This has just been posted on the Moodys Tax Advisors blog.
IRS says hundreds of thousands of US citizens are not reporting Canadian trusts
This week the IRS released statistics on the number of returns it received in 2010 from US citizens with foreign trusts. The results are startling (you may find the report by clicking here). In all of Canada only 324 returns were filed that report ownership in a non-US trust, which likely means hundreds of thousands of US citizens residing in Canada had not filed the appropriate returns. This is important for two reasons: first, the penalties for not filing are draconian (but waivable); and second, last week the US Government Accountability Office (GAO) issued a report that encouraged IRS to pursue those taxpayers who file late returns using a technique known as “quiet disclosure.”
The US State Department knows of more than 687,000 US citizens residing in Canada but most experts agree that the actual number is several times that number. Many common Canadian retirement and savings vehicles are considered foreign trusts under US law. These vehicles include registered education savings plans (RESPs), tax free savings accounts (TFSAs), registered disability savings plans (RDSPs) and the like. Of course, typical Canadian trusts used for income splitting and succession are also considered foreign trusts and carry the same reporting obligations. Any US citizen who owns, contributes to, or receives a distribution from any of these trusts must report that interest on the appropriate form at the appropriate time or face severe penalties.
Penalties for Failure to File
Contributions to or distributions from any of these trusts triggers the obligation to file US tax form 3520 on or before the due date of the US income tax return (form 1040). The failure to file penalty for the form 3520 is a minimum of $10,000. In addition, an ownership interest in any of these vehicles triggers the obligation to file the US form 3520-A on or before March 15. The failure to file this form triggers a minimum $10,000 penalty. Both of these penalties can be waived if the taxpayer has “reasonable cause” for not having filed.
In continuation: My patience wore down to nil a long time ago. So if you are expecting civility, don’t hold your breath. If you attack me, I will come out “verbal” guns blazing. Do yourself a favor and mind your own business. If you are one of “us” as you succinctly put it with your statement of “Roy has our interests at heart”, then I would suggest that you figure out your own problems. Evidently if you have time to pick at me about my grammar, then you evidently have time to spare on figuring out how to solve your own.
@bubblebustin – a closed year is one on which the Statute of Limitations (SoL) has run out. For tax, it is only relevant if one has filed. There is no SoL on a tax return if one has not filed. The SoL only starts running as of the year/date you file.
The normal SoL is 3 years if no gross omissions (25% or more) of income are found to have been declared. If gross omissions are found ,the SoL is 6 years. As of 2010, FATCA also increases the SoL to 6 years for omissions of more than $5000, I believe. It would be worthwhile to check me on that. Also check that the FATCA rule only relates to omissions of foreign income.
Closed years do not factor into play in OVDI. In OVDI, you are “voluntarily” opening all 8 years. One must opt out of OVDI to have the rules found in the IRM (Internal Revenue Manual) apply and that is when you can consider closed years.
Outside of OVDI, whether it is Streamlined or regular Opt Out, for tax, closed years are accepted as closed years and they cannot be opened for tax assessment unless there was evidence of fraud.
Don’t get too hopeful that 3 years will go by while you wait in OVDI and they will close and you will be able to get taxes back outside of OVDI. While you are in OVDI and even when you opt out before the examination is finished, the IRS will always “protect the interest of the Service” and “ask” you to sign SoL extensions for years that are going to close.
There is one little technical detail that could lead to you getting a tax refund even if you sign an SoL extension. If the IRS countersigns the tax SoL extension you have signed after the SoL has run out for the year in question, then that year is closed. The IRS is extremely diligent about asking you to sign these SoL extensions before the SoL runs out, but they don’t always countersign them before the SoL runs out. So when the IRS countersigns the SoL extension is something one always needs to check if they eventually opt out and are outside of OVDI.
The SoL extension requests I was sent advise you that you do not have to sign them, but I was advised by legal counsel to sign the SoL extension as 1) one needs to show they are cooperating and 2) if someone has reasonable cause, the SoLs will not matter.
For FBAR, it works a little differently. The SoL for the FBAR form is 6 years from the date it was due. I was asked to sign FBAR extensions in late 2012. For me, as I had not been asked previously to sign FBAR extensions before they ran out, 2003 and 2004 were out of consideration for FBAR penalties outside of OVDI.
The key is to be “out of OVDI”. An opt out into the Streamlined Program from OVDI pretty much guarantees no tax or FBAR penalties if you are accepted into this program. While the Streamlined is supposed to be for low risk non-filers, for those coming from OVDI, exceptions are allowed so you can opt into it. In my case, that exception was years filed before 2009. As a result, I had closed years before 2009.
As the IRS cannot open up closed years for assessment, yes, any tax that I may have owed for those years and paid in OVDI will be refunded to me. The tax I owed in those years was insignificant, but the amount of tax owed is not the determining factor. It is whether the year is closed or not.
I know this can be very confusing, but I hope this helps a little bit.
@Not that Lisa!
Thank you for taking the time to explain this to me. Yes, it is very complicated and fraught with pitfalls. You’ve done a great job of explaining what you know, and where I’m confused I can always seek clarification elsewhere. I suspect that this is uncharted territory for many a tax professional.
It will be interesting to see what the IRS comes back to us with. The only year we had a tax liability in OVDI was in 2008, but of course, as you know, we were previously non-filers.
bubblebustin and Not that Lisa!,
Thank goodness you’ve been able to discuss this here — and help others as well. I can only imagine what you’ve gone through and you and your husband, bubblebustin, having to continue to wonder just what the US IRS will decide for you. Not that Lisa! — thanks for all you’ve shared of your case.
Thank you. We’ll be out of it one day. My heart goes out to you and those like you who have loved ones who are forever trapped. To be persecuted through government policy without recourse and left unable to live fully as a citizen in the country in which one was born is nothing short of an atrocity.
Very good opportunity to comment on the CBC site and raise the issue of the injustice of the US taxes imposed on Canadian registered savings and how the Canadian government has not negotiated for the RDSP to be exempted under the Canada-US tax treaty – thus discriminating against Canadians with disabilities.
See CBC story on the RDSP – http://www.cbc.ca/news/canada/story/2013/05/21/f-rdsp-open-account-grandson.html
“.. The IRS wants us to believe that there are hundreds of thousands of Americans who have failed to file required U.S. tax returns for their Canadian trusts.
Let’s go over this, as it reflects a relentless demand by Treasury and the IRS for ever-more information on any financial transaction that may have –even remotely – an American connection…”
“…..Consider that ignorance of the tax law is not defined as “reasonable cause” and you begin to see the box that the IRS is placing you in. They can pass any ludicrous demand – perhaps they want the napkin from your third lunch in the fifth week of alternating quarters – and then, with a straight face, say that your ignorance of their requirements is not an excuse. ….”
Mention of the IRS and its relentlessly confiscatory and draconian treatment of any attempt to save for the future if you live in the big world outside the US and are considered a US taxable serf in lifelong bondage merely because of birthplace or parentage, etc..
How convenient it is for the IRS to define everything as taxable as their default. And of course, penalize us out of existence for not living in the US. And we’ve already paid taxes in full where we actually live and receive services.
You don’t even have to come up with an imaginary demand like a napkin from a specific event to find examples of a ludicrous filing requirement by the US. Just look at the demand to file both FBAR and 8938’s for foreign accounts, and the fact that FBAR filing thresholds have never been adjusted for inflation throughout their existence.
The IRS is incapable of understanding that these demands and threats mostly serve as barriers to compliance. Sure, we can thank goodness that TAS is there, but we should be very concerned about their growing need. The fact that they exist and are utilized to the vast extent they now are is a pretty good sign of how out of control the IRS is. For example, the level of policing a population needs in order to maintain peace is a pretty good sign of its health as a society, generally speaking. The IRS and those in charge of running it are no exception to this rule, and without removing whatever’s rotting at its core, I only see things getting worse as the US becomes more desperate.
“OBSERVATION: After the 501(c)(4) scandal, one will forgive my extreme cynicism on argument (3). Perhaps I will relent some when IRS bigwigs go to jail…” or when individuals who fail to pay their fair share are denied the position of Treasury secretary- if only to hold those considered for office to a higher standard or as an example. The example Geithner gave the public was how you should try to get away with something until you get caught. Doesn’t that smell rotten?
Steve Hamilton is an American CPA who gets it