The information featured on this blog is designed to orient U.S. citizens (“USCs”) and U.S. lawful permanent residents, i.e., “green card” holders (“LPRs”) to important U.S. federal tax consequences to them. It’s primary focus relates to those USCs or LPRs who are contemplating renouncing their citizenship or abandoning their permanent residency status.
There are many complex federal tax rules that are often overlooked in the international area. One of those is the excise tax that is payable by the USC or LPR individual, not the non-U.S. insurance company, when premiums are paid to an insurance company. The IRS takes the position that the ” . . . the Service will generally seek payment of the excise tax from the U.S. person making the premium payment . . .” See, IRS Foreign Insurance Excise Tax- Audit Technique Guide.
This is a 1% excise tax on the premiums paid for each life insurance, sickness or accident insurance or contracts. See, IRC Section 4371. If you reside in London and buy life insurance with a UK life insurance carrier (or Paris with a French insurance company, Toronto with a Canadian insurance company, etc.) in your home country, you are probably not thinking that you need to pay Uncle Sam a tax on what you perceive as a “run of the mill” insurance coverage.
Indeed your life insurance company in your country of residence will not be advising that as a USC or LPR, you should be paying Uncle Sam.
If the insurance contract is a casualty policy, the excise tax is 400% greater than the 1% tax on life insurance premiums; i.e., a 4% excise tax. The payment of the tax is made on IRS Form 720, Federal Excise Tax Return.
In my experience, I never find that any individuals who are USCs and LPRs living around the world are aware of this obscure tax. When the tax is not paid the IRS has unlimited time to assess tax and penalties, including late payment penalties, late filing penalties and negligence penalties. Plus, interest that accrues on the unpaid tax and penalties can grow the amounts owing over time. See, When the U.S. Tax Law has no Statute of Limitations against the IRS; i.e., for the U.S. citizen and LPR residing outside the U.S., posted March 24, 2014.
The excise tax amount may not seem too significant. However, if it is not timely paid, there will be late payment and late filing penalties (e.g., for failure to file the excise tax return). This 1% or 4% excise tax is on the gross premium payment. This tax amount can certainly add up when insurance premiums are paid annually and over many decades.
Finally, be aware that the IRS is focusing on this excise tax on insurance contracts, at least within its OVDP program where IRS revenue agents are asserting that 25%, 27.5% or 50% of the value of the entire asset (e.g., the cash surrender value of the insurance policy) is subject to the “in lieu of penalty”.