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.”
Background
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.
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Thanks for posting Calgary411.
The data on which the statistics are based is stale (2010), but the trend is very interesting.
FWIW I filed five years of back returns, with a partial sixth on the way, without a peep from the IRS, other than a stimulus cheque for $300 and a request for a reasonable-cause letter from the FBAR people in Detroit (which I sent, and never heard from them again.)
I don’t know if this counts as “quiet disclosure” – I’ve never had any US income or owed anything US taxes. I associate the term with people with tax liabilities who are trying to solve them without attracting attention.
Sorry Roy, but I think this one of those times when we have “to shoot the messenger”. Canadians will get along better with the Americans if they are ignorant of these idiotic and invasive rules. The cross border work of helping Canadians come into compliance with American laws is loathsome.
This kind of post, in my view, shows why the government of Canada has to stand against the financial invasion of Canada. Canada is a sovereign country, last I checked. It is not occupied territory of the United States, nor is it a protectorate of the United States. I get really pissed off at every attempt to make Canadians living in Canada obey US laws. I have no representation in Washington–neither do another 30,000,000 Canadians. So why should any of us pay taxes in the United States because of our income splitting trusts and our TFSA? The United States is an odious monster. Those who feed the beast make the problem worse.
I am not sure I want to shoot the messenger but I do wonder why the GAO does not seem willing to take any direct action against Flaherty and Canada. Why doesn’t the GAO demand that sanctions be placed by the United States against Canada. Isn’t the GAO really powerful.
Woah Petros you don’t mean that.
“Canadians will get along better with the Americans if they are ignorant of these idiotic and invasive rules”
I thought you founded IBS to disseminate information bring light to an issue that was, until IBS, opaque at best. I can’t believe that you now advocate the suppression of information.
You’re better than that, IBS is better than that. As a result, I’ll just attribute your comment to a typo or writing without the aid of coffee.
Roy and Petros,
Over the past two years I have gone back and read GAO reports going back 25 years. They are all the same. GAO says the IRS needs to do more to “crack down” in people living outside the US. Every time they are published the IRS silently nods its head in agreement and then goes back to whatever they doing before. The idea of getting people in another country to self assess(unlike most homeland Americans subject to wage withholding) all of their income on complex information returns is simply unworkable.
@RoyBerg1
Thanks for the article – as usual interesting insight.
I refer to your comment that:
“IRS hates “Quiet Disclosures”… and they really mean it!
When a taxpayer has missed a return or two there are basically three options to bring these filings current. First he may participate in one of the IRS’s voluntary disclosure programs. Second, if he qualifies, he may participate in the new Streamlined Filing Procedure. Third, he may simply file the late returns or ignore the late returns and become compliant prospectively. This third option is commonly referred to as a “quiet disclosure.” The IRS hates quiet disclosures.
On April 26, 2013 the GAO released a report (which you may find by clicking here) that encouraged the IRS to seek out off-shore filers who have circumvented the IRS’s recent Voluntary Disclosure programs in favor of quite disclosure. The IRS agreed with the Report’s recommendations and, as a result, those taxpayers who have or plan to engage in quiet disclosure likely face significantly increased risk of IRS examination.”
The most significant part of the GAO Report is the suggestion that the IRS is “leaving money on the table” (my words) by not assessing penalties. This confirms that the purpose of the information returns is to find a way to assess penalties.
The GAO Report makes no distinction between Americans Abroad and your basic Homeland tax cheat. As “A Broken man” notes, he seems to have come into compliance (of course it’s not over yet). But, why would the IRS come after somebody like him? At this point the IRS is wasting its limited resources and creating a huge diplomatic problem. Remember the US is presently trying to con other countries into surrendering their sovereignty by accepting FATCA. Do you really think that while the US is trying to get countries to “FATCA out US citizens” it is going to demonstrate how coming into US tax compliance will rob those US citizens of their life savings? I doubt it, but we will see. (Of course anything is possible.) Even if they try to make an example of some poor middle class American in Canada who was saving for retirement with a mutual fund, it is likely to backfire. They have painted themselves into a corner. What do you think the IRS should do at this point? It’s not that they don’t have credibility. It’s that they do have credibility and the credible message is clear – we don’t want compliance, we want penalties. That’s what happens when tax compliance is now perceived as an exercise in “penalty abatement”.
The FBAR (and other information returns) is nothing but a fund raising mechanism. The only valuable FBAR is an “unfiled FBAR” which is worth penalty revenue to the US.
Furthermore, there really doesn’t appear for there to be way to come into compliance without the risk of huge penalties. So, the decision facing the typical American in Canada is:
1. Come into compliance and risk penalties; or
2. Not come into compliance and risk penalties.
Given that option 1 will have huge professional fees and the second may have huge professional fees, which should people do?
The incentives to come into compliance have diminished with the Shulman OVDI programs. It is very clear that the IRS does NOT want compliance. Compliance gets them no revenue. Penalties do.
US tax compliance has become nothing more than a bad joke. It will take more than a generation for the IRS to repair the damage it has done to the nation’s tax system.
There is only one thing that is clear:
Renounce US citizenship at the earliest possible moment whether you are tax compliant or not!
@Royberg1 – What would you advise the IRS to do at this point?
Thanks for reading all those GAO reports, Tim. Their BLIND EYE is reminiscent of all those past decades of nothing done and nothing said by the US regarding all the tax and reporting returns not being filed by US Persons Abroad. Some Canadian accountants that did our Canadian tax returns told many of us that we did not need to file US returns — we would owe nothing. The US turned a blind eye. As well, all these decades, nothing done re all those US Persons in Canada (with a US place of birth on their Canadian passports) being waved through at the US-Canada border. Now both of these aspects are hitting like we have not before seen.
We’ve been lulled into complacency — the US was our enabling partner in this. They did a piss poor job of educating all the US Persons in Canada, or elsewhere, of those laws they were going to hammer us with as soon as they thought that a good idea. Are they now properly advising all new Green Card applicants and all US Persons going to other countries for work?
@RoyBerg1
My previous comment should not be interpreted to be an “attack on the messenger”. I would be interested in your thoughts on what you would advise the IRS to do at this point.
@Tim
The US government is taking action against Flaherty and Canada – It’s called FATCA. It’s called PFICs. It’s called FBAR. And it is all under the general heading of “citizenship-based taxation”.
Our purpose was never to disseminate information on behalf of the United States. Perhaps you should read our about page.
I should have added the words, “cross border professionals”. But the purpose was never to disseminate information and to tell people what they have to do to obey US laws. That said, we have helped many people relinquish their US citizenship so that they can be freed of these laws which are an infringement of Canadian sovereignty.
You can attribute the comment to anything you like. But I meant what I said. It really pisses me off. It is a violation of the Canadian sovereignty and cross border professionals in Canada are similar to the carpet-baggers who went to the South to profit. But the difference is that Canadians haven’t lost a war to the United States. We have these people like Jamie Golombek who inform Canadians of their responsibility to pay US taxes: there should be a law against it–these people and the media have not thought this problem through–it is not an event to profit from it, rather it is a violation of Canadian sovereignty for the United States to rely on Canadian taxpayers to solve their fiscal problems. This is not the Roman Empire: this is the 21 century. Rome ate Egypt’s wheat. Why should a single loonie go into the United States treasury to pay for food stamps for 44 million poor in the United States. We have our own poor to deal with here. Did you see that Canada is also running a deficit? So every tax dollar that Canadians pay into the US treasury takes away from all Canadians and contributes to our own fiscal demise.
The United States is supposed to be the best country in the world. Is that why they have to leech off the other nations. Americans should be ashamed of themselves.
@Roy,
The report is interesting, but what I think Petros and others did not appreciate is the last sentence of your article:
“There are options for bringing these filings current but, as the GAO report indicates, quiet disclosures should not be one of them.”
The ‘official’ options so far are OVDI and streamline procedure.
With your last sentence, you are basically saying like some other lawyers that OVDI is the only solution to bring these filings current. The Streamlined procedure only address non filers. Other people who have filed but made mistakes and canadians living and working in the US are out of luck.
Spending 40k-50k in legal fees and going through OVDI, possibly foregoing 27.5% of your net worth is not a solution. It’s a death penalty.
For people with no criminal exposure, quiet disclosure IS the best solution there is to become compliant, even if the IRS doesn’t like it. The other solution if you don’t want to get ruined is to stay non-compliant.
Saying that OVDI is the only solution is not the message we want to post on IBS. That’s what Petros is saying.
Chris, I’m actually saying that the United States should join all the twentieth century countries who have instituted resident-based taxation. That way the United States will only be one century behind. Their tax system is barbaric, a relic of medieval Europe, and those of us living permanently in Canada need to do as little as possible to feed the beast–meaning that we should seek evasive lines of response–such as relinquishment, until such time as the government of Canada will get a pair and stand up against this violation of our sovereignty by the Obama administration.
@All
Please! In the December 2011 FS, the IRS itself made it clear that one could come into compliance without OVDI. That factsheet is a clear reminder of what to do. The law requires 1040s and FBARs. If you want to be compliant, just follow the directions in that FS. (Yes, I realize that there are risks, and that you may need advice on how to best do that, but my point is a simple one – you don’t need these programs.)
These lawyers who claim OVDI and the streamlined procedure are the only options are simply (IMHO) wrong.
@Petros
Agree totally – you must renounce at the earliest moment consistent with your circumstances.
Renunciation = the legal way of non-compliance
Get out!
Once the Canadian government sees that US citizenship-based taxation is a direct attack on the Canadian Treasury they will be forced to respond. What they don’t see is that the IRS attack on “so called” US persons is an attack on all Canadians and the Government of Canada.
@USCitizenAbroad,
Yes, you are absolutely correct in saying that there really is no way to come into compliance without risking HUGE penalties! I don’t see any good solutions, especially after the GAO report that came out recently. It seems that you are damned if you go into OVDP and damned if you try to amend you returns via a quiet disclosure. I’m totally fed up with the IRS expecting us to know about all these various forrms and how to file them or expect us to have thousands of dollars to spend each year for a tax professional to do so in order to avoid draconian penalties!
“US tax compliance has become nothing more than a bad joke. It will take more than a generation for the IRS to repair the damage it has done to the nation’s tax system.
There is only one thing that is clear:
Renounce US citizenship at the earliest possible moment whether you are tax compliant or not !”
How can one renounce US citizenship without being tax compliant? I thought you had to sign a form somewhere saying that you were tax compliant for the past 5 years. Can you please tell me if/how one
can renounce without being tax compliant and not face HUGE PENALTIES or other ugly action from the IRS?
To be fair to the IRS (I know, I know) they make the point of OVDI very clear up front.
OVDI is a very expensive amnesty program for people who have used undisclosed foreign accounts and undisclosed foreign entities to avoid or evade US taxes. If you haven’t done this, should you be in OVDI? Of course not.
A number of Canadian accountants steered their clients into OVDI when they really shouldn’t have, and it pretty much inevitably is going to lead to litigation.
@Albatros, changing one’s citizenship is a fundamental human right. The United States doesn’t require (nor can it constitutionally or under international law) tax compliance to change citizenship, either through relinquishment or renunciation. Tax compliance may come afterwards, but it is not always necessary–as suggested for example by some of the posts on the side bar.
@Albotross
If you don’t/can’t certify 5 years of compliance you automatically become a “covered expatriate”. I understand this to mean two things:
1. You are subjected to the EXIT tax regeime. You need to learn what this would mean for you.
Your course of action is dependent on YOUR facts and YOUR circumstances. So, before doing anything get some objective advice (if you can find any).
2. Covered expats can’t bequeath things to US persons without those persons being subject to a massive tax. So, if you have anything you want to give to US persons, do it before you renounce.
Your individual circumstances need to be understood.
And once again… what you do is just flat out ignore their pathetic little threats.
@Petros @Albotrass
I think this was the subject of either a recent thread or a series of comments. If somebody could find it ..
@ABrokendMan
“The objective remains the same as the 2009 OVDP and 2011 OVDI – to bring taxpayers that have used undisclosed foreign accounts and undisclosed foreign entities to avoid or evade tax into compliance with United States tax laws.”
The problem is that the wording is ambiguous. What if one has “avoided” the payment of US tax because of interest from a foreign account that was undisclosed? “Avoidance” doesn’t need to be intentional. “Evasion” does. The problem is that the IRS did NOT clarify this particular statement early on.
@USCitizenAbroad –
There’s a snake in the middle of the road. You can stomp it or you can walk on by. Up to you.
I have never felt so precious in all my life. I am the penalty pot of gold at the end of the FBAR to FATCA rainbow. I have never filed a FBAR because “O Canada”, silly me, I thought I was a Canadian because Canada is my birthplace but the USA thinks I was “Born free” … to eventually pay, for all eternity, homage to the IRS. (A little card of green let me down.) Didn’t Tina Turner once sing, “What’s birth got to do with it”? (Something like that.) Since my FBAR fines alone would wipe out my inheritance from my Canadian parents and thereby wipe out any chance of getting through my “golden” years in anything other than basic survival mode, I elect to remain elusive. The only thing which stops me from jumping into the abyss is the Flaherty promise and I read recently that he may be stepping down from the Finance Minister’s throne, possibly as soon as this summer. If he takes his promise with him and doesn’t pass it along then he will have cooked my Canada goose for sure.
So right on, Petros! The last the USA will see of me as I leap over my own fiscal cliff is my right middle finger and I’ll try to take my little pot with me when I go. Seems strange to be looking to an American politician for a glimmer of hope (thank you Rand Paul) but now I’d like to see something legislative in nature on our side of the border to match or exceed it … something more substantive than a promise which might disappear when Flaherty does.
@Em, seriously, what you do is just ignore them entirely. Seriously, just tell the US to fuck themselves. There’s jack shit they can do to you.
@USCitizenAbroad
“Furthermore, there really doesn’t appear for there to be way to come into compliance without the risk of huge penalties. So, the decision facing the typical American in Canada is:
1. Come into compliance and risk penalties; or
2. Not come into compliance and risk penalties.”
Well said!
We will soon be filing our SECOND US tax return since we entered OVDI. 17 months and still NO WORD! Anyone who’s thinking about OVDP needs to take this into consideration, that any route to compliance whether it’s Streamlined (with its unclear definition ‘high compliance risk’ gotcha clause), QD (which now red flags your file), OVDP (with long waiting times, possibility of being tossed into Streamlined after incurring the costs of filing for 8 years, or having to make the opt-out decision), or the new yet unofficial “OVDP with the intention to opt-out, or hope to get tossed into Streamlined model” (fraught with uncertainly and a potential waste of resources for all parties concerned) I fail to see how any don’t open a Pandora’s Box of trouble.