Federal Excise Tax on Foreign Insurance Premiums: Form 720

Yes — a US person who pays premiums to a foreign insurer on a policy covering a US risk can owe a federal excise tax of 1% or 4% of the gross premium, reported quarterly on Form 720. The liability sits with the person paying the premium, not the insurer, and it is entirely separate from Form 1040.

It is the quietest federal filing obligation in the cross-border canon. No broker issues a statement for it. No tax software prompts it. It does not appear on a Form 1040 checklist, it is not part of the FBAR or FATCA architecture, and the foreign insurer collecting the premium has no reason to raise it. And yet, for a US person paying premiums into a policy written by an insurer outside the United States, the federal excise tax on foreign insurance premiums under section 4371 of the Internal Revenue Code is a live, self-assessed, quarterly return — one that most people discover years after the first premium left their account.

This guide sets out precisely when the charge arises, why the life-insurance limb catches Americans abroad in a way the casualty limb does not, whether a treaty position is available where the insurer is British, and — the part that matters most to anyone reading this after the fact — how missed quarters are put right without turning a modest excise liability into a disclosure problem. At Jungle Tax we see this most often mid-way through a wider catch-up exercise, when the premium history surfaces alongside the unfiled returns.

What is the federal excise tax on foreign insurance premiums?

Section 4371 imposes a federal excise tax on premiums paid on certain policies issued by a foreign insurer or reinsurer where the policy covers a US risk. A foreign insurer or reinsurer, for this purpose, is defined by section 4372(a) as a nonresident alien individual, a foreign partnership or a foreign corporation. A foreign government, or a municipal or other corporation exercising the taxing power, is outside the definition.

Three features make it unusual, and all three are why it goes missed:

• It is an excise tax, not an income tax. It bites on the payment of a premium, not on income, gain or profit. Whether the policy ever pays out, whether it produces gains, and whether the payer has any US tax liability at all are irrelevant.
• It is reported on a return most private clients have never heard of. Form 720, the Quarterly Federal Excise Tax Return, is the same return used for fuel taxes, air transportation taxes and the PCOR fee. The foreign insurance charge sits at IRS No. 30.
• It is quarterly. Everything else in the cross-border private client calendar is annual. This is not.

The tax is computed on the gross premium — the consideration paid for assuming and carrying the risk, as Treasury Regulation section 46.4371-3(b) puts it — not on a net figure after commission, brokerage or any reinsurance the insurer subsequently arranges. That distinction alone accounts for a good number of understated returns.

The three rates

Type of cover	Statutory limb	Rate on gross premium
Casualty insurance and indemnity bonds	Section 4371(1)	4%
Life, sickness and accident insurance, and annuity contracts	Section 4371(2)	1%
Reinsurance of the above	Section 4371(3)	1%

The reinsurance limb has narrowed. Following the litigation over cascading excise tax, the IRS accepted in Rev. Rul. 2016-03 that the 1% charge does not apply to premiums paid on a policy of reinsurance issued by one foreign reinsurer to another foreign insurer or reinsurer in the circumstances described in Rev. Rul. 2008-15. The current Instructions for Form 720 say so expressly. That development is relevant to captives and to structures with layered foreign reinsurance; it does not help the individual or family office paying a first-layer premium to a foreign carrier.

Which policies are actually within scope?

Scope turns on two questions asked in sequence: is the insurer foreign, and is the risk a US risk? The second question is answered differently depending on which limb of section 4371 you are in — and this is the point at which generalist commentary tends to go wrong.

Life, sickness, accident and annuity contracts

For these, the US risk test is about the person, not the property. The policy or contract must be with respect to the life of, or hazards to the person of, a citizen or resident of the United States. There is no requirement that the individual live in the United States, own US assets, or have any other US connection beyond citizenship or residence.

Read that carefully, because it is the whole cross-border problem in one sentence. A US citizen living in London, insured under a policy written by a UK life office, is insuring the life of a US citizen. The risk is a US risk for section 4371 purposes even though the policyholder, the insurer, the premium account and the beneficiaries are all British. The same logic reaches an accidental American who has never set foot in the United States but is nonetheless a citizen by descent, and whose parents or spouse took out cover in the ordinary course of British life.

Casualty insurance and indemnity bonds

Here the test is about the insured and the location of the risk. Section 4372(d) defines the insured as either (a) a domestic corporation or partnership, or an individual resident of the United States, insured against hazards, risks, losses or liabilities wholly or partly within the United States; or (b) a foreign corporation, foreign partnership or nonresident individual engaged in a trade or business within the United States, insured against risks within the United States.

Two consequences follow. First, residence — not citizenship — drives the casualty limb, so a US citizen resident in the UK insuring a Cotswolds house with a UK insurer is generally outside it. Second, the "wholly or partly" language for a domestic insured is unforgiving: where a single policy covers a mixture of US and non-US risks, the IRS position, supported by longstanding case law, is that the entire premium is taxable, with no allocation between the taxable and non-taxable portions. A US-resident client insuring a global art collection, a yacht or an aviation interest under one foreign-written policy should assume the whole premium is in charge unless the position has been specifically examined.

What sits outside

• Premiums paid to a US insurer. The charge is on foreign insurers. Note the trap in reverse: a US branch or division of a foreign corporation is not a domestic insurer, so premiums paid to it are generally within the charge, subject to the effectively connected income exemption below. A US subsidiary of a foreign group is a domestic insurer, and premiums paid to it are not.
• Effectively connected premiums. Section 4373(1) exempts amounts effectively connected with the conduct of a US trade or business, unless exempt from section 882(a) under a treaty.
• Insurers with a section 953(d) election. A foreign insurer that has elected to be treated as a domestic corporation is, for this purpose, domestic — so the section 4371 charge does not arise on premiums paid to it. A narrower election exists under section 953(c) for related person insurance income of a captive.
• Export transit cover. The Export Clause of the US Constitution prevents the tax applying to premiums covering goods in export transit from a State.
• Certain indemnity bonds required to secure payment of specified obligations of the United States, under section 4373(2).

Who owes the tax, and who has to file the return?

The Form 720 instructions are blunt: the person who pays the premium to the foreign insurer — or to any nonresident person, such as a foreign broker — must pay the tax and file the return. Failing that, any person who issued or sold the policy, or who is insured under the policy, is required to pay and file.

Behind that sits section 4374, under which the liability is joint and several and may be imposed on the insured or beneficiary, the policyholder where different from the insured, the insurance company, or the broker who obtained the insurance. Parties are free to agree between themselves who will file and pay; the IRS is not bound by that agreement. Where a British broker or insurer has told a client "we deal with any US taxes", that is a commercial allocation, not a legal answer, and it does not extinguish the client's own exposure.

For most private clients the practical answer is simple and uncomfortable: if you wrote the cheque, you were the filer.

Why does the quarterly cadence catch people out?

Because the entire rest of the US cross-border file runs on an annual rhythm. Form 1040, Form 8938, the FBAR, Form 5471, Form 3520 — all annual, all synchronised to the calendar year, all handled once. Form 720 is not.

Quarter covered	Form 720 due by
January, February, March	30 April
April, May, June	31 July
July, August, September	31 October
October, November, December	31 January

A client paying a monthly or annual premium to a foreign life office therefore has a return obligation in every quarter in which a premium is paid. Ten years of monthly premiums is forty potential returns, not ten. That arithmetic is what turns a trivial amount of tax into a meaningful compliance exercise — and it is why the problem is best identified early rather than at the point a client is already mid-way through a wider catch-up.

Two mechanical points ease the position. Excise taxes are generally subject to semimonthly deposit rules, but no deposit is required where the net liability for the taxes listed in Part I of Form 720 does not exceed $2,500 for the quarter — the tax is simply payable with the return. That covers virtually every private client scenario. And there is no annual aggregation option: a well-known one-time filing election exists on Form 720, but it applies to the gas guzzler tax, not to foreign insurance. Do not let anyone tell you the year can be swept up in a single filing.

Note also that an EIN is generally needed to file Form 720. An individual who has never had one will need to obtain one before the first return can be lodged — a small administrative step that nonetheless has to be sequenced correctly.

Does a treaty exempt premiums paid to a UK insurer?

Sometimes. Not automatically, and not on the strength of the treaty alone. This is the limb on which we most often see confident, and wrong, advice.

The United States has a number of income tax treaties containing an exemption from the section 4371 excise tax, and the United Kingdom is among the countries listed by the IRS on its Exemption from Section 4371 excise tax page. But the UK exemption is a qualified exemption, which means two conditions must be satisfied, not one.

Condition one: the anti-conduit limb

Qualified treaties restrict the exemption where the foreign insurer reinsures the risk with a person not itself entitled to an excise tax exemption. In the US-UK treaty the covered-taxes article reaches the federal excise taxes on insurance premiums paid to foreign insurers only to the extent the risks covered are not reinsured with a person not entitled to relief under that or another convention. Where the exemption is broken, the tax is computed on the proportion of the premium reinsured with a non-exempt party.

The UK position has a further gloss that distinguishes it from most other qualified treaties: the anti-conduit limb is not breached merely because a UK insurer reinsures with a non-exempt entity, unless the UK insurer is acting as a conduit — that is, unless the arrangement has as a main purpose the reduction of the excise tax. The classic fact pattern the IRS is looking for is a US group that previously paid premiums direct to its own Bermudian captive and paid the 4% charge, then interposed a UK carrier and stopped paying anything. That is a captive and corporate issue rather than a private client one, but it matters for founders and family offices with in-house risk vehicles.

Condition two: residence, limitation on benefits, and the closing agreement

The insurer must in fact be a treaty resident and must satisfy the limitation on benefits article. Because verifying that is impractical for a payer, the IRS operates a closing agreement programme under Rev. Proc. 2003-78, as modified by Rev. Proc. 2015-46. A foreign insurer applies, provides a statement signed under penalty of perjury, obtains an EIN, posts a letter of credit, pays a user fee, and undertakes recordkeeping obligations; agreements are recertified periodically.

The critical sentence for the payer is this: a person otherwise required to file and pay may treat the policy as exempt if the premiums are paid to an insurer resident in a treaty country with an excise tax exemption and, prior to filing the return for the taxable period, that person has knowledge that a closing agreement between the IRS and the foreign insurer was in effect for that period. The closing agreement is not a legal prerequisite to the treaty exemption — but in practice it is the only reliable means by which a payer can satisfy itself, and it is the first document an examiner will ask for.

The IRS publishes lists of insurers with closing agreements in the Internal Revenue Bulletin and states that those lists cannot be relied on as conclusive. The practical step is to ask the insurer directly, in writing, and to keep the answer. If a British insurer cannot confirm a closing agreement in force for the years in question, the honest advice is that the treaty position is fact-dependent and unproven, not that the premiums are exempt.

Who discloses what

A treaty-based return position ordinarily triggers disclosure under section 6114, on Form 8833. For this tax, Treasury Regulation section 301.6114-1(c)(1)(vii) waives the requirement for insureds and insurance brokers — so the disclosure obligation falls on the insurer, not on the US policyholder. An insurer with a closing agreement in force is relieved of it as well. In other words, the US payer relying on a treaty exemption generally does not file Form 8833 and generally does not file a protective Form 720; what the payer needs is contemporaneous evidence of the basis on which it concluded no return was due.

US excise tax and UK Insurance Premium Tax compared

UK-resident clients frequently assume that because their premium already carried UK Insurance Premium Tax, no further charge can arise. The two taxes are structurally different and can apply to the same premium.

	US: section 4371 excise tax	UK: Insurance Premium Tax
Who accounts for it	The person paying the premium (liability joint and several with insured, policyholder, insurer, broker)	The insurer, who registers and accounts to HMRC
Return	Form 720, quarterly, filed by the payer	IPT return filed by the insurer; policyholder files nothing
Headline rates	4% casualty and indemnity bonds; 1% life, sickness, accident, annuity; 1% reinsurance	12% standard rate; 20% higher rate on travel cover and certain cover sold with vehicles and appliances
Long-term life cover	Within charge at 1% where the life is that of a US citizen or resident	Most long-term insurance is exempt
Reinsurance	1%, subject to the foreign-to-foreign carve-out in Rev. Rul. 2016-03	Exempt
Risks located abroad	Charge depends on US risk tests, not on where the premium is paid	Premiums for risks located outside the UK are exempt
Visibility to the client	None — self-assessed, no third-party reporting	Usually shown on the policy documentation

Because IPT is an insurer-side tax and the section 4371 charge is a payer-side tax, there is no credit, no offset and no double taxation relief between them. HMRC's Insurance Premium Tax manual is the authority on the UK side; it has nothing to say about the US charge, and nor will a UK broker.

How are missed quarters corrected?

The remediation path is more prosaic than most clients fear, provided it is sequenced properly. What it is not is a voluntary disclosure programme — there is no bespoke amnesty for this tax, and there does not need to be.

Step one: reconstruct the premium record

Obtain a full premium history from the insurer or broker, by policy, by payment date, in the currency paid. You need gross premiums, not net-of-commission figures, and you need payment dates rather than policy anniversaries, because the charge follows the payment. Convert to US dollars using a defensible and consistently applied rate. Where premiums were paid by a trustee, a company or a family office rather than by the individual, identify who actually made each payment — that determines who the filer is.

Step two: determine scope and treaty position year by year

Do not assume a single answer covers the whole period. Insurers change; closing agreements are entered into, renewed and terminated; policies are varied and extended, and premiums paid for extended cover follow the cover. Where a treaty exemption is claimed for some periods and not others, document the basis for each.

Step three: file original returns for the open quarters

A quarter for which no return was filed is corrected by filing the return that should have been filed, on the Form 720 revision applicable to that period, reporting the premiums at IRS No. 30 and paying the tax. Returns are filed with the IRS at Ogden, Utah, or electronically through an authorised excise tax e-file provider. Where the taxpayer is now fully compliant going forward and will have no further liability, the "Final" return box is used on the last return so the IRS stops expecting filings.

Step four: use Form 720-X where a return was filed but was wrong

Adjustments to liabilities reported for prior quarters do not go on the current Form 720. They go on Form 720-X, Amended Quarterly Federal Excise Tax Return. This is the route where premiums were understated — commonly because a net rather than gross figure was used — or, in the opposite direction, where tax was paid on premiums that were in fact exempt and a refund or credit is due.

Step five: address penalties and the limitation period honestly

Failure-to-file and failure-to-pay additions run under section 6651 — broadly 5% of the unpaid tax per month or part month for late filing, capped at 25%, and 0.5% per month for late payment, with interest running throughout. Because the underlying tax is 1% or 4% of premium, the absolute sums are usually modest; the point of filing is not the money but closing the exposure. Reasonable cause relief is available, and the IRS instruction is to respond to any penalty notice with an explanation after filing rather than attaching one to the return itself.

The limitation period is the real reason to act. For a period in which no return was filed, the assessment period does not begin to run. A quarter left unfiled in 2014 remains assessable indefinitely; a quarter filed in 2014 has, ordinarily, long since closed. That asymmetry is the same one that drives the whole of cross-border catch-up work, and we have written about it at length in our guide on the statute of limitations clock that never starts.

Step six: understand what streamlined does and does not cover

This is the point most often missed. The IRS Streamlined Filing Compliance Procedures are built around delinquent or amended income tax returns and the associated international information returns, together with FBARs. They are not a mechanism for filing delinquent excise tax returns. A client completing a streamlined submission through our IRS streamlined filing team does not thereby regularise unfiled Forms 720; the excise position must be dealt with alongside, on its own footing, and the two workstreams must be sequenced so the narrative in the non-wilful certification is consistent with what is being filed elsewhere. Where the wider question is which remediation route to use at all, our guide on choosing between the delinquent information return route and streamlined sets out the analysis.

Where this sits in the wider cross-border file

A foreign policy rarely creates only one obligation. The excise tax on the premium is separate from, and additional to, the reporting and income tax consequences of holding the policy:

• FBAR and Form 8938. A foreign policy with a cash surrender value is generally a reportable foreign financial account or specified foreign financial asset once the relevant thresholds are met. Pure term cover with no cash value generally is not, because there is no balance to report.
• Income tax on the policy. Whether a foreign policy qualifies as life insurance for US purposes, and how gains inside a wrapper are taxed, is a separate analysis entirely — one governed by the income tax rules, not by section 4371. Paying the excise tax says nothing about the income tax treatment, and vice versa.
• Underlying holdings. Depending on structure, assets held within or alongside a policy can raise their own reporting questions.
• Movement of funds. Where premiums are funded by transfers between jurisdictions, the mechanics of moving money are worth understanding in their own right — see our guide on the US remittance transfer tax and sending money from the US to the UK.

The right sequence is to establish the excise position first, because it is mechanical and quickly resolved, then deal with the income tax and reporting analysis, which is where judgement and cost actually sit. Doing it the other way round tends to produce a completed catch-up with an unremediated tail.

Common misconceptions worth correcting

• "My insurer would have told me." A UK, Irish, Swiss or Channel Islands insurer has no obligation to raise a US excise tax that falls on the payer, and generally will not.
• "There is a treaty, so it is exempt." The UK exemption is qualified. It depends on residence, limitation on benefits, the anti-conduit limb and, practically, a closing agreement in force for the period.
• "It is only 1%, so it does not matter." The tax is small; the unfiled return is not, because an unfiled return leaves the period open indefinitely.
• "I will pick it up on my 1040." There is no line for it. Form 720 is a wholly separate return with its own due dates, its own payment mechanics and, usually, its own EIN.
• "We can file one return for the year." No. The single-filing election on Form 720 is for the gas guzzler tax.
• "Streamlined will sweep it up." It will not. Excise returns sit outside the streamlined procedures.

What a properly run remediation looks like

In practice, a well-run exercise for a private client runs to a predictable shape: a premium schedule agreed with the insurer; a scope memorandum recording, period by period, whether the charge arose and on what basis; a treaty file containing the insurer's written confirmation of its closing agreement status; an EIN application where needed; the delinquent returns themselves, filed in a single tranche with payment; a final return closing the account where premiums have ceased; and a short reasonable cause narrative held ready in case a penalty notice follows. For clients who are simultaneously addressing unfiled income tax returns, the excise workstream is run in parallel and reconciled to the same facts.

It is unglamorous work, and it is exactly the sort of quiet obligation that separates a complete cross-border file from one that merely looks complete. If you hold a policy written by a foreign insurer, or you advise a family that does, the question worth asking is not whether the policy was a good idea — it is whether the premiums have ever been reported. For the broader picture of how these obligations interact, our cross-border tax and high net worth pages set out how we approach it, and our full guides library covers the surrounding compliance landscape.

Speak to us before the next quarter closes

If you have paid premiums to a foreign insurer and have never filed a Form 720, the position is almost always fixable — quickly, quietly and for a fraction of what clients expect. What matters is that it is done deliberately, with the treaty position documented and the returns sequenced correctly against any wider catch-up. To review your premium history and agree a remediation plan in confidence, contact our cross-border team for a confidential consultation. We will tell you plainly whether a return is due, for which periods, and what it will take to close them.