You buy a foreign insurance policy or issued policies that fall under the federal excise tax requirements; then, for sure, you would have to file Form 720 with the Internal Revenue Service. Though it covers many kinds of excise tax, foreign insurance policies are classified under this because the United States government is taxing the premiums from some foreign insurance companies. A bit confusing, but the knowledge of what needs to be done will ease your job in filling out and prevent punishments when filing.
What is Form 720?
It is Form 720, which is a quarterly excise tax return filed by businesses and persons to report and pay various forms of excises in the United States. These include environmental taxes, air transportation taxes, manufacturer tax on specific product-related items and foreign insurance premiums paid as an excise tax. A foreign policy is considered an excise tax mainly if U.S. citizens or companies make purchases from non-U.S. issued insurance companies.
Why Foreign Insurance Policies Are Liable for Excise Tax
Otherwise, the federal excise taxes would have been applicable on foreign insurance policies because U.S. laws do not want any unequal competition amongst the domestic and foreign insurance companies. Mainly, these taxes are levied on those policies that are bought from foreign insurance companies which do not have any U.S. branch office or those who have not agreed to abide by U.S. tax laws. The excise tax has been levied so that the amount paid as premium to these foreign insurance companies is also included in the U.S. tax system.
According to the IRS, a U.S. company or any individual that procures an insurance policy from a foreign entity is liable to an excise tax. Normally, it is taxed as follows:
- 4% excise tax for foreign life, sickness, or accident insurance policies.
- 1% excise tax for foreign reinsurance policies.
- 4% excise tax for foreign casualty insurance policies. Who Needs to Submit Form 720 Regarding Foreign Insurance?
Anyone purchasing foreign insurance would have to make an excise tax filing Form 720. It can be a US business, individual, or even an intermediary that sources the purchase of this foreign insurance. Here, even though the policy is sourced from a foreign insurance provider, the U.S. party purchasing the insurance will be responsible for the excise tax.
Many typical examples include:
- U.S. companies have international operations that are insured through foreign carriers.
- High-value property or asset coverage from foreign companies by an individual.
- Reinsurance in which risk is transferred by a U.S.-based insurer to a foreign reinsurer.
Filing Form 720 on Foreign Insurance Policies
- Decide if you are required to file a tax return: Do you purchase insurance or reinsurance from a non-U.S. company? First, determine if your contract is subject to excise tax. Based on the above discussion, if your insurer does not have a U.S. home office, or if you purchased the policy from a provider in a state that is not licensed to conduct business in the United States, you most likely are subject to excise tax.
- Gather Your Policy Information: Just prior to submitting Form 720, you will want to have all of the information you will need on hand. This includes the information regarding the foreign company for whom you are providing coverage, the type of policy being issued, the face amount of the policy, and whether it is a life, casualty, or reinsurance policy. This information is used for reporting the exact amount of excise tax you owe.
- Submit Form 720:
- Part I of the form will be where you will report the excise tax. Foreign insurance excise taxes are usually reported under line 65 for foreign issuers insurance policies.
- You should determine the tax based on the total premium paid during the quarter. The rate to apply for life, sickness, or accident is 4%, and for reinsurance 1%.
- Form 720 quarterly return: Form 720 is a quarterly return. This return must be filed on the last day of the month following the close of each quarter. Such quarters include
April 30th-for first quarter
July 31st- for second quarter
October 31st- for third quarter
January 31st-for fourth quarter
Take extra time to make sure that you send in your form by the deadline and therefore, avoid incurring penalties. - Pay the Excise Tax: Along with filing the Form 720, you are also required to pay the excise tax you owe. You can pay online using the IRS’s Electronic Federal Tax Payment System (EFTPS). Alternatively, you can include a check or money order with your return.
Failure to File Form 720 Penalties
Non-filing or misreporting foreign insurance transactions may be levied with heavy penalties and interest. Failure to file penalty gets imposed by the IRS at between 5% of unpaid tax per month for each late return, up to 25%. Late payment penalties of 0.5% per month might also be charged on any unpaid excise tax.
This could be very expensive for businesses since the excise tax accrues every quarter. Failure to keep proper records on foreign insurance transactions would attract penalty. Moreover, the filing is done on time.
Common Mistakes to Avoid
- Under/Overreporting Premiums: Ensure that you report the amount of premiums paid to foreign insurers correctly. If there’s underreporting, then penalty will be imposed.
- Forgetting to File: Because Form 720 is a quarterly return, it’s very important to remember to file in each quarter-even if you are only required to report foreign insurance taxes.
Assuming Exemptions. Some buyers mistakenly assume they don’t need to file if the foreign insurer is big and well-known. But tax is determined by the location and status of the insurer, not by its size or popularity.
A U.S. individual or business purchasing a foreign insurance policy has to make a return on Form 720 to the IRS. This will involve satisfying every applicable requirement, ensuring that all the details are provided correctly and, most importantly, on-time submission of the form in order not to incur penalties imposed by the tax law of the United States of America. Engage a tax professional if you’re not sure whether your foreign insurance policy is liable to excise tax.
Staying informed and proactive can definitely make the filing process less complicated and avoid unexpected tax liabilities.