US Tax Pitfalls for People Having a Pension Plan Abroad
I am a tax preparer and I'm trying to help a client who is a Peruvian born and now a United States citizen.
Before coming to USA and while living and working in Peru, he accumulate a considerable amount of money in an employer sponsored pension plan. Now he is considering bringing some of that money to take care of some personal needs like buying a house, etc.
How does he supposed to report this money in his tax return? Any especial tax treatment?
I asked IRS and they would not give an straight answer. If anybody has an idea I would appreciate it very much.
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What I'm going to write is far too long for a comment, so I'll put it here even though its not an answer. That's the closest thing to an answer you'll get here, I'm afraid. I'm not a tax professional, and you cannot rely on anything I say, as you undoubtedly know. But I'll give you some pointers.
Things you should be researching when you have international clients:
Tax treaty - no treaty with Peru, unfortunately.
Reporting obligations: FBAR, 3520/3520A, 8938. If your client hasn't been filing those he might be in trouble already. There are additional forms for people who are shareholders of foreign companies, partners in foreign partnerships, etc; but this is not related to the issue at hand.
Tax calculations: check if you have PFIC on your hands hidden somewhere in these accounts.
Check if Sec. 402 can apply to the pension funds, if so your life may become much easier. If not, and you have no idea what you're doing - consider referring the client elsewhere. You can end up with quite a liability suit if you make a mistake here, because the penalties on not filing the right piece of paper are enormous.
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