Assurance Vie and U.S. Tax Rules: FBAR, FATCA & PFIC

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Assurance Vie and U.S. Tax Rules

Assurance Vie and U.S. Tax Rules

Assurance Vie and U.S. Tax Rules

Assurance Vie and U.S. Tax Rules: The IRS tax treatment of an assurance vie for U.S persons is complicated. Like the SICAV or UK investment ISA, the assurance vie has many tax-deferred components, which do not receive tax-deferred status under U.S. tax law. Outside of the United States, the hybrid life insurance policy/unit-linked investment vehicle is a very common type of investment  — sometimes is is referred to as a Unit-Linked Insurance Policy or “ULIP.” With an assurance vie, the life insurance serves as a wrapper for various types of investments. It is a common type of foreign investment held by French/U.S. dual citizens or residents. The primary benefit of the assurance vie is that the income grows tax-free within the wrapper.   France is the primary country that offers the assurance vie, although this type of investment may also be available in other countries as well.

What is a French Assurance Vie?

The assurance vie accumulates investment income and grows tax-free.  Therefore, the income earned on the assets within the assurance vie is not taxed until distribution in France.

Avoid Traditional French Estate Laws

In general, the French estate laws are complex and strict. One primary benefit of the assurance vie is that it helps to put the owner in control of beneficiary distributions. With the assurance vie, the owner of the policy/investments can select the beneficiaries for distributions.

How is Assurance Vie Taxed in the US

For U.S. persons with French assurance vie, the major hiccup will be the U.S. tax ramifications. Namely, the assurance vie does not enjoy the same tax-deferred treatment as it does in France. Therefore, the growth within the assurance vie is taxable as it grows. The key issue for U.S. tax of an assurance vie is when does the income become taxable. The answer hinges on whether the assurance vie qualifies as a PFIC or not. If it is a PFIC, then tax may be deferred until distribution, at which time the Taxpayer may get walloped pretty hard with an excess distribution PFIC tax. If the assurance vie is not a PFIC, then the growth is taxable during each year that the income accrues.

FBAR & Assurance Vie

Whether the assurance vie most closely resembles a life insurance policy or an investment account, it is reportable on the FBAR.

FATCA & Assurance Vie

An assurance vie is the type of investment that is also reportable on FATCA Form 8938.

PFIC & Assurance Vie

Analyzing the assurance vie under PFIC (Passive Foreign Investment Company) rules is complicated.  At its core, if the assurance vie satisfies the elements of PFIC, then reporting is required on Form 8621 – and the tax becomes subject to the PFIC excess distribution calculation rules.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.

*Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or 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.

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