Form 720 and the 1% Foreign Insurance Excise Tax

A US person who pays premiums to a foreign insurer owes a federal excise tax of 1 percent on every dollar of premium, quarter after quarter, on a return most preparers have never filed. The tax has been in the Internal Revenue Code since 1942, it sits in Chapter 34 where nobody looking at a Form 1040 would ever meet it, and the foreign insurer that sold the policy has no reason to mention it. It surfaces years later, usually when somebody finally reports the policy on an FBAR, and by then there can be dozens of unfiled quarters behind it. This guide covers the tax itself, who the law puts on the hook, which policies are caught, how the treaty exemption actually works, and why a streamlined offshore submission leaves the whole thing standing.

What Is the 1% Excise Tax on Foreign Insurance Premiums?

It is a federal tax on the act of paying a premium to a foreign insurer, and it has nothing to do with whether the policy makes money. IRC Section 4371 charges the tax on each policy of insurance, indemnity bond, annuity contract, or policy of reinsurance issued by a foreign insurer or reinsurer, and the rate depends on which paragraph the policy falls under. The tax is imposed on the premium paid, so a policy that never pays a claim and a policy that pays a large death benefit carry exactly the same charge on the way in.

The three rates are not interchangeable, and picking the wrong one is the most common arithmetic error on this return.

A foreign insurer is defined in IRC Section 4372(a) as an insurer or reinsurer who is a nonresident alien individual, a foreign partnership, or a foreign corporation. The definition carries one carve-out that matters in practice, because it does not reach a foreign government, or a municipal or other corporation exercising the taxing power. A state-owned insurer is still a foreign corporation unless it exercises a taxing power, so a government-linked commercial insurer in Asia or Europe is usually inside the tax even though the state owns it. A compulsory national social insurance or state pension scheme is a different case, because the contributor is issued no policy of insurance and no annuity contract at all, and IRC Section 4372(e) reaches a premium only where there is a policy or other instrument by which a contract of insurance or an annuity contract is made, continued, or renewed. Contributions to a scheme of that kind therefore sit outside the tax. Where an insurer does issue a contract covering the individual, whether a retirement annuity, an endowment, a group life plan, or personal accident cover, the premium is inside the tax even where an employer or the state sponsors the arrangement and even where participation is compulsory.

Who Has to File Form 720 for a Foreign Life Insurance Policy?

The person who paid the premium files first, and after that the law spreads the liability wide. Treasury Regulation 46.4374-1(c) puts the return obligation on the person who makes payment of the premium to a foreign insurer or reinsurer, or to any nonresident agent, solicitor, or broker, so paying a local agent abroad does not move the obligation. It provides that where that person does not pay, the tax is paid on the basis of a return by any person who makes, signs, issues, or sells the document. IRC Section 4374 itself reaches any person who makes, signs, issues, or sells the taxable instrument, or for whose use or benefit it was made, signed, issued, or sold.

The IRS Audit Techniques Guide for this tax states the practical rule in one line, that while the Service generally holds the person making the premium payments liable, the liability is joint and several, and it lists the insured, the policyholder where that is someone other than the insured, the insurance company, and the broker who obtained the insurance. For a US person who bought a policy directly from an insurer abroad, all of those roles collapse onto one household. Nobody else is going to file.

The joint and several rule earns its keep where somebody else pays the premium. A foreign employer funding a group life or personal accident plan, or a relative abroad paying premiums on a US person's life, still leaves the US insured within reach, because Section 4374 reaches the person for whose use or benefit the instrument was made, signed, issued, or sold.

Which Policies Are Caught, and Which Sit Outside?

The scoping rule for a life policy is narrower than most summaries suggest, and it depends on who the insured is. IRC Section 4372(e) defines the taxable contract for Section 4371(2) as any policy or other instrument by whatever name called whereby a contract of insurance or an annuity contract is made, continued, or renewed with respect to the life or hazards to the person of a citizen or resident of the United States. The same paragraph of Section 4371 carries sickness and accident cover at the same 1 percent, so foreign private medical, critical illness, and personal accident policies sit in the tax alongside whole life, endowment, and annuity contracts.

Read that definition closely, because three things fall out of it. The insured has to be a US citizen or resident, so the status of the person whose life is covered controls, and the tax reaches a policy that is merely continued or renewed while that person is a US person. A policy bought abroad years before the insured ever set foot in the United States becomes a taxable contract once the insured is a US person and the next premium continues it. And the premiums paid before that date sit outside the tax entirely, which is why the year a person became a citizen or green card holder or met the substantial presence test is the first number to pin down.

IRC Section 4373 removes two categories from the tax. The first is any amount effectively connected with the conduct of a trade or business within the United States, unless that amount is exempt from Section 882(a) under a treaty obligation. The Audit Techniques Guide explains that this arises where the foreign insurer is itself carrying on an insurance business in the United States and paying income tax on the premium under Section 882(a). The policyholder's own trade or business has no bearing on it. The second is an indemnity bond required to secure payment of a federal pension, allowance, allotment, relief, or insurance, or to secure a duplicate for a federal instrument.

How Do You Compute the Tax on a Foreign Policy?

Multiply the gross premium by 1 percent, and watch what does and does not come out of that base. Treasury Regulation 46.4371-3(b) defines the premium payment as the consideration paid for assuming and carrying the risk or obligation, and it includes any additional assessment or charge paid under the contract, whether payable in one sum or in installments. The Audit Techniques Guide reads that as the whole amount of the premium, so there is no reduction for the insurer's expense loading, no reduction for the savings portion of a policy that is mostly investment, and no allowance for the part of a unit-linked contract that buys no insurance at all. A policy that is 95 percent savings and 5 percent insurance is taxed on 100 percent of the premium. The Audit Techniques Guide names the only three reductions the IRS allows, which are return premiums, refunds or credits for a policy cancellation or an overcharge, and forwarded premiums. A premium refunded on a cancelled policy therefore comes out of the base, and the tax already paid on it is recoverable. Whether a premium funded by a policy dividend, by paid-up additions, or by an automatic premium loan carries the tax is an open question, because Reg. 46.4371-3(b) reaches the consideration paid for assuming and carrying the risk or obligation while Reg. 46.4374-1(b) attaches liability on transfer of the payment to the insurer, and no ruling addresses a premium settled inside the contract. The conservative course on a catch-up is to report those quarters and say so.

Premiums paid in a foreign currency convert to dollars, and the conversion date matters for the same reason it matters when computing basis on a surrender. A premium is translated at the rate for the date liability attached, which Treasury Regulation 46.4374-1(b) fixes at the time the premium payment is transferred to the foreign insurer or reinsurer, including a transfer to any bank, trust fund, or similar recipient the insurer designates, or to any nonresident agent, solicitor, or broker. That same date decides which quarter the premium falls in, so a payment debited in late December but transferred in January belongs to the first quarter. Rebuilding a decade of monthly premiums at one year-end rate produces a number that is wrong in a direction nobody can predict, and a currency that moved 40 percent across the period turns that shortcut into a material error.

One more feature of the base is worth pricing in before a US person buys or keeps a foreign policy. Premiums on a personal life policy are a personal expense, so the 1 percent riding on them earns no income tax deduction. The tax does not come back on surrender or on a death benefit, and it does not lift the policy's basis for computing gain, so every dollar of it is a permanent cost. Excise tax overpaid on a return already filed is a different question, and it is claimed on Form 720-X within the period IRC Section 6511 allows, which is three years from filing the return or two years from paying the tax, whichever is later.

When Is Form 720 Due, and How Many Returns Are There?

Form 720 is a quarterly return, so the rhythm of this tax has nothing to do with April 15. The return for the quarter ending March 31 is due April 30, June 30 is due July 31, September 30 is due October 31, and December 31 is due January 31. The foreign insurance tax is entered in Part I on the line for IRS No. 30, and the instructions have the filer enter the quarter's premiums, multiply them by the rates printed on the form, and carry the total onto that one line.

Whether the cycle runs on between premiums depends on what else the filer reports on this form. 26 CFR 40.6011(a)-1(a)(2)(i) keeps a filer on the quarterly cycle, empty quarters included, until a final return is filed, and it then provides that in the case of a one-time filing a first return is also a final return. 26 CFR 40.6011(a)-2(b)(1) defines a one-time filing as one where the person reporting the tax does not engage in any activity with respect to which tax is reportable on the return in the course of a trade or business, so the premium alone does not settle it. A policyholder with no other Part I or Part II item therefore files each quarter that carries a premium as its own first and final return, and the quarters between premiums are not filed at all. Anyone who already files Form 720 in the course of a business, for a fuel tax, the indoor tanning tax, sport fishing equipment, or the remittance transfer tax, stays on the full cycle even though the policy itself is personal, and so does a business paying the premiums. Ten years of monthly premiums is 40 quarterly returns either way.

Does a Tax Treaty Exempt the Premium?

Sometimes, and the exemption does not belong to the policyholder. The IRS states that a foreign insurer establishes the exemption by entering into a closing agreement with the Service, available where the insurer is a resident for treaty purposes of a country whose treaty with the United States contains an excise tax exemption. The procedure sits in Revenue Procedure 2003-78, as modified by Revenue Procedure 2015-46. The IRS publishes both the list of qualifying treaties and an alphabetical list of the insurers that hold an agreement. The 16 treaties the IRS lists are those with Cyprus, Finland, France, Germany, India, Ireland, Israel, Italy, Japan, Luxembourg, Mexico, the Netherlands, Spain, Sweden, Switzerland, and the United Kingdom. Five of those entries carry a condition on the IRS page. Under the Finland, France, Germany, and Sweden treaties the exemption generally does not apply where premiums are paid to an office outside the company's country of residence, and the Luxembourg exemption covers insurance premiums while leaving reinsurance premiums taxable. The IRS also cautions that Section 6139 of the Technical and Miscellaneous Revenue Act of 1988 keeps the excise tax applicable to premiums allocable to coverage for periods after December 31, 1989 whatever the Barbados or Bermuda treaties say. Revenue Procedure 2003-78 lets a payer treat a premium as exempt only where, before filing the return for that period, the payer knows an agreement was in effect for that period, and the published entries carry both effective dates and termination dates. On a map that spans years, one insurer can be exempt for some quarters and taxable for others.

Two facts from those lists decide most real cases, and Korea and India show why, because they cut in opposite directions.

India is the case that teaches the rule. A treaty that carries an excise tax exemption is necessary and it is not sufficient, because the exemption is delivered through the insurer's closing agreement, and an insurer that never applied has no agreement for a policyholder to rely on. Checking the treaty list alone and stopping there produces a confident wrong answer.

A payer who takes a treaty position anyway is standing on the insurer's paperwork, and a 1,000 dollar penalty can land on him for it. The Form 720 instructions put the annual Section 6114 disclosure on the foreign insurer or reinsurer, and Treasury Regulation 301.6114-1(c)(1)(viii) waives it on any one of three alternative conditions joined in the text by the word or, where the person claiming the position is an insured as Section 4372(d) defines the term "without the limitation therein referring to section 4371(1)," or is a US or foreign broker of insurance risks, where the insurer makes that annual Form 720 reporting, or where the insurer holds a closing agreement with the Service. That first condition lifts the casualty limitation for this one purpose, so a US resident insuring his own life has a real argument the waiver already covers him, while a citizen living abroad is outside the residence prong and does not reach it that way. Where no condition applies the disclosure is live, and IRC Section 6712 charges 1,000 dollars for each annual failure, or 10,000 dollars where the payer is a C corporation, so take the position only with the insurer's treaty residence and exact legal name in hand.

What Happens When Form 720 Was Never Filed?

The clock never starts. IRC Section 6501(c)(3) provides that where no return is filed, the tax may be assessed at any time, so an unfiled quarter from 2011 is as open today as an unfiled quarter from last year. Filing starts it. IRC Section 6501(a) gives the Service three years from the date the return was filed, and Section 6501(b)(4) treats a return carrying an entry for a subtitle D tax as a return of every amount of that tax properly reportable for the period. That runs tax by tax, because 26 CFR 40.6011(a)-1(a)(1) makes the filing requirement separate for each tax listed by IRS Number and requires an entry on that number's line to file a return of it, so what starts the clock here is an entry on the IRS No. 30 line, and a quarter that left the line blank starts nothing even where the same Form 720 went in on time for a fuel tax or another item. The same regulation counts a "none" or "zero" written on that line, or a "none" across the whole return, as a return of the tax, so a business that filed its empty quarters that way holds quarters that did close. Those three years are the ordinary case. Section 6501(e)(3) gives the Service six years where a subtitle D return omits more than 25 percent of the tax reported on it, which is a live risk where a decade of premiums was reconstructed, and Section 6501(c)(1) leaves a false or fraudulent return open with no limit at all. An unfiled quarter is not closed by the passage of time, and an income tax return or an FBAR does not close it either, because those are different returns reporting different taxes.

The penalty arithmetic is ordinary. Failure to file carries 5 percent of the unpaid tax for each month or part of a month, capped at 25 percent, under IRC Section 6651(a)(1). Failure to pay carries 0.5 percent per month, capped at 25 percent, under Section 6651(a)(2), and IRC Section 6651(c)(1) reduces the failure to file addition by the failure to pay addition for any month in which both apply. Both are computed on the unpaid tax, and on a 1 percent tax that produces small numbers. Interest under IRC Section 6601 runs on each quarter's unpaid tax from that quarter's own due date, so the oldest quarter in a catch-up carries the longest run of it.

One penalty here is specific to this tax. Treasury Regulation 46.4374-1(d) carries a fine of double the amount of tax for a person who fails to comply with intent to evade, and it points to IRC Section 7270. That fine requires intent to evade, so it does not reach a policyholder who never knew the tax existed. Where it does apply it runs to twice the tax, which is about four times the most the two Section 6651 ceilings can reach together. Both Section 6651 additions are excused where the failure was due to reasonable cause and not willful neglect, which is the relief a policyholder who first learns of this tax years later normally argues.

Does Streamlined Fix the Form 720 Problem?

It does not, and this is the single most expensive misunderstanding in this area. The Streamlined Domestic Offshore Procedures call for amended income tax returns for the most recent three years together with the required information returns, six years of FBARs, a signed certification on Form 14654, and payment of the tax and statutory interest, plus a 5 percent miscellaneous offshore penalty computed on foreign financial assets. Each of those items is an income tax return, an information return attached to one, or an FBAR.

The excise tax lives in Chapter 34 of the Code and is reported on Form 720. No part of a streamlined submission reports it, pays it, or closes the quarters in which it went unreported. A taxpayer can therefore run a complete streamlined package, write the 5 percent penalty check, receive no further contact from the IRS, and still hold an unbroken run of open excise quarters on the same policy that drove the submission.

Our guides to the streamlined domestic offshore procedures and to choosing among quiet disclosure, streamlined, and voluntary disclosure cover what those programs do reach, which is worth reading beside this page so the boundary is clear.

What Does a Clean Catch-Up Actually Involve?

It involves establishing four facts before a single return is prepared, and each one changes the answer. The date US status began sets the first taxable quarter, because premiums paid before it sit outside Section 4372(e), and citizenship, a green card, and a substantial presence year are three different dates for three different people. The insurer's exact legal name and treaty residence decide the closing agreement question, since a subsidiary in one country can carry a different answer from a parent in another and several treaties withdraw the exemption where the premium is paid to an office outside the insurer's country of residence. A dated premium schedule from the insurer drives both the quarterly allocation and the currency conversion, and a single figure for the life of the policy cannot be split across quarters without one. The fourth fact is what else the same policy triggers, because the Section 7702 test, the PFIC question, and the reporting forms travel with it, and running the excise catch-up in isolation usually means paying twice to open the same file.

The IRS has run a voluntary compliance initiative for this tax in the past, under Announcement 2008-18, which covered non-US persons in the reinsurance chain and did not reach a first-leg failure by a US payer. There is no standing program built for an individual policyholder today, which means the route gets chosen on the facts of the policy.

How Does the Excise Tax Sit Beside PFIC, Section 7702, FBAR, and Form 8938?

It sits on top of all of them and answers to none of them. A single foreign cash value policy can run four separate US regimes at once, the excise tax, the Section 7702 income tax question, PFIC, and the two reports, and the excise tax is the only one of the four that depends purely on the act of paying a premium.

The four regimes are independent. A policy can qualify as life insurance under Section 7702, hold no PFICs at all, and still owe the 1 percent on every premium. A policy can also fail Section 7702, generate annual ordinary income, carry PFIC filings, sit on the FBAR and on Form 8938, and owe the excise tax on top. Our deeper guide to foreign life insurance and the four US regimes walks the income tax and reporting side, the PFIC and Form 8621 guide covers the fund-level filings, and the Form 8938 guide and FBAR guide cover the two reports.

Common Mistakes on the Foreign Insurance Excise Tax

These are the errors we see most often, and each one changes the number or the filing count.

1. Assuming the insurer handled it. Foreign insurers outside the closing agreement system do not file US excise returns, and the liability under Section 4374 comes back to the policyholder.
2. Applying the casualty US-risk test to a life policy. Section 4372(d) governs Section 4371(1), and a life policy is scoped by Section 4372(e) and the insured's US status.
3. Reading the treaty list as the answer. India is on the treaty list and no India-based insurer appears on the published closing agreement list, so the exemption usually has no vehicle. The list can run short and it can run long. An insurer is added only after it files a Form 15674 consent to disclose, so a company holding an agreement can be missing from it, and the IRS separately cautions that the published lists cannot be relied upon as conclusive that a particular company has a valid closing agreement in effect, so a listed company can still be a dead end. The IRS says to contact the company directly, and that is the only answer that holds.
4. Taxing the whole history of the policy. Premiums paid before the insured became a US person sit outside the tax, and counting them overstates the liability.
5. Netting down the premium. The base is the gross premium, so the savings component of a unit-linked contract stays in it.
6. Converting at one rate. Each premium translates at the rate for the date liability attached under Reg. 46.4374-1(b), which is the date the payment was transferred to the foreign insurer, to a bank or trust fund the insurer designated, or to a nonresident agent, solicitor, or broker, and a single year-end rate distorts every quarter.
7. Filing one annual return. Form 720 is quarterly, and a single catch-up filing does not stand in for the quarters it covers.

Bottom Line

The foreign insurance excise tax is small, mechanical, and almost never filed, and those three facts together make it dangerous. One percent of a premium is a number most people would pay without argument, and the reason it turns into a project is that it is charged on a quarterly return nobody filed, under a liability rule that reaches the policyholder directly, in a Code chapter that no income tax filing ever touches. Where the returns were never filed, the quarters do not close on their own, and a completed streamlined submission does not close them either. The work is to fix the date US status began, count the quarters, name the insurer precisely enough to answer the treaty question, and file what the count says is owed. If the premiums are still running, the current quarter is a Form 720 quarter too, due on the next of April 30, July 31, October 31, and January 31, so the count stops growing only once that one is filed on time.

Have questions about a foreign insurance policy or unfiled Form 720 quarters? Contact TS CPA for a free consultation. We respond within the same day.

Official IRS and Government Sources

Every rule described above comes from one of the following primary sources, and each link goes to the government or Cornell Law School text so you can read the language yourself.

• IRS, About Form 720, Quarterly Federal Excise Tax Return
• IRS, Instructions for Form 720
• Rev. Rul. 2016-03, IRS
• IRS, Exemption from Section 4371 Excise Tax
• IRS, Foreign Insurance Excise Tax Audit Techniques Guide
• IRS, Streamlined Domestic Offshore Procedures
• IRC Section 4371, Cornell Law School LII
• IRC Section 4372, Cornell Law School LII
• IRC Section 4373, Cornell Law School LII
• IRC Section 4374, Cornell Law School LII
• IRC Section 6501, Cornell Law School LII
• IRC Section 6651, Cornell Law School LII
• IRC Section 7702, Cornell Law School LII
• Treas. Reg. 46.4374-1, Cornell Law School LII
• Treas. Reg. 46.4371-3, Cornell Law School LII
• Treas. Reg. 46.4371-4, Cornell Law School LII
• Treas. Reg. 301.6114-1, Cornell Law School LII
• 26 CFR Part 40, Excise Tax Procedural Regulations, Cornell Law School LII
• IRS, About Form 720-X, Amended Quarterly Federal Excise Tax Return