Crossposted from RenounceUScitizenship
- Not if you are U.S. citizen
Introduction – The Four Principles Of US Taxation Abroad
The U.S. tax system (at least in relation to U.S. citizens abroad) operates on the following four basic principles:
1. If something is “foreign” it should be punished.
2. The “principle of penalty” – There is no way that somebody can clean up innocent mistakes without paying penalties or the threat of penalties.
3. “No good deed goes unpunished” – Those who have filed (and are in the system) will have greater problems than those who have never filed. (Look at the new Streamlined compliance procedures for US citizens abroad for evidence of this – those who have filed cannot use the procedure to amend returns)
4. U.S. citizens abroad are tax cheats.
Those four principles sum it up.
This morning I came across an article preaching the virtues of the TFSA (“Tax Free Savings Account”) for Canadian residents. The article points out that:
Among the top reasons for the rise in popularity of TFSAs is their flexibility. Money can be pulled out without penalty in case of a financial emergency, TFSAs don’t have to be converted into a RRIF upon retirement, and they can contain a variety of different types of investments. Investors don’t get an immediate tax break the way they do with an RRSP contribution, but investments inside a TFSA grow tax-free
The TFSA is going to become a very significant means of investing and savings for Canadians.
Well, not all Canadians. As you know “Not all Canadians are created equally”. Those Canadians who are also U.S. citizens are, by virtue of “American Exceptionalism”, simply exceptional. They are exceptionally different. They are also targeted for exceptionally harsh tax treatment. For those who just want the bottom line:
Under no circumstances should a U.S. citizen invest in a TFSA. I came across a TFSA video on the Globe web site (it’s only one minute you can view it now) that suggests that TFSAs might be a good investment for U.S. citizens in Canada. The video is full of half truths and IMHO is wrong. As discussed in some of the comments, the reporting costs and potential for penalties for investing in a TFSA (not to mention the LCUs) are so extreme that you should run. This comment is particularly succinct:
As the “Interested Layman” stated below. TFSAs are only recognized as Trusts. As a trust form 3520A is supposed to be filed by March 15. (I know that is before US income filing is due). Then form 3520 when you file your US income tax. Fun, fun, fun! Just adding the income to your income tax is not what they want. My US tax accountant would not do my income tax unless I filed this form and back-filed it for years 2009 and 2010 (TFSA started in 2009). The IRS fine for not filing these forms is $10,000 or 35% of the account.
Next any Dual (like myself) or US citizen living in Canada who has opened a RESP must also file the same forms. Unlike RRSPs an RESP is recognized as a TRUST and also is taxed by the IRS. I know individuals who have paid the accountant more to file the forms then they have in the RESP account. Fun, Fun, Fun!
Now for the rant!
I find it very interesting that the IRS insists on pursuing law abiding citizens as if they are criminals. One of the reasons for the Revolutionary war was to keep King George from taxing the colonies. Very ironic. Canada only taxes by residency. The US taxes by birth. Once a citizen always a citizen. You pay tax no matter where you reside.If you want to give up your citizenship you have to pay all taxes you are deemed to owe. This means if you own a business or a home, you have to pay the taxes on unrealized capital gains on them to be free.
I left the US 40 years ago. I received no money from the US. I could not write off mortgage interest on my home to pay for it. Now if I sell my home I will be tax liable to the US for taxes on the Capital gains? Damn!
By the way, there are many investments that are prohibited to US citizens in Canada.
That’s the bottom line. For those who did not fully understand the above comment, let me explain:
1. Unless you have been living under a rock you know that U.S. citizens, regardless of where they live must file tax returns and pay tax on their world income. Since at least 2011 U.S. citizens abroad are presumed to be tax cheats. (Principle 4 – All U.S. citizens abroad are tax cheats.)
2. U.S. citizens abroad are taxed in the same way as U.S. residents. They complete the same tax return. They are subject to the same rules. (The only exception is that at least for the moment they have the possible benefit of the Foreign Earned Income Exclusion.)
3. From a U.S. perspective the TFSA is NOT tax free. Hence, you must include the income every year on your U.S. return. But, TFSA is not just any kind of income, it is income from a “Foreign Trust”.
4. The U.S. penalizes and puts special restrictions on anything “Foreign” including “Foreign Trusts”. (Principle 2 – If something is foreign it should be punished.)
5. All Foreign Retirement and Investing Plans are “Foreign Trusts”. TFSAs are “Foreign Trusts”.
6. Form Nation imposes special reporting requirements on Foreign Trusts. There are two forms. The first is Form 3520. The second is Form 3520A.
7. Form 3520 is the form where you as the taxpayer have to report the information on the Foreign Trust. This is complicated, time consuming and expensive to complete. US citizenship has been priced out of the market. It is filed along with your tax return and is due when your tax return is due.
8. Form 3520A is a form that the administrator of the trust/TFSA (for example the CIBC bank is required to complete. This particular form -are you ready for this – is due on March 15. Yes, you got it. Form 3520A is due before your tax return is filed. Do you really think you could get your bank to complete a 3520A for you and file it?
9. What happens if CIBC does not not file the From 3520A by March 15? Answer: as the beneficiary of the Foreign Trust, you will be subjected to draconian, idiotic and unfair penalties. (Principle 2 – The Principle of Penalty)
10. Who could possibly know about Form 3520A? Answer nobody. Well, not quite. Once you file your return with the Form 3520 and they see there was no Form 3520A, they will educate and threaten fines. (Principle 3 – No good deed goes unpunished.)
Conclusion: Stay away from any Canadian investment plan except the RRSP. Although an RRSP is a “Foreign Trust”, they are covered by special arrangements. First, the IRS does not require the 3520 for RRSPs. Second, remember the Form 8891 every year. Form 8891 is required to ensure that the income from your RRSP does not have to be included on your U.S. tax return.
Who could have known all this? Nobody!
Also, US citizens in Canada should NOT purchase Canadian mutual funds (they are PFICs). Furthermore, for US citizens abroad, home ownership can be very taxing. There are many other problems, but I won’t wreck YOUR Thanksgiving weekend. And Homelanders wonder why US citizens expatriate. Now really.
Message to financial planners: Normal principles of financial planning do NOT apply to US citizens abroad!
_______________________________________________________________________________
From the IRS – As of October 5, 2012 – Seeing Is Believing – Note the Principle of Penalty
Form 3520 – This is the information the taxpayer must provide
http://www.irs.gov/instructions/i3520/ch01.html
Penalties
The U.S. owner is subject to an initial penalty equal to the greater of $10,000 or 5% of the gross value of the portion of the trust’s assets treated as owned by the U.S. person at the close of that tax year, if the foreign trust: (a) fails to file a timely Form 3520-A or (b) does not furnish all of the information required by section 6048(b) or includes incorrect information. See section 6677(b). Additional penalties will be imposed if the noncompliance continues after the IRS mails a notice of failure to comply with the required reporting. For more information, see section 6677.
Criminal penalties may be imposed under sections 7203, 7206, and 7207 for failure to file on time and for filing a false or fraudulent return.
Penalties may also be imposed under section 6662(j) for undisclosed foreign financial asset understatements.
Reasonable cause. No penalties will be imposed if the taxpayer can demonstrate that the failure to comply was due to reasonable cause and not willful neglect.
Note.
The fact that a foreign country would impose penalties for disclosing the required information is not reasonable cause. Similarly, reluctance on the part of a foreign fiduciary or provisions in the trust instrument that prevent the disclosure of required information is not reasonable cause.
Form 3520 A -This is the information that your bank must provide – I kid you not!
http://www.irs.gov/instructions/i3520a/ch01.html
Purpose of Form
Form 3520-A is the annual information return of a foreign trust with at least one U.S. owner. The form provides information about the foreign trust, its U.S. beneficiaries, and any U.S. person who is treated as an owner of any portion of the foreign trust.
A foreign trust with a U.S. owner must file Form 3520-A in order for the U.S. owner to satisfy its annual information reporting requirements under section 6048(b). Each U.S. person treated as an owner of any portion of a foreign trust under sections 671 through 679 is responsible for ensuring that the foreign trust files Form 3520-A and furnishes the required annual statements to its U.S. owners and U.S. beneficiaries.
Exception. Canadian registered retirement savings plans (RRSPs) and Canadian registered retirement income funds (RRIFs) are not required to file Form 3520-A with respect to a U.S. citizen or resident alien interest holder who is eligible to file Form 8891, U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans, with respect to the RRSP or RRIF. In addition, other eligible Canadian plans within the meaning of section 3 of Rev. Proc. 2002-23, 2002-15 I.R.B. 744, are relieved of any obligation to file Form 3520-A with respect to a U.S. citizen or resident alien beneficiary who has made an election in accordance with section 4 of Rev. Proc. 2002-23 and has complied with the annual reporting requirements of Rev. Proc. 2002-23.
The financial advisor should also make them aware of how the US citizen of one of them would affect their children’s RESPs (also foreign trust accounts according to the US) — FBAR reporting and US tax returns. Also, the children of this marriage would likely be Accidental US Citizens (Paul a resident of Canada for a decade will have been a resident of the US for the requisite amount of time for the children to be regarded US citizens, right?) There is a lot more to what they have to be advised about, I think, than how the TFSA will work better for one than the other of the couple. If this couple thinks they are being given complete and good (read “responsible”) financial advice by their financial advisor who clearly does not have all the entrapments clearly in mind, they are mistaken. It is similar to the advice so many of us got in Canada by Canadian accountants in years past that we did not have to file US tax returns — bad advice from “professionals” who haven’t availed themselves of all the possible consequences vs benefits for their clients. They might also include into their scenario the price of US tax compliance and reporting for the rest of this family’s lives — just so they know and can buy into it if they think that best for their circumstances.
A new release from Canada’s Department of Finance informs Canadians that “all Canadians” will now enjoy an allowable increase of $500 to their TFSA’s:
http://www.fin.gc.ca/n12/12-179-eng.asp
@Bubblebustin
“All Canadians” – I wonder if this could be the genesis of Charter S. 15 argument.
@USCitizensAbroad
It’s a question I just posed to Allison Christians.
This pretty much illustrates how much of a onerous problem FATCA is on Canadian families who have a US spouse. My wife can not allow the company who hires her to create a company-funded RRSP in her name therefore she cannot save for her retirement. Nor can she draw off my RRSP as my beneficiary as she will end up having the entirety of it taken by the United States leaving her with the same end-result “nothing”. Form 8891 is yet another invasion of privacy by the United States into a legally held “savings for your retirement”. In other words, my entire family has no means of holding on to any of our money other than “through me” – the sole Canadian citizen in the family and once I die, the US has carte-blanche.to do whatever it likes financially to my family? All the rest of my family (due to them being either children who under the birthright US have had conveyed upon them by their mother, or as my wife is a US citizen herself) are tough out of luck. My wife is taking steps to get her Canadian citizenship but has to run the gauntlet of the IRS to be a current filer (with 5 years of income tax filings to the IRS) in order to shed her US shackles. 3 of my four children will have to shed their US shackles by the time they’re 18 as they’re protected by Canadian citizenship, but will be unable to get a part-time job while in school for fear of triggering US taxation and eating into the FEIE (provided it is still around when they are old enough to work – this will be an education for the school system itself as I will have to explain to the teacher why my sons or daughter cannot participate in the work experience program and how Canadian apathy in general (the old “better them than us” attitude allowed that to happen.)).
The simple upshot of this is – the only rational explanation that I can see from this exercise in monetary extortion-: a) the United States is $16T in debt through fiscal mismanagement and overspending. b) the IRS, and in extension the President of the United States, is looking for money under every rock that they can overturn. c) the world is letting it happen because they a) believe falsely that the United States is the bastion of democracy. b) believe mistakenly that the United States is everyone’s friend and “friends wouldn’t hurt their friends”c) that ultimately they know that the USA is acting like a school ground bully, using criminal methods to extort money out of everyone, and everyone is afraid of what the USA is capable of doing to them so they capitulate out of fear.
Ultimately, the US is holding the rest of the world hostage with threats of extortion and financial ruin. In ordinary society this would be deemed a criminal act. Yet nobody has brought that up to the United Nations? Yet this sort of behavior is OK’d because every country has the right to “tax their citizens”. The myopic vision of those involved fail to see the other side of the coin: the “give up your information on our citizens living in your country or we will financially cripple you.” Who gives that kind of right to the United States? In doing nothing, we all give that kind of right to the USA. And that in itself is “NOT RIGHT!” But yet we do nothing. No country seems to have a government that will stand up to the United States. Unless it is China and everyone knows just exactly what the opinion of China is (in terms of human rights and freedoms).
So far, it is sad that my “fellow Canadians” – the first-class citizens, like me, are still under the mistaken impression that the US is a “friend”. No matter how many times I have tried to explain it to them, their opinion is. “If your wife doesn’t like it so much, why doesn’t she renounce her citizenship”? The problem there being that they have you by the short and curlies until you have got your CLN (certificate of loss of nationality) in hand. No matter how many times I have tried to educate my fellow “first-class” Canadians, their opinion is that “it doesn’t affect us”. I’ve beginning to get the impression that getting through to the Canadian “first class” public is tantamount to the same effect of “urinating in the ocean” and frankly, I’m just wondering just what it is going to take to get the public to understand what a violation of national sovereignty FATCA is. Yet all our politicians seem to be doing is cozying up to the United States and selling our country down the river. Frankly, at this point, I’m disgusted to be Canadian.
@Animal We have the same problem in Switzerland. Swiss law provides for optional pension plans with tax benefits (3rd pillar, somewhat like IRA but more restricted). There is also the MANDATORY 2nd pillar that is run by one’s employer, according to certain standards. The IRS appears to seek to tax both, though I only found this out recently.
You mention spouses. My wife has, by law, a 50% interest in any pension capital earned during our marriage. Therefore taxing my pension or attempting to FBAR it out of existence would be expropriating a person who has NO ties to the US (my wife is Swiss, and has never even set foot in the US).
I have already been a second-class Swiss Citizen because I could not invest in stocks in any bank because of my place of birth. My brokerage account in the US was forcibly closed in the 90s and I was never able to open another one. Also, I am having trouble finding work because my last job was in a bank and at my level no bank wants to hire a USP. The US has already caused enormous damage to me through its policies, costing me more than the double taxes. So one gets done over multiple times.
Jefferson, like calgary411, I also have a son who will, by virtue of his disability will never be free of the United States, so the nightmare will never go away. I wrote about it at one point in one of the comment areas in one of the posts here, but can’t find it to reference it. So I will do a Coles Notes version:
I have 4 children. My youngest son is severely autistic. The doctors say that he doesn’t have a chance of really developing much beyond the mental age of 3. The USA has deemed that in order to expatriate, one must know exactly what they are doing. This means that my son will never be able to expatriate. He is in essence a “trapped American” for the rest of his life. This means that the IRS will be able to leech the income that he makes from the Canadian government that is supposed to go for his care and therapy based on the fact that it is considered “income” in their eyes. That is the main reason why I am absolutely OUTRAGED! So my message to the US government and to the IRS is. You want my son’s money that is supposed to go towards his care and rehabilitation (what he can make of it)…you are coming through ME first and trust me, you will not get through. Go ahead and cite me. I won’t be setting foot in the US and it is no big loss to me.
@the Animal
Like Calgary411 and many others, you are a true hero for your children.
@the Animal, I echo @bubblebustin’s comment – you, and @Calgary411, and the others here with minor children, and dependents with disabilities which prevent them from being allowed to renounce. You parents are heroes. The US holds the whole Canadian household in thrall – the minors and dependents, as well as those with no obligation to the US. Shame on the US for holding your children as tax hostages to the IRS, and shame on Canada for letting the US do that to Canadian citizens and residents on what should be sovereign autonomous Canadian soil. You and your families should never have been put in that position by either government.
And,
I see that the Globe and Mail editorial today is yet again pushing mandatory participation in workplace PRPPs – instead of an enhanced CPP. Meaning that those who cannot escape the US-citizenship-based-extortion inside Canada would be given no choice, but automatically enrolled in a mandatory ‘foreign trust’ in our workplace, thus creating for us yet another punitive IRS financial reporting obligation (and concomitant potential penalty trap) – resulting in punishment by the US for trying to save for old age and disability here in Canada where we live and earn. That creates additional unnecessary burdens for our Canadian-only-citizenship family members, who we’ll turn to when we’re elderly – since as duals, or US persons in Canada, we’re to be denied yet another opportunity to avail ourselves of what Harper, Flaherty and our home government would offer to ALL other Canadians as savings options.
Until one gets rid of US citizenship, he or she will forever be a “Trapped American.”
FromTheWilderness, you are only “trapped” as long as you don’t use the 10-toed escape route by “renunciation” as a able-bodied, have all your faculties and wits about you individual. My son on the other-hand is “trapped” as is calgary411’s. He will not be able to renounce his cititzenship for as long as he lives since he has no way of understanding the deeper implications of renouncing his citizenship and the United States will not let him go if “he cannot understand the ramifications of ‘losing his citizenship’, nor will they let the parent renounce on behalf of the children. That is the true meaning of injustice and “trapped”. If you do nothing as an able-bodied person, then you are just an ostrich; not trapped.
Those of us who are near each other, need to band together, sit down and write down all the pertinent details of the ramifications of any FATCA related legislation as it would affect us. Then we need to sit down with a panel of government representatives to discuss just exactly what effect it would have on families. We are reaching a point of no-return with the government considering an IGA. And as seen with the panel at the UoT. Any IGA would have far-reaching implications on all of us.
@The Animal,
Thanks for pointing out the distinction between being trapped and choosing not to do anything about your situation but be an ostrich, as bad as that is for everyone, how unfair it is for everyone — having to hide, look over their shoulders to see if there might be any “IRS whistleblowers” getting close to getting a spiffy reward for turning you in. I don’t want to live like that. Unless we all are willing to stand up for our convictions, who will know in the Canadian government, in the complacent media who should be telling our story that all of these million US Persons in Canada even have a problem? They are not saying anything to any great extent. Not many showed up to a great presentations on civil liberties and treaty override at the University of Toronto on December 15th.
In my mind and personally, mine is now a fight with the Canadian government. Will our Canadian government tell us that they will not honour Flaherty’s statements by signing an IGA? If that is the case, can they tell us that 3% of its Canadian population will be discriminated against ‘by nationality’ thus being able to close many of our accounts with the banks in order to do business as usual with the US they wish to protect, etc., etc. Will they tell us that this is because the US business with Canada and Canada’s banks trumps / is more important than how the signing of an IGA for FATCA will affect an estimated one million US Person families in Canada?
Just be straight with us, Canadian government – it may help our decisions. Do we have any guarantee of the words of Canada’s Finance Minister that we have value to the Canadian society, that Canada is not a tax haven and Canada will not collect any penalties for FBARs? Is Mr. Flaherty telling us to be brave and stand up to the US / that Canada will protect us? Will that now change with the new Form 8938 which will generally be an enhanced FBAR but to be attached to the US tax return, 1040, so collectable from US Persons in Canada when or if Canada decides to submit to the US extra-territoriality and sign an intergovernmental agreement with the US?
Other countries, I believe, are waiting for Canada to be a leader. Canada can be a leader. Will Canada be a leader in saying NO. Will some of us come out in this; some hide; some with no power to do either — to make the decision of renunciation — to be forever trapped?
I don’t know if we parents of disabled children are heroes so much, at least not on this issue — other issues that we have control over, ABSOLUTELY. Our hands our tied to help our children with developmental disabilities escape the entrapment of US citizenship based taxation since the US Department of State feels US citizenship for these children, whatever age, is something very precious so there had better be a ‘life and death’ compelling reason to do so. We are powerless to help our own children who it is our duty to protect. Do I as a Parent have any say in which I consider the precious citizenship for my son who was not born in the US, not raised in the US, never registered with the US, never had any benefit from the US? If not, why not? Is this not blatantly a human rights / discrimination issue?
Here are the views I submitted in a comment for the Canadian Community Living Association publication, to an excellent article called “Apple Trees for the Future” http://www.cacl.ca/news-stories/blog/view-point-apple-trees-future#comment-225. I was glad to see that it got through moderation. It is specifically about the innovative Canadian Registered Disability Savings Plans (RDSP), also considered by the US a “foreign trust” so taxable to the US and reportable on IRS forms 3520 and 3520A. If we are to be discriminated against for having such accounts in that the cost of administration will negate any benefit, at least tell every Canadian that if they are also a US Person, these are not effective savings plans for them. Warnings will save some people from this nightmare.
The Globe and Mail has a recent article (Feb. 8) about TFSAs and RRSPs. I used the comment section to point out the pitfall of a TFSA for Canadian residents with a US connection.
http://www.theglobeandmail.com/globe-investor/personal-finance/retirement-rrsps/rrsp-or-tfsa-the-right-answer-depends-on-you/article8362840/
For those who are unfortunate enough to be a ‘US taxable person’, and found themselves with a toxic TFSA:
Caveat, NOT tax advice below.
Here is a link to information about using a Form 7004 – which if ‘correctly’ filed, can be used to request an extension for the 3520A – whose deadline is coming up soon, in mid March – depending on the ‘trust’s reporting year’ http://www.snclaw.com/cgblog/59/122/Filing-Deadline-to-Report-U-S-Person-s-Ownership-of-RESP-and-TFSA-Approaches
An interesting exchange about TFSAs and the 3520 and 3520A:
http://www.linkedin.com/groupItem?view=&gid=2283518&type=member&item=214128380&commentID=120555649&qid=4217015d-d5fa-4834-9424-cffc51a694db&goback=.gmp_2283518
Also other interesting links about the TFSA and the 3520 and 3520A reporting. Note, some more recent than others:
http://forums.serbinski.com/viewtopic.php?p=19169
http://www.taxspecialistgroup.ca/public/taxtips.asp?n=11-08&site=tsg
See very interesting exchange of comments at the bottom of this page re erroneous 3520 threatening letters back in the fall of 2012.
http://thetaxtimes.blogspot.ca/2012/08/new-filing-compliance-procedures-for.html?goback=.gmp_2283518.gde_2283518_member_214128380.gmp_2283518.gde_2283518_member_200903605
Another Canadian article about IRS treatment of TFSAs:
http://business.financialpost.com/2013/03/08/tfsas-a-new-tax-risk-for-americans-living-in-canada/
“In a newly published resource called Tax Guide for American Citizens in Canada, which Mr. Pound co-authored with New York-based lawyer Max Reed, he says that the U.S. and the IRS have provided no guidance regarding the treatment of common investment vehicles such as the TFSA.
…………Before publishing the guide, Mr. Pound wrote a letter to the IRS seeking “clarification” on the intended tax treatment for TFSAs and other investment vehicles such as Registered Education Savings Plans. There has been no response, Mr. Pound said this week………..
“In cases where the rules are ambiguous, full disclosure is best,” the tax guide says, urging U.S. citizens to write the IRS informing them of their use of the Canadian investment vehicles.
An IRS crackdown that began in 2011 promised harsh penalties for expatriates who neglected to file multi-form U.S. tax returns.”
New Globe & Mail article that discusses TFSA’s and RESP’s:
http://www.theglobeandmail.com/globe-investor/personal-finance/taxes/if-youre-a-us-citizen-beware-these-tax-traps/article9747664/
Who cares about the rules?
The problem – US citizenship based taxation.
The solution – end US citizenship based taxation.
Interesting questions at the TaxAlmanac site, about the IRS taxation of TFSAs. The professional asking the IRS for information about how to treat/report them, got this response from the IRS information line: “….I just got off the phone with the IRS Tax Department and was told my question was “beyond the scope of their department” and to check with professional organizations.”
See; http://www.taxalmanac.org/index.php/Discussion:Canadian_RESP_and_TFSA_accounts
Similarly, this one is interesting too:
“………I understand that the IRS is negotiating with Canada on this subject…..”
http://www.taxalmanac.org/index.php/Discussion:Canadian_Tax_Free_Saving_Account
That’s the IRS for you, making ‘compliance’ from those abroad, who already paid a full set of taxes, and owe the US nothing, so easy, and so clear that even professionals and the IRS information line aren’t clear on what to do. Except I bet they’ll send one of those automated threatening 3520 letters with a whopping fine as their default position.
How many times has the IRS been asked this simple question?
Why oh why have these “help” people not been given the answer to that question to pass on to those who ask?
Why, for god’s sake?
@Calgary411, badger
it’s hard to fathom how an organization like the IRS can maintain any kind of integrity when they don’t even know what it is they are enforcing. Shame on them! It’s fairly easy to predict what lies ahead for the IRS. With the recently announced furloughs and the not-too-distant onslaught of newly minted taxpayers coming forward into compliance, expect a COMPLETE IMPLOSION!
@calgary411, and @bubblebustin.
The IRS is dysfunctional as well as being disingenuous and diabolical.
If they’ve never OFFICIALLY ruled on the TFSAs and RESPs, and RDSPs being ‘foreign trusts’, and requiring the 3520 and 3520A, then how can they charge penalties for not filing the forms? They are very busy sending out 3520 and 3520A penalty letters – proactively.
And if there is an OFFICIAL ruling, , as the practitioner asked on the TaxAlmanac site, where is it posted?
And if it is official, then why doesn’t the IRS information line know about it – given the huge numbers of those in Canada with registered accounts and the upsurge of people trying to become ‘compliant’, whether going forward, or backfiling.
They profit from our mistakes and lack of information, and from IRS complexity and from IRS incompetence. No matter what, it is us who will be punished, and the IRS who will reap the penalties.
So, there is NO incentive for them to assist us.
Even with the RRSP problems – they finally ruled that they are not taxable foreign trusts, but continue to require the annual treaty election and form 8891. Why? The PLRs abound for RRSPs, and at thousands per PLR, this must be a tidy revenue generator for them. If not, why not just address the RRSP issue and make it US tax exempt automatically? Unless they just enjoy punishing us, or getting the PLR fees.
They don’t truly want ‘compliance’, they just say that. They want penalties.
They have no interest in making it possible or palatable to comply. If all those abroad tried to become compliant, the IRS wouldn’t be able to cope – as they can’t already.
The AICPA note in an official submission (a MUST READ) to Congress that the use of penalties by the IRS has turned first and foremost into a revenue generating scheme rather than to encourage compliance:
http://www.aicpa.org/PRESS/PRESSRELEASES/2013/Pages/AICPA-Submits-Civil-Tax-Penalty-Reform-Proposals-to-Congress.aspx
“The AICPA report addresses the following specific issues:
The trend away from voluntary compliance as the primary purpose of civil tax penalties;
The lack of clear standards in some penalties;
The fact that some penalties are disproportionate both in amount and severity;
The fact that some penalties are overbroad, deter remedial and other good conduct, and punish innocent conduct;
The trend toward strict liability;
An erosion of basic procedural due process;
Inconsistencies between penalty standards and the role of tax professionals;
The increase in automated assessment of penalties that can lead to unwarranted assessments;
The need for better coordination and oversight of penalty administration;
The bias in favor of asserting penalties;
The need to improve Internal Revenue Service (IRS or “Service”) guidance and training; and
The need for the IRS to increase its efforts to educate taxpayers and tax professionals. ”
The AICPA report goes on to assert:…..”we believe the real message is that the IRS views
penalties as a revenue source, that a cost-benefit analysis is performed around whether or
not to assert penalties, and that only penalties that have high dollar amounts attached to
them are worth enforcing. This view leads not to a policy based on the deterrent value of
penalties, but rather a policy that says that penalties most likely to be imposed should be
high because the cost of asserting and defending them will be offset by the proceeds of
the penalty……” from pg 5 ‘AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
Report on Civil Tax Penalties: The Need for Reform ‘
Unfortunately, they do not address FBARs, and the other jeopardies commonly confronting those living abroad with legitmate legal local accounts – held where we live and work – outside the US. In fact, they say: ……..”The current civil penalties in the Internal Revenue Code (IRC or “Code”) have become removed from the original purpose of civil penalties, to encourage voluntary compliance. There are areas where civil penalties should be used, such as we have seen with abusive
tax shelters and unreported foreign assets”….
They do not separate or make a distinction between the potential FBAR and 3520 penalties on our legal local accounts with those deliberately unreported by US resident homelanders with Cayman accounts when they say; ‘unreported foreign assets’.
@Badger
You can add ‘dictatorial’ to that. The IACPA submission nails it rather well. As a matter of fact, I was looking for it the same time you were to support your previous comment.