violations, the penalty can still equal up to $10,000 per violation unless the taxpayer can show that there was reasonable cause for failure to file, in which case no penalty is imposed.⁴

Because of the steep penalties imposed upon taxpayers who do not comply with FBAR reporting obligations, the IRS has issued guidance to allow certain “low risk” nonresident U.S. taxpayers who have resided outside of the U.S. since January 1, 2009 to catch up on filing delinquent U.S. income tax returns and FBARs with respect to their foreign accounts. Whether an individual is “low risk” or not will be determined based on the amount of U.S. income tax owed (less than $1,500 per tax year is low risk), and these delinquent returns will be processed in a streamlined manner absent any other high risk factors.⁵ The plan is described by the IRS as a method to provide assistance to U.S. citizens residing abroad, including dual citizens, with foreign retirement plan issues.⁶

In addition to FBAR filing requirements, a U.S. individual may be required to comply with FATCA and report any foreign financial assets with an aggregate value of over $50,000 (or higher amount, if the Secretary otherwise provides) on Form 8938, Statement of Specified Foreign Financial Assets, attached to his or her U.S. tax return.⁷

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1     See IRS “FAQs Regarding Report of Foreign Bank and Financial Accounts (FBAR) – Financial Accounts,” available at https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar (last accessed June 17, 2024).

2     See IRS Guidance: “Report of Foreign Bank and Financial Accounts (FBAR),” available at https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar (last accessed June 17, 2024).

3     31 USC § 5321(a)(5).

4     See IRS FS-2011-13 (Dec. 2011).

5     See IRS Instructions for New Streamlined Filing Compliance Procedures for Nonresident, Non-Filer U.S. Taxpayers, available at http://www.irs.gov/Businesses/Corporations/Summary-of-FATCA-Reporting-for-US-Taxpayers (last accessed June 17, 2024).

6     IR-2012-65 (June 26, 2012).

7     IRC § 6038D(a).