Pension and FBAR - Completely confused...

Hi guys.

I'm British and my fiancee is American. She files her taxes each year and last year began filing the FBAR as I added her to my savings account. She does not earn enough here to pay US taxes.

Last night she realised that the two accounts she has access to,totalling more than $10k, had been listed on the FBAR in GBP and not USD. We asked someone at the IRS what to do and were told to wait 120 days before filing an amendment, which we'll do. Does this sound right and does this affect us in any way?

It was while I was reading up on this that I realised she has never declared her pension on her tax return or on the FBAR. From August 2010 to April 2013, she had a pension that she and her employer made contributions to. The pension is with Scottish Life and I can't work out if that means it's an 'employer administered' pension or if that just applies to government, NHS pensions etc. The current balance stands at around £4,000.

What do we do about this? Last night I read numerous threads and articles and got absolutely nowhere. What does she need to declare and on what forms must she do this? Does she have to amend previous forms or is it just going forward?

Also, if this was something she should have declared before, will we be in trouble?

Thanks in advance.

The first thing you need to do is understand what type of pension your fiancee has. As you have a statement with a balance it's probably a defined contribution plan. Can your fiancee invest the pension money in various types of investment funds and move the money between them?

You have two options on how to deal with the pension contributions and the ongoing gains.

1) Use the treaty to exclude the contributions and gains from current taxation. There is some disagreement between professionals whether UK DC pension plans are covered in the Treaty pension articles.

2) Declare the pension contributions and gains on your US taxes and pay tax now. UK tax credits might well cover any US tax due and you'll build up a tax free US basis. The paper work side of this option could be complicated because of the structure of the pension and the underlying funds.

Thanks for the response nun. Yes, I believe it is a defined contribution plan. The company used a financial adviser who set up each employee's account for the company and I think, like mine, the money in it can be invested in different funds and moved to another pension account should she start another pension with a different company and want everything in one place.

Where can I find the treaty you mention and how do we do this?

If we wanted to declare it, would we do this next year or go back and amend previous years? As she and the employer have contributed over a number of years would surely have to be done by amending previous tax forms wouldn't they? Surely we couldn't state the payments contributed when they wouldn't add up to the amount that's in there.

Any further information would be hugely appreciated. This system is unclear, unhelpful and confusing.

It might be best for you to go to one of the US/UK expat tax services to file the 1040Xs and 8833 required if you go the tax treaty exemption route. If you decide to declare the pension contributions and gains I'd definitely employ a professional.

The plot thickens.

We spoke to a CPA at the weekend who said that if we were amending the FBAR to put the amounts into USD (as they should be) that we should add the pension.

However, I was wrong about the pension - it's a Group Personal Pension Plan, not a Defined Contribution plan. My fiancee can only access it when she's 55 or over and she's only 29 now.

The CPA recommend we mention it on the amend but did not say anything about amending previous FBARs where she didn't mention it. What do you think?

Also, there seems to be some confusion around the internet on reporting the contributions/gains. Right now we don't mind if the pension is taxed when it's taken out, we just want the easy path at the moment.

My fiancee used to pay into this plan (she isn't with the company any more) but didn't declare payments/contributions/gains from this pension (or the interest from her saving account mentioned on the FBAR) on the 1040 as we honestly didn't know we had to.

So, with the CPA saying we should mention the pension on the amended FBAR when we correct the wrong currency we put in, is this all we have to do? Does the 1040 remain the same and we don't change it? Do we file it differently next year?

The FBAR says we need to wait 120 days before filing an amendment but the CPA said this wasn't necessary at all.

Apologies for all the questions, we just want to make sure we're doing things right and I'm tired of reading so many conflicted views!

Quickly adding to this - nun, I've read some of your opinion on this on other forums.

On the British Ex-Pats forum you recently agree with someone who says that for personal pension plans an FBAR is required but form 3502 can't be reasonably filled out so it's just a case of reporting the pension on the FBAR and nowhere else.

Again, I'm sorry to do your head in about this. I just want to check the pension should be reported on the FBAR but nowhere else unless she's taking an income from it.

However, I was wrong about the pension - it's a Group Personal Pension Plan, not a Defined Contribution plan. My fiancee can only access it when she's 55 or over and she's only 29 now.

A GPPP may well be a defined contribution plan so be careful with the definitions. Given that you mentioned that your fiancee received a statement with a balance I'd bet that the GPPP is a DC plan. Also even if your fiancee cannot take income until 55 she may well be able to direct the investments. So that would definitely require FBAR filing if the threshold is met.

Also, there seems to be some confusion around the internet on reporting the contributions/gains. Right now we don't mind if the pension is taxed when it's taken out, we just want the easy path at the moment.

My fiancee used to pay into this plan (she isn't with the company any more) but didn't declare payments/contributions/gains from this pension (or the interest from her saving account mentioned on the FBAR) on the 1040 as we honestly didn't know we had to.

So, with the CPA saying we should mention the pension on the amended FBAR when we correct the wrong currency we put in, is this all we have to do? Does the 1040 remain the same and we don't change it? Do we file it differently next year?

Ask you CPA how they intend to deal with the employee and employer GPPP contributions and the annual gains. They are all taxable on your 1040 and should be included on the 1040X. There are two possible paths.....either exclusion under the Treaty or current taxation and the use of foreign tax credits.

Quickly adding to this - nun, I've read some of your opinion on this on other forums.

On the British Ex-Pats forum you recently agree with someone who says that for personal pension plans an FBAR is required but form 3502 can't be reasonably filled out so it's just a case of reporting the pension on the FBAR and nowhere else.

Again, I'm sorry to do your head in about this. I just want to check the pension should be reported on the FBAR but nowhere else unless she's taking an income from it.

I'm not sure you're remembering my posts correctly.

1) UK Personal Pension Plans should go on FBAR.
2) The US taxation of those plans is open to debate. Some would claim a treaty exemption on all gains and on contributions up to the IRS limits, others would declare the contributions and gains on the 1040 using foreign trust and PFIC forms and use foreign tax credits to cover the US tax.

You should ask your CPA what approach they will use and why.

Thank you again.

I'll go back to the CPA and ask him these things.

When we spoke to him he never mentioned declaring anything on the 1040. He told us to add the pension to the FBAR and that was the only place it needed to be.

We're in a bit of a jam if we do have to declare the contributions and gains - I don't even know if Scottish Life can give us a three year breakdown. Even if they do, I'm nervous that we'll be subject to fines or some kind of punishment.

She doesn't come close to going over the limit in terms of her wages, and we wouldn't have to pay tax on any interest, contributions or gains because of this if we added them, but the IRS/Treasury scare me and I'm convinced we'll get in trouble somehow.

I wish we'd known all this earlier.

Here is a link to a discussion on SIPPs which will probably be the same to the IRS as the GPPP.

Both Lizzit and Guya are very experienced tax professionals that specialize in international taxation. They have a genuine disagreement about how SIPPs should be taxed. I like Lizzit's approach as it applies the treaty to simplify the tax filing for US owners of SIPPs which I believe is the intent of the treaty. If you read the posts in the link you'll get a good overview of the two paths that are open to your CPA and you might even go into your meeting knowing more than him/her.

http://www.taxalmanac.org/index.php/Discussion:US_taxation_of_UK_Stakeholder_Pension_/_SIPP