US Taxes and foreign pensions: The need for proper disclosure


I love a good challenge, and a big part of the reason I love my position at IRSMedic is that there is simply no greater challenge than foreign taxation. The nuances of foreign taxation — and the Offshore Voluntary Disclosure Program (OVDP) — present me with a problem just waiting to be conquered. I enjoy finding mistakes that great attorneys and CPAs often miss, and this is just one example of a hundred similar stories.


A really solid accounting firm that we have collaborated with several times had a client with a foreign pension distribution that he mistakenly failed to declare. The accounting firm took the initiative and directed their client to seek our help with this issue, knowing that we are experienced in the taxation of foreign pensions and foreign trusts. As the preparer with the most experience in dealing with foreign pensions, the case was assigned to me.


The client lived and worked in a foreign country for most of his life while he remained a US citizen. Throughout his career, he took part in a government mandated pension in that foreign country. He was making exactly 50% of the contributions and his employer was contributing the other 50%. After he finished his employment in the foreign country, he moved all of these funds to another bank and invested them. He allowed this money to continue to grow in foreign investments for several years after his retirement before taking a distribution of all of the funds in 2010.


US taxation and foreign pension funds: The bad news

His accountant, not knowing how to handle what is technically a foreign trust, and really not understanding what it was for US tax purposes, didn't know that there were annual IRS reporting forms. The client believed that the taxation of this trust had been fully satisfied as the foreign country taxed him tens of thousands of dollars; upon their transfer, the government had withheld and remitted a significant portion of said funds.


What he didn't know is that anyone making this type of transfer is able to file a form with the bank that will prevent them from withholding this tax. Our client, like most everyone in a similar situation, didn't know this was possible. Yet, fortunately for him, pursuant to the U.S. treaty with this country, the client should not have been taxed in that other country and instead should have been taxed in the United States.


US taxation and foreign pension funds: The good news

The client contracted us to complete his OVDP submission but wished to use his accountants for the necessary amending of returns. His accountants drafted these returns and assessed him a liability of over $100,000 for the distribution. When we saw this, we knew that we could find a much more favorable treatment for his distribution. We explained the situation to the client and his accountants who then hired us to work on the foreign trust component of his returns.


Once this case was assigned, I began the necessary research into the particular pension, the relevant treaties, and the foreign trusts involved in the transaction. Ultimately, we were able to lower the client’s liability regarding the trust to under $20,000, meaning the client would keep an additional $80,000 in his pocket.


US taxation and foreign pensions: The reality

Even good CPAs can get it wrong; it doesn't happen all the time, but it does happen. Having a working knowledge of tax law can significantly increase the chances of reducing liability. That's what we were able to see things that they couldn't. To learn how our other clients have felt about their experience with us, click here.