United States Income Taxation of United Kingdom-Based Pension Plans

Many United Kingdom citizens reside in the United States having worked all part or all of their career in the U.K. Due to their U.S. citizenship or residency they must comply with U.S. laws concerning their interests in U.K.-based pension plans, and they are subject to heavy penalties for noncompliance with those laws. Voluntary disclosure programs are available for minimizing the cost of delinquent compliance.

U.K. law recognizes defined benefit as well as defined contribution pension plans. Most U.K.-based defined benefit plans are funded entirely by the sponsoring employer, but some also allow employee contributions.

I. Internal Revenue Code

A. Income Taxation

A distribution from a U.K.-based defined contribution pension plan to a U.K. citizen living in the U.S. is not subject to United States income tax to the extent it represents gross income realized by the individual in a year before he or she became a U.S. citizen or resident. This is because the individual is a cash basis taxpayer, and he or she realized the distributed funds as gross income in a year before he or she became a “U.S. person” for U.S. income tax purposes. A withdrawal from an account, without more, is not gross income.

An interest in a defined benefit pension plan is not an account but a legal or contractual right to receive a monthly benefit pursuant to the governing statute or plan document (contract). A benefit received from a defined benefit pension plan looks like current gross income, even if the participant’s interest in the plan was funded entirely with contributions made before the participant became a U.S. person.

The grantor trust rules of U.S. Internal Revenue Code (“IRC”) § 671-679 determine when an individual who creates a trust and transfers property to it (the “grantor”) is deemed to own that property for U.S. income tax purposes. Under the grantor trust rules, the beneficiary of an account in a United Kingdom-based defined contribution pension plan likely is treated as the owner assets held in that account. For example, IRC § 673 treats the grantor as owner of any portion of a trust in which he retains a reversionary interest in trust corpus or income. IRC § 674 treats the grantor as owner of any portion of a trust in respect of which the beneficial enjoyment of the corpus or income therefrom is subject to a power of disposition exercisable by the grantor. IRC § 676 treats the grantor as the owner of any portion of a trust the income of which may be held or accumulated for future to the grantor or the grantor’s spouse.

IRC § 678(a)(1) provides that a person other than the grantor shall be treated as the owner of any portion of a trust with respect to which such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself. Thus, where a trust is funded entirely by an employer for the benefit of an employee, the grantor trust rules treat the employee as owner of the trust only once he or she can begin making withdrawals from the trust. A U.K.-based defined contribution plan’s governing document determines when a participant may begin may begin receiving distributions from the plan; a governing document may provide that participants may begin receiving distributions as early as age 55.¹

IRC § 679(a) provides that a U.S. person who directly or indirectly transfers property to a foreign trust shall be treated as the owner for his taxable year of the portion of such trust attributable to such property if for such year there is a United States beneficiary of any portion of such trust. IRC § 679(a)(4)(A) provides that if a nonresident alien individual transfers property to a foreign trust, and thereafter becomes a U.S. resident, such individual shall be treated as the owner of such property for U.S. income tax purposes transferred to such trust within five years before such individual’s U.S. residency starting date.

If a U.S. person is treated as the owner of property held in a U.K.-based defined contribution pension plan, such person would be required to recognize for U.S. income tax purposes current gross income realized from the account, but for supervening provisions of the United States-United Kingdom Income Tax Treaty of 2001 (the “Treaty). Treaty Article 4, paragraph 1 provides in part:

Except as provided in paragraphs 2 and 3 of this Article, the term “resident of a Contracting State” means, for the purposes of this Convention, any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature.

The “Contracting States” are the two parties to the Treaty—the United States and the United Kingdom. A United Kingdom citizen residing in the United States is a resident of both Contracting States for purposes of Treaty Article 4, paragraph 1. Treaty Article 4, paragraph 4 breaks this tie:

Where by reason of the provisions of paragraph 1 of this Article, an individual is a resident of both Contracting States, then his status shall be determined as follows:

1. a)he shall be deemed to be a resident only of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (centre of vital interests);
2. b)if the State in which he has his centre of vital interests cannot be determined, or if he does not have a permanent home available to him in either State, he shall be deemed to be a resident only of the State in which he has an habitual abode;
3. c)if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident only of the State of which he is a national;
4. d)if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall endeavour to settle the question by mutual agreement.

The Treaty defines a “national” of the United States as a citizen of the United States.² The Treaty defines a “national” of the United Kingdom as any British citizen, or any British subject not possessing citizenship of any other Commonwealth country or territory, provided he has the right of abode in the United Kingdom.³

Every income tax treaty has a savings clause providing that, notwithstanding any other provision of the treaty, a party to the treaty may tax its citizens and residents as if the treaty had not come into effect. The savings clause of the Treaty, Article 1, paragraph 4, provides, “Notwithstanding any provision of this Convention except paragraph 5 of this Article, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and by reason of citizenship may tax its citizens, as if this Convention had not come into effect.” The exceptions articulated in Article 1, paragraph 5 of the Treaty include Article 17 (Pensions, Social Security, Annuities, and Child Support) and Article 18 (Pension Schemes).

Article 17, paragraph 1 a) of the Treaty provides: “Pensions and other remuneration beneficially owned by a resident of a Contracting State shall be taxable only in that State.” So, a United Kingdom citizen who works in the United Kingdom before retiring in the United States is taxable with respect to his United Kingdom-based defined contribution pension plan, if at all, only by the United States.

Article 17, paragraph 1 b) of the Treaty provides:

Notwithstanding sub-paragraph a) of this paragraph, the amount of any such pension or remuneration paid from a pension scheme established in the other Contracting State that would be exempt from taxation in that other State if the beneficial owner were a resident thereof shall be exempt from taxation in the first-mentioned State.

The participant in a U.K.-based pension plan may under U.K. law receive 25 percent of the participant’s balance in the plan at any given time free of U.K. income tax.⁴ Therefore, by virtue of Treaty Article 17, paragraph 1 b), said 25 percent may also be received free of U.S. income tax.

Treaty Article 18, paragraph 1 provides:

Where an individual who is a resident of a Contracting State is a member or beneficiary of, or participant in, a pension scheme established in the other Contracting State, income earned by the pension scheme may be taxed as income of that individual only when, and, subject to paragraphs 1 and 2 of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support) of this Convention, to the extent that, it is paid to, or for the benefit of, that individual from the pension scheme (and not transferred to another pension scheme).

Thus, a U.K. citizen retired and residing in the U.S. is not subject to U.S. income tax on income accrued in his U.K.-based defined contribution pension plan until such income is distributed to him. And in any event, as noted above, the United States cannot tax income accrued in a defined contribution pension plan before the participant became a “U.S. person.”

To summarize:

1. The interest in a U.K.-based pension of a citizen or resident of the U.S. is subject to income tax if at all only by the U.S.
2. Contributions to a U.K.-based defined contribution pension plan, and income accrued in a U.K.-based pension plan, before the participant became a U.S. citizen or resident will never be subject to U.S. income tax.
3. Income accrued in a U.K.-based pension plan is subject to U.S. income tax if at all only when it is actually distributed.
4. 25 percent of the balance in a U.K. defined contribution pension plan at any given time may be distributed free of U.S. income tax.

B. Information Reporting

1. Form 8833

A Treaty-based tax return position concerning an interest in a defined contribution pension plan based in the United Kingdom need not be reported on Form 8833, Treaty-Based Return Position Disclosure Under § 6114 or 7701(b). The Internal Revenue Service waives the Form 8833 reporting requirement for a treaty position that reduces or modifies the taxation of income derived from pensions. Treas. Reg. § 301.6114-1(c)(1)(iv); Instructions to Form 8833.

2. Forms 3520, 3520-A

a. The Filing Requirement

Where the grantor trust rules of IRC §§ 671-679 (discussed above) treat a foreign trust as owned by a U.S. person, two reporting requirements apply. First, the U.S. person is required to report the foreign trust on Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Second, the foreign trust itself is required to report the foreign trust on Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner. But if the foreign trust itself fails to file a Form 3520-A reporting the foreign trust, then the U.S. owner must file a substitute Form 3520-A reporting the foreign trust.⁵ A substitute Form 3520-A is a Form 3520-A with “Substitute Form 3520-A” written at the top of page 1.⁶ In the balance of this article, references to “Form 3530-A” shall include substitute Form 3520-A.

A U.S. Employer Identification Number for the foreign trust must be entered on line 1b of Form 3520-A or Form 3520-A. If the foreign trust does not have an EIN, the owner can obtain one online at IRS.gov/EIN, or by calling 267-941-1099. Form 3520 does not require an EIN for the foreign trust.

The Form 3520, Form 3520-A filing requirement applies only to an arrangement that is a trust. Treasury Regulation § 301.7701-4 defines “trust” as “an arrangement . . . whereby trustees take title to property for the purpose of protecting or conserving it for the beneficiaries under the ordinary rules applied in chancery or probate courts.” Such an arrangement requires a trustee and one or more beneficiaries. It excludes a personal pension plan or a self-invested personal pension (“SIPP”) created and entirely funded by the same individual who retains the power to currently make withdrawals from the Trust, or terminate the Trust.

Where the arrangement is a trust, we move to the question of whether the U.S. person is treated as an owner of the foreign trust under the grantor trust rules of IRC §§ 671-679. As noted above, a U.S. person who owns an account in a U.K.-based defined contribution pension plan likely is treated as owner of the account under the grantor trust rules. Therefore, a U.S. person who owns an account in a U.K.-based defined contribution pension plan likely is required to report the account on Form 3520 and Form 3520-A.

Reporting on Forms 3520 and 3520-A, and the penalty for failure to so report, is effective for taxable years of U.S. persons beginning after December 31, 1995.⁷

b. Penalties

The owner of a foreign trust is subject to a penalty for failure to timely file Form 3520 or Form 3520-A. The penalty is equal to the greater of $10,000 or following (as applicable):

• 35 percent of the gross value of property transferred to a foreign trust, for failure by a U.S. transferor to report on Form 3520 Part I the creation of the foreign trust or the transfer of property to it.
• 35 percent of the gross value of distributions received from a foreign trust, for failure by a U.S. person to report on Form 3520 Part III the receipt of distributions from a foreign trust.
• 5 percent of the gross value of the portion of a foreign trust’s assets treated as owned by a U.S. person under the grantor trust rules of Internal Revenue Code §§ 671 through 679, if U.S. owner of the foreign trust fails to timely file a Form 3520-A.⁸

3. Form 8938

a. The Filing Requirement

IRC § 6038D requires U.S. persons to report their interests in specified foreign financial assets.⁹ The IRS requires § 6038D reporting to be done on Form 8938, Statement of Specified Foreign Financial Assets. Form 8938 reporting applies to an unmarried citizen or resident of the United States with more than $75,000 in specified foreign financial at any time during the tax year, or more than $50,000 in specified foreign financial assets on the last day of the tax year. Form 8938 reporting applies to a married resident of the United States who files a joint tax return and who has more than more than $150,000 in specified foreign financial at any time during the tax year, or more than $100,000 in specified foreign financial assets on the last day of the tax year.¹⁰

The term “specified foreign financial asset” includes—

1. financial accounts maintained at a foreign financial institution; and
2. the following foreign financial assets, if they are held for investment and not held in an account maintained at a financial institution:
   1. stock or securities issued by someone that is not a U.S. person (including stock or securities issued by a person organized under the laws of a U.S. possession);
   2. any interest in a foreign entity; and
   3. any financial instrument or contract that has an issuer or counterparty that is not a U.S. person (including a financial contract issued by, or with a counterparty that is, a person organized under the laws of a U.S. possession).¹¹

The IRS provides that examples of “specified foreign financial assets” include the following, if they are held for investment and not in a financial account:

1. stock issued by a foreign corporation.
2. a capital or profits interest in a foreign partnership.
3. a note, bond, debenture, or other form of indebtedness issued by a foreign person.
4. an interest in a foreign trust or estate.
5. an interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement with a foreign counterparty.
6. an option or other derivative instrument with respect to any of these examples or with respect to any currency or commodity that is entered into with a foreign counterparty or issuer.¹²

An asset is “held for investment” for this purpose if the taxpayer does not use it in, or hold it for use in, a trade or business.¹³

A foreign defined contribution pension plan is an “foreign financial account,” as is a mutual fund held within the plan. An interest in a foreign defined benefit pension plan, in contrast, is not a financial “account” but a legal or contractual right to receive a periodic sum of money.

A U.S. citizen or resident with an interest in a foreign defined contribution pension plan must report the plan, or accounts held in the plan, on Forms 3520 and 3530-A. If such individual is required to file Form 8938, then such individual need only include the plan, or mutual funds held within the plan, in the maximum number of custodial accounts and the maximum value of custodial accounts in Part I of Form 8938, and indicate in Part IV of Form 8938 the number of Forms 3520 and 3520-A such individual is filing for that year; such individual need not report detailed information about the foreign defined contribution pension plan in Form 8938, Part IV.

Section 6039D reporting, and the penalty for failure to so report, is effective for tax years of U.S. persons beginning after March 18, 2010.¹⁴

b. Penalty

A taxpayer is subject to a $10,000 penalty for failure to file a Form 8938.¹⁵ If the failure continues for more than 90 days after the day on which the IRS notifies the taxpayer of the failure, then there is an additional penalty for each 30-day period (or fraction thereof) dung which the failure continues after such 90-day period, up to a maximum additional penalty of $50,000.¹⁶

C. Penalty Relief

Notice 2022-36 provides that the Internal Revenue will not impose penalties for failure to timely file 2019 or 2020 Forms 3520 or 3520-A that are filed on or before September 30, 2022.¹⁷ Notice 2022-36 relief apparently does not apply to the penalty for failure to timely file Form 8938.

The penalty for failure to timely file Form 3520, Form 3520-A, or Form 8938 may be abated if the failure was due to reasonable cause and not willful neglect.¹⁸ Reasonable cause is based on all the facts and circumstances in each situation and allows the Internal Revenue Service to provide relief from a penalty that would otherwise apply. Reasonable cause relief is generally granted when the taxpayer exercised ordinary business care and prudence in determining his or her tax obligations but was nevertheless unable to comply with those obligations.¹⁹

Reasonable cause may be established if the taxpayer shows ignorance of the law in conjunction with other facts and circumstances, such as—

1. the taxpayer’s education; and
2. whether the taxpayer has been penalized before.²⁰

The taxpayer may have reasonable cause for noncompliance due to ignorance of the law if the taxpayer was unaware of the law and could not reasonably be expected to know of it.²¹

The Internal Revenue Manual notes that if a foreign trust fails to file Form 3520-A, and the U.S. person who is deemed owner of the foreign trust may be able to avoid penalties for failure to timely file Form 3520-A with respect to the foreign trust by attaching a Form 3520-A to a timely-filed Form 3520.²²

D. Assessment Statute of Limitations

IRC § 6501(a) provides the general rule that tax may be assessed, or a judicial proceeding for the collection of such tax begun without assessment, not later than three years after the taxpayer filed an income tax return for that year.²³ IRC § 6501(e)(1) provides that if a tax return underreports gross income by more than 25 percent, or by more than $5,000 and the underreporting is attributable to one or more assets reportable on Form 8938 (applied without regard to the dollar threshold thereof), then tax may be assessed, or a judicial proceeding for the collection of such tax begun without assessment, not later than six years after the taxpayer filed an income tax return for that year.²⁴

IRC § 6501(c)(8)(A) provides that if a taxpayer fails to report information required to be reported on certain international information returns, including Forms 3520 and 3520-A, then the time for assessment of income tax with respect to any tax return, event, or period to which such information relates shall not expire before the date which is three years after the date on which such information is reported to the Internal Revenue Service. IRC § 6501(c)(8)(B) provides that if the failure to report information referred to in § 6501(c)(8)(A) is due to reasonable cause and not willful neglect, then 6501(c)(8)(A) assessment statute tolling shall apply only to “the item or items related to such failure.”

Thus, if a U.S. person fails to file Form 3520 or Form 3520-A with respect to a foreign trust for a given year, the assessment statute of limitations does not begin to run, not only as to the delinquent Form 3520 or Form 3520-A, but as to the taxpayer’s U.S. income tax return for that year, until the delinquent Form 3520 or Form 3520-A is filed. But if the failure to file Form 3520 or 3520-A was due to reasonable cause and not willful neglect, then the suspension of the assessment statute of limitations is limited to the delinquent Form 3520 or 3520-A.

II. Bank Secrecy Act

Americans had been evading U.S. income tax by transferring financial assets overseas and investing them there and not reporting the resulting income on U.S. income tax return. The Bank Secrecy Act counters this by imposing the FinCEN Form 114, Foreign Bank and Financial Account (“FBAR”) reporting regime of 31 USC § 5314(a).²⁵ A U.S. person with a financial interest in foreign financial accounts exceeding $10,000 at any time during a calendar year must report the foreign financial accounts on an FBAR for that year. An FBAR for a given calendar year is due to be filed by the succeeding April 15th, but is automatically extended to the succeeding October 15th.

FBAR Part I calls for biographical information about the filer, including the taxpayer’s name, U.S. taxpayer identification number, and date of birth. Part I also asks two questions. One question asks whether the filer had a financial interest in 25 or more financial accounts during the year. If the answer is “Yes,” then the filer is directed to enter the number of accounts, and not complete Part II or Part III.

The other question asks whether the filer had signature authority over, but no financial interest in, 25 or more financial accounts during the year. If the answer is “Yes,” then the filer is directed to complete Part IV items 34 through 43 for each person on whose behalf the filer has signature authority.

FBAR Part II calls for information concerning accounts which the filed owned (had a financial interest in) separately during the year. Such information includes the maximum account value, the type of account, and the financial institution’s name and address.

FBAR Part III calls for information concerning accounts which the filer owned jointly during the year. Such information includes the name, taxpayer identification number (if known) and address of the joint owner.

FBAR Part IV calls for information on accounts over which the filer had signature authority but no financial interest during the year.

31 USC § 5321(a)(5)(A) authorizes the Secretary of the Treasury to “impose a civil money penalty on any person who violates, or causes any violation of, any provision of § 5314.” In the case of a non-willful violation of the recordkeeping and reporting requirement, the amount of the penalty shall not exceed $10,000, and there is no penalty if (a) the violation was due to reasonable cause, and (b) the amount of the transaction or the balance in the account at the time of the transaction was properly reported (albeit late).²⁶ In the case of a willful violation of the recordkeeping and reporting requirement, the maximum penalty authorized increases to the greater of $100,000 or 50 percent of the balance in the unreported foreign financial account at the time of the violation.

31 USC § 5322(a), (b) prescribes criminal penalties for willful violation of the recordkeeping and reporting requirements of § 5314(a).

A United States person must file an FBAR for a given calendar year who has a financial interest in, or signature authority over, foreign financial accounts with an aggregate balance of $10,000 or more at any time during that calendar year.²⁷ The FBAR filing due date for a given calendar year is the 15th day of the fourth month following close of the calendar year, and is automatically extended for six months.²⁸

“United States person” means a citizen or resident of the United States.²⁹ “Resident of the United States” includes a lawful permanent resident of the Unites States (i.e., a “green card holder”), as well as an individual who satisfies the substantial presence test of 26 USC § 7701(b)(3).³⁰ Generally speaking, an individual residing the United States is a “resident” of the United States for this purpose. This is the same definition of “United States person” that obtains under the Internal Revenue Code, addressed above.

A financial account includes, but is not limited to, a securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution (or other person performing the services of a financial institution). A financial account also includes a commodity futures or options account, an insurance policy with a cash value (such as a whole life insurance policy), an annuity policy with a cash value, and shares in a mutual fund or similar pooled fund (i.e., a fund that is available to the general public with a regular net asset value determination and regular redemptions).³¹

“Financial interest” in a foreign financial account means legal title or beneficial ownership of the account. Thus, a United States person who is the owner of record or holder of legal title of a foreign financial account has a financial interest in the account, regardless of whether the account is maintained for the benefit of the U.S. person or for the benefit of another person. A U.S. person also has a financial interest in an account the owner of record or holder of legal title of which is–

1. an agent, nominee, attorney, or a person acting in some other capacity on behalf of the United States person with respect to the account;
2. a corporation in which the United States person owns directly or indirectly: (i) more than 50 percent of the total value of shares of stock or (ii) more than 50 percent of the voting power of all shares of stock;
3. a partnership in which the United States person owns directly or indirectly: (i) an interest in more than 50 percent of the partnership’s profits (e.g., distributive share of partnership income taking into account any special allocation agreement) or (ii) an interest in more than 50 percent of the partnership capital;
4. a trust of which the United States person: (i) is the trust grantor and (ii) has an ownership interest in the trust under the grantor trust rules of Internal Revenue Code §§ 671-679;
5. a trust in which the United States person has a greater than 50 percent present beneficial interest in the assets or income of the trust for the calendar year; or
6. any other entity in which the United States person owns directly or indirectly more than 50 percent of the voting power, total value of equity interest or assets, or interest in profits.³²

A U.S. person’s interest in a United-Kingdom-based defined contribution pension plan is an “account,” and the U.S. person has a “financial interest” in the account. Hence the U.S. person must report the account on an annual FBAR filed with FinCEN.

A participant’s interest in a defined benefit pension plan, amounting to a promise by the pension plan to pay the participant a periodic sum of money, and is not an account, and hence is not reportable on an FBAR.

The IRS may assess a civil penalty under 31 USC § 5321(a) at any time before the end of the six-year period beginning on the date of the transaction with respect to which the penalty is assessed.³³ The “date of the transaction” with respect to the FBAR filing requirement is the due date of the FBAR, whether it is filed or not.³⁴

The Bank Secrecy Act first became law in 1982.³⁵

III. Voluntary Disclosures

IRS voluntary disclosure programs enable a U.S. person to minimize tax and penalties in becoming compliant with the U.S. Internal Revenue Code and Bank Secrecy Act concerning interests in U.K.-based pension plans. But the voluntary disclosure programs are just that—they can be availed of only so long as the IRS has not contacted the taxpayer concerning the taxpayer’s noncompliance, and the taxpayer is not under audit by the IRS.

A. Delinquent FBAR Filing Procedures

Under the Delinquent FBAR Submission Procedures, the taxpayer files delinquent FBARs as needed for the preceding six years. In the dropdown box on page one of the delinquent FBARs, “Did not know that I had to file” should be selected as the reason for failure to timely file the FBAR. If the filing is voluntary and complete, the IRS will assess no penalty.³⁶

B. Delinquent International Information Return Submission Procedures

Under the Delinquent International Information Return Submission Procedures (“DIIRSP”), the taxpayer files delinquent FBARs as needed for the preceding six years.

The taxpayer also files delinquent international information returns as needed. International information returns include Form 8938, Statement of Specified Foreign Financial Assets, Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, 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.

The taxpayer must file a reasonable cause statement with each delinquent international information return. A reasonable cause statement explains that the taxpayer’s failure to timely file the international information return was due to reasonable cause and not willful neglect. Both the taxpayer and the taxpayer’s representative sign the reasonable cause statement under oath.

The IRS reserves the right to assess penalties. But if the DIIRSP submission is voluntary and complete, and the IRS accepts the taxpayer’s reasonable cause statement, it will assess no penalty.

If delinquent international information returns are filed with amended U.S. income tax returns, the amended tax returns may report a de minimis amount of previously unreported income. But using the DIIRSP to file amended income tax returns reporting more than de minimis amounts of previously underreported income could be considered abusive and should be avoided. It would also render the IRS’ Streamlined Compliance Procedures for Residents of the United States, upon which the U.S. person incurs a penalty, a nullity.

There are two drawbacks to the DIIRSP. First, the IRS will not acknowledge a DIIRSP submission. The best a U.S. person can do is make sure that the DIIRSP submission is done right, and retain proof of its delivery to the IRS.

Second, and more important, the DIIRSP are not discrete as to tax years. Under the Streamlined Procedures for residents of the U.S., a taxpayer can file amended income tax returns and international information returns as needed for the last three tax years, and become compliant for all prior periods. There is no such provision under the DIIRSP. Under IRC § 6501(c)(8), the assessment statute of limitations does not begin running on an international information return until it is filed. Thus, under the DIIRSP, a U.S. person must file all delinquent international information returns as needed for all prior periods.

C. Streamlined Compliance Procedures

1. General Criteria.

An applicant under the Streamlined Compliance Procedures must certify that his or her noncompliance—failure to file FBARs, report income, or file international information returns—was not willful. The applicant also must not be under IRS audit.³⁷

2. Streamlined Compliance Procedures for Persons Residing in the United States

Under the Streamlined Compliance Procedures for Persons Residing in the United States, the U.S. person files FBARs or amended FBARs as needed for the last six years. The U.S. person also has amended U.S. income tax returns, including all required international information returns, prepared as needed for the last three years, and files them with Form 14654, Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures. On Form 14654 the U.S. person (1) explains that his or her noncompliance concerning foreign income, accounts, or entities was due to reasonable cause and not willful neglect; and (2) computes his or her Title 26 miscellaneous offshore penalty. The U.S. person pays tax due on the amended returns, and interest on the tax. The U.S. person also pays a Title 26 miscellaneous offshore penalty equal to 5 percent of the U.S. person’s high aggregate balance of foreign financial accounts as of the end of the preceding five years.³⁸

The taxpayer’s FBARs or amended FBARs are filed electronically. On page 1 of the FBARs, in the dropdown box labeled “If this report is being filed late, select tree reason for filing late”, “Other (Please provide explanation below) should be selected. A text box will then open, and “Streamlined Filing Compliance Procedures” should be entered in it.³⁹

The Form 14654 is sent to the IRS enclosing amended U.S. income tax returns, including all international information returns, as needed for the last three years, and checks in payment of tax and interest due, and the Title 26 miscellaneous offshore penalty. “Streamlined Domestic Offshore” should be written in red at the top of each amended U.S. income tax return.⁴⁰

If the submission is voluntary and otherwise conforms to the Streamlined Compliance Procedures, the IRS will assess no penalty beyond the taxpayer’s self-assessed Title 26 miscellaneous offshore penalty. The IRS will send the U.S. person an account statement for each amended income tax return filed. If the IRS agrees with the taxpayer’s computation of the Title 26 miscellaneous penalty, it will send the taxpayer a notice assessing it. If the IRS accepts the submission under the Streamlined Compliance Procedures for Persons Residing in the United States, all of the taxpayer’s noncompliance concerning foreign income and foreign accounts, and foreign entities is forgiven.

3. Streamlined Compliance Procedures for Persons Residing Outside the United States

Under the Streamlined Compliance Procedures for Persons Residing Outside the United States, the U.S. person files FBARs or amended FBARs as needed for the last six years. The U.S. person also has amended U.S. income tax returns, including all required international information returns, prepared as needed for the last three years, and files them with Form 14653, Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures. On Form 14653 the U.S. person explains that his or her noncompliance concerning foreign income, accounts, or entities was due to reasonable cause and not willful neglect. The U.S. person pays tax due on the amended returns, and interest on the tax. There is no Title 26 miscellaneous offshore penalty under the Streamlined Compliance Procedures for Persons Residing Outside the United States.⁴¹

Individual U.S. citizens or lawful permanent residents, or estates of U.S. citizens or lawful permanent residents, meet the applicable non-residency requirement if, in any one or more of the last three tax years, (1) the individual did not have a U.S. abode, and (2) the individual was physically outside the U.S. for at least 330 full days.⁴² The IRS defines an individual’s “abode” as follows:

The location of your abode is based on where you maintain your family, economic, and personal ties. Your abode is not necessarily in the United States merely because you maintain a dwelling in the United States, whether or not your spouse or dependents use the dwelling. Your abode is also not necessarily in the United States while you are temporarily in the United States; however, these factors can contribute to your having an abode in the United States.⁴³

The taxpayer’s FBARs or amended FBARs are filed electronically. On page 1 of the FBARs, in the dropdown box labeled “If this report is being filed late, select tree reason for filing late”, “Other (Please provide explanation below) should be selected. A text box will then open, and “Streamlined Filing Compliance Procedures” should be entered in it.⁴⁴

The Form 14653 is sent to the IRS enclosing amended U.S. income tax returns or amended income tax returns, including all international information returns, as needed for the last three years, and checks in payment of tax and interest due. “Streamlined Foreign Offshore” should be written in red at the top of each U.S. income tax return or amended tax return.⁴⁵

If a submission is voluntary and otherwise conforms to the Streamlined Compliance Procedures, the IRS will assess no penalty. The IRS will send the U.S. person an account statement for each amended income tax return filed. The IRS will not otherwise acknowledge a submission under the Streamlined Compliance Procedures for Persons Residing Outside the United States. If the IRS accepts the submission under the Streamlined Compliance Procedures for Persons Residing Outside the United States, all of the taxpayer’s noncompliance concerning foreign income, foreign accounts, and foreign entities is forgiven.

IV. Summary

Favorable options are available for resolving noncompliance with United States laws concerning U.S. persons’ interests United Kingdom-based pension plans. But U.S. Treasury compliance programs are voluntary; they are not available once Treasury is aware of the U.S. person’s noncompliance. Hence a U.S. person should become compliant with U.S. laws concerning U.K.-based pension plans as soon as possible.

Stephen J. Dunn practices international tax law, Federal tax controversies, and trusts and estates law. He has helped a great many taxpayers comply with United States laws concerning foreign income, accounts, and entities. His firm, Dunn counsel PLC, is based in in Troy, Michigan.