Dual U.S. / Australian Citizen Superannuation Fund
Australian Superannuation funds, also known as “supers”, are very similar to qualified retirement plans here in America. How it works is that both the employer and the employee contribute pre-tax funds (in some cases post-tax dollars, deeper explanation of this detail is beyond the scope of this article), and the funds accumulate tax-free. While the funds in your super accumulates free from Australian tax, it is still subject to U.S.taxes. You would need to report those on your Form 1040, and file a Foreign Bank Account Report (FBAR) on Form FinCEN 114 (formerly known as TDF 90-22.1). Failure to file the FBAR may get you into hot water. You could face criminal tax violations, and/or fines in excess of 50% of the balance in the fund.
Even worse, because superannuation funds are set up as trusts, they are subject to the reporting requirements of IRC Section 6048. For instance, IRC Section 6048 provides that a responsible party must notify the IRS every time a U.S person establishes a foreign trust or transfers money to one. When a U.S. person who owned a portion of the foreign trust dies, the IRS also requires notification. Also, the IRS needs a report on any information about distributions from foreign trusts. U.S. persons who are required to report can do so on Form 3520. Furthermore, under IRC Section 6048(b), any U.S. Person who is an owner of a foreign trust is obligated to file Form 3520-A every year if the trustee does not file.
Tax penalties for non-filing are almost as steep as those for the non-filing of FBARs. If a taxpayer neglects to file the annual Form 3520-A, they would be fined under IRC Section 6677 of 5% each year for which the form isn’t filed. In addition, each time a deposit goes in or a withdrawal comes out of the superannuation fund, a penalty of 35% of the amount of the deposit or withdrawal is assessed. The only escape from the penalties is demonstrating that there was “reasonable cause” for failure to file. There is no statute of limitations on the failure to file the Form 3520, or 3520-A. The IRS may assess these penalties at any point, even many years later.
Here is an example. Let’s say you contribute $40,000 annually from 2000 to 2012 to a superannuation fund, and neglect file the appropriate reports on those deposits. Then in 2013, your account total has ballooned to $750,000, you withdraw it all. You will be fined 35% of the $40,000 contribution ($14,000) for each year that you didn’t file Form 3520, and 5% of the total balance in the account each year. On top of that you would pay a penalty of 35% on the withdrawal ($262,500). That excludes the normal income taxes that would be due each year on the gains. Pile on a 20% accuracy penalty under IRC Section 6662, and the total penalties will more than drain the account.
People who own superannuation funds should therefore think about entering either the Streamlined Filing Programs or the IRS Offshore Voluntary Disclosure Program (OVDP).