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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@Em
Fred is right — your middle finger approach is the appropriate one. I too had a green card, but the immigration lawyer I talked to about this said that since I totally abandoned it in 1969 she couldn’t see any way the US could successfully argue it is still valid. I mean, when you look at all the rules that immigration applies to maintaining the validity of a green card — I had violated 99% of them within the first two weeks of arriving in (back) Canada, and the last vestige of validity vanished the following February when I didn’t do my annual report thingy.
Will the IRS still see me as a US person? Probably they’ll try if I give them the opportunity, but they have to find me first — and if I ever get wind of anyone like me getting tripped up, I’ll just never venture south again. Em, that Canadian birth place on a Canadian passport is your best protection. Mine has a UK birthplace on it, which is almost as good.
@Petros, I am taking your words out of context, but you say that:
“Canadians will get along better with the Americans if they are ignorant of these idiotic and invasive rules.” and “But the purpose was never to disseminate information and to tell people what they have to do to obey US laws.”
At present, only a small percentage of US persons abroad likely know of or appreciate the full extent of US tax laws.
Don’t you think it would be much more helpful in causing change if every single such US person, rather than this minority, had complete awareness of the mess we find ourselves in—not necessarily to comply, but to get “pissed off” and complain loudly?
@ Fred — My own incompetence complicated my case but I did it all with good conscience so my middle finger is still up.
@ Arrow — Thanks for the words of encouragement. I haven’t been “there” for over 15 years and I have no intention of ever going “there”. I had altogether different reasons way back when and now I have even more reasons for staying happily homebound in Canada. I just want to say that I wish you all the best on the road to good health. It’s a far, far better destination than the USA. Cheers!
@IRScompliantforever, well, I don’t know for sure. But I think many blissfully ignorant Canadians unaware of US law were quite happy and most of the time, not too anti-American in their overall sentiments. Awareness of filing requirements results in a great lowering of respect for the greedy tax grabbers South of our border, and this makes relations with them a tad less cordial, to say the least. Getting everyone aware of their tax requirements and mad as hell is prelude to very nasty relations between the two countries. I’ve had people tell me that they never feared the US before, that they didn’t know what hate was, until Obama started his FBAR witch hunt. Awareness of the stupid laws, having an accountant or a lawyer tell you that you must do these filings or even join OVDI is the beginning of the end of friendship, pretty similar I would think to when the yankees crossed the river and invaded Ontario in 1812.
And let’s be realistic. The reason I relinquished my US citizenship is because I live here now. I have my home, my family and my wife to protect. For me, the United States has become a foreign country, because I don’t feel welcome there any more, thanks to the Obama adminstration policy of applying FBAR to long term residents overseas, as implemented by the tax-cheat Timothy Geithner. I was born in the US, and I pledged to the flag when I was little and was once proud to be an American, but I have made new allegience now to the Queen of Canada, in hope that that is the best way to protect my family to the most significant threat to my well-being that I’ve faced–bigger than Al Qaeda–the IRS.
Albatross You asked ‘how/if one can renounce without being tax compliant?’
Simple. Just do it. One (renunciation) is not dependant on doing the other (being compliant.)
As Fred says so eloquently there is jack shit they can do if you choose not to follow their rules.
I interpret Petros’ statement “Canadians will get along better with the Americans if they are ignorant of these idiotic and invasive rules” as:
FATCA in combination with the USA’s archaic policy of citizenship-based taxation is obviously stupid and never going to fly, so those Canadians (probably the majority- wish I was one of them), who are blissfully living their lives as per normal, are better off never having known about the asteroid’s near hit.
Apologies to @MarkTwain who I discover already clearly made my point about the unjustified rationale for an exit tax (this has to be fought):
“The article, unfortunately appears to be caving in to the absurdites:
“Having established that the worldwide taxation of long-term expatriates and accidental, nominal, and unaware citizens is unjustified, and that it is unfair and unwise to force U.S. citizens overseas to give up their citizenship to avoid a tax regime that should not apply to them, there are various alternatives to the perpetual worldwide taxation of expatriates. The simplest approach, which is the one followed by most countries, is not to tax nonresident citizens and to treat a departure from the country as a nonevent for tax purposes. Given the history of U.S. taxation of nonresidents, the attitude of Congress, and the unjustified perception that U.S. persons abroad are not “paying their fair share,” this option is clearly not politically viable”
He goes on to recommend an exit tax, which he calls equivalent to Canada, and what looks like a tax upon the gains in personal assets over the course of residence. This is a really bad ending to a story with a good beginning.”
@Roy Berg,
re your comment; ….”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”…….
Information in this arena, its reproduction and its dissemination is never just neutral. It is being wielded against us a weapon, and sold to us as a valuable commodity.
Information is frequently used to threaten us into only a very restrictive path to compliance, or to club us after the fact – as in what we ‘knew’ or ‘should have known’ and when did we know it. Information about the rules is rarely as simple as it is presented, and often is insufficient to help us to comply properly, or to comply without error or possible obliteration. We need to know about successfully arguing against the penalties, about ‘reasonable cause’, etc. specific to these forms.
Petros and those who created and maintain IBS; with the other participants here have sought out and provided us with invaluable information when no-one else was willing or able to.
He and they and others at IBS have actively worked against the sequestration and suppression of information that would help us to help ourselves – seeking to understand what our options vis a vis the US and compliance truly were in a practical sense.
It is the US IRS and Treasury who deliberately withhold and suppress information.
Should Petros and IBS be held to some standard that neither the US government, IRS, and Treasury have been, or are willing to meet? They actively withold information in a deliberately adversarial and opaque way.
This is not a contest of equals. We are without their vast resources. We are for the most part, without affordable and accessible assistance by tax and legal practitioners. Information or the lack thereof is being used as a disabling weapon against us, or a prod when herding us one way or the other. Or as a marketing tool to sell us services.
Information can never be neutral in this context. Nor is the crafting, with-holding, suppression or sale of it. The possession of it, or it’s mere existence in the IRS ether, is being used against us (ex. in proving ‘willfulness’, or ‘reasonable cause’).
As an aside:
I find it very interesting and deeply ironic that even INSIDE the US, the rate of noncompliance with estate trust reporting due to ignorance of the requirements, is very high – ex. see ‘Trusts May Unknowingly Owe Income Taxation in California: California’s Unique Rules for the Income Taxation of Trusts’ Article By: G. Michelle Ferreira, Courtney A. Hopley, Karen D. Yardley of Greenberg Traurig, LLP
Thursday, February 9, 2012 “…The FTB is aware that there is a significant amount of non-compliance in the income taxation of trusts…”
I have seen other stats about the rampant lack of estate reporting compliance in the US. And they are resident taxpayers who only have one country to report to. We are already compliant where we live. Many US resident homelanders aren’t even willing or capable of doing that.
@Badger
That was brilliant. Thank you.
Although this is a Canadian topic I’m going to interject anyway. The FATCA IGA for Switzerland excludes company pensions (“pillar II”) and individual retirement accounts (“pillar III”) from FATCA reporting. So even if the USP fails to report these pension accounts on Form 8938, the USG wouldn’t know about them.
In the event that Canada signs a FATCA IGA, could it not be expected that it would also contain provisions to exclude pension reporting?
Thanks Arrow.
: )
Roy, there is only one crime being committed and that’s “extortion”! Extortion against Canadians and permanent residents who have no means of defending themselves against the “tax cheat” IRS propaganda juggernaut. They have no representation in Congress and homelanders could care less. They get no benefits from the USA, so in essence, this citizenship taxation though legalized by statute is nothing more than EXTORTION! Add on top of that “kidnapping” which is the simple term for not allowing mentally disabled citizens to expatriate because they have no way of knowing about the ramifications of their decision??? That’s just a thinly veiled reasoning for continuing to “tax the shit” out of these poor trapped mentally disabled citizens who should be able to expatriate to protect themselves from this predatory nation. And I’m a 100% born in Canada, Canadian and unlike my fellow Canucks, I can see the potential threat to our Canadian sovereignty.
It’s time we stopped playing placating pals to this predator and tell it to go to hell! As someone else said here. The best way is to show them the “middle finger”.
Your protest smacks of “I don’t want to lose my ‘nest egg’ of compliance-clients.”
@ The Animal,
“That’s just a thinly veiled reasoning for continuing to “tax the shit” out of these poor trapped mentally disabled citizens who should be able to expatriate to protect themselves from this predatory nation.”
I don’t know of many mentally disabled citizens of any country that are high income earners to get the shit taxed out of them…
@The_Animal
Roy is a lawyer who is a tax professional. His professional obligations preclude him from taking any position except the one that he is taking. What do you expect him to say?
The compliance industry works first for the IRS, second for themselves and if there is anything left then …
Well, tell that, Harold, to calgary411. You’re drinking the US compliance Kool-Aid. Those who have disabled children are stuck wondering if the Canadian federal government disability allotments (a trust) though non-taxable by Canadian tax laws, are taxable by US government. Do your homework.
Well no shit, USCitizenAbroad. I’m just calling him out. He isn’t a help to those who are vulnerable. All he is is just like the United States Government, a predator.
@Animal, Renounce, ah, we finally get down to the nitty gritty ethical question: Is the US tax compliance industry in Canada ultimately good or evil? In all fairness to Mr. Berg, he likely believes that he is doing a good thing by helping US citizens living in Canada work through their citizenship and tax issues. Undoubtedly, there are many people that he can serve who can and will appreciate his services. I personally appreciate his interaction on this blog, and if I shot the messenger, then I do so because I come to the problem from a different, perhaps more historical view. It’s as if the compliance industry is unable to see the forest for the trees.
I have maintained that the extra-territorial taxation claims of the United States is an act of war (casus belli) against the countries in which its alleged citizens live, since it is an attempt to tax incomes which are purely the perogative, under international law, of the country in whose jurisdiction the person lives. Thus, a private firm, a newspaper, or other media outlet that propogandizes on behalf of the United States, commits an unethical action, because they are promoting the enforcement of unjust laws passed in another jurisdiction and saying quite unjustly and incorrectly that Canadians must obey these laws. This is an absurdity. The United States has no jurisdiction to pass laws taxing citizens of other countries who are living in those countries. This is an egregious violation of so many laws at so many levels that if another nation did it, other than the nation with the largest economy and the biggest military, the nations of the world would condemn them as a rogue nation: this is no mere speculation but what has happened to Eritrea’s extra-territorial taxation of 2% of its expats incomes: a quite reasonable form of taxation when you consider that it costs so much less to come into compliance and they have never threatened their citizens with fines exceeding their accumulated wealth, as have the United States with their FBAR threat of a potential 300% civil penalty.
Thus, the compliance industry, perhaps unwittingly, serves Canadians who wish to come into compliance with US law and this seems at the time to be a service. But in the big picture, they become unwitting participants in the destruction of the relationship between two peaceful countries. For when one country commits enough crimes of this nature, it either leads to occupation or war. War between Canada and the United States hasn’t happened since 1812. We have benefitted from a 200 year peaceful relationship. But I see it slipping way, if only subtlely and slowly.
Roy Berg is doing his job. I hear he is quite good at it. Yet still, there are ethical ramifications. My problem with Moody’s press release is that it says what Canadian residents must do according to US law. But it doesn’t explain how this is a travesty of justice. It doesn’t explain alternatives to paying US taxes and OVDI fines on your TFSA, like say, yawning and getting back to my wonderful life in Canada. Why not shrug? Which one of the compliance industries lawyers say shrug? None that I know of, and still, that is a very big alternative since Canada has said it will not collect from Canadian citizens any taxes for the United States and it will collect no FBAR fines from anyone ever.
@Harry,
You’re quite dismissive in saying “I don’t know of many mentally disabled citizens of any country that are high income earners to get the shit taxed out of them…”
I hope this may help you understand the injustice of entrapment by US citizenship-based taxation (the only industrialized country that practices citizenship-based taxation is the US!) for some — developmentally disabled and “mentally incapacitated” persons have accounts held in trust for them. The US considers these “foreign” trusts in Canada.
ENTRAPMENT AS AN “ACCIDENTAL AMERICAN” US CITIZEN WITHOUT THE RIGHT TO RENOUNCE THAT CITIZENSHIP
Adult children who have developmental disability born in foreign countries to US parent(s) or anyone with mental incapacity and who does not understand the concept of citizenship or consequence or benefit of such cannot renounce US citizenship. US Department of State advises that a Parent, Guardian or Trustee of such an individual DOES NOT HAVE THE RIGHT to renounce US citizenship on behalf of their family member, even with a court order, although they make other, some life and death decisions, for them every day. I am presenting an example of a person who has lived in Canada since 1969, became a Canadian citizen in 1975 and has an adult son who was born in Canada, raised in Canada, never registered with the US, never had any benefit from the US, has and will never live in the US but has US citizenship as he was born to a US parent in Canada.
The Registered Disability Savings Plan that the Parent / Trustee holds for him to save for his future when she is gone is considered a “foreign trust” by the US, taxable by the US, and with huge compliance costs for the son, herself or the executor of her estate after she is gone to file tax returns and Foreign Bank Account Reports each year, negating benefit of this Canadian registered disability account for him compared to ANY OTHER developmentally delayed Canadian by virtue of his US status and US citizenship-based taxation law. It would be very unlikely that this person or any other like him would owe any taxes to the US, so a exercise in futility and great compliance costs. This person’s son is imprisoned by the US though he will never live there. He will not be the only one affected by this. Canadian families who have members with a “mental incapacity” (including things like dementia, brain injury from an accident, etc.) have more important things to worry about each day, more important places for money intended for their family members well-being – other than the US IRS.
This was submitted in March of 2012 to the IRS Taxpayer Advocate Service — on behalf of all in this situation: Comments to TAS
Note that the mother feels this should also be human rights issue and has been reported to the various government representatives and to the Canadian Civil Liberties Association on behalf of those so affected:
This is from the ‘Americans with Disability Act’ which doesn’t address a lot of the discrimination for RDSPs, etc. for Canadians with developmental disabilities (and the like).
The mother of this developmentally delayed “US Citizen” did glean the following portion, which talks about discrimination ‘economically’. Her comments are in CAP’s.
The Congress finds that
(1) physical or mental disabilities in no way diminish a person’s right to fully participate in all aspects of society, yet many people with physical or mental disabilities have been precluded from doing so because of discrimination; others who have a record of a disability or are regarded as having a disability also have been subjected to discrimination;
(2) historically, society has tended to isolate and segregate individuals with disabilities, and, despite some improvements, such forms of discrimination against individuals with disabilities continue to be a serious and pervasive social problem;
(3) discrimination against individuals with disabilities persists in such critical areas as employment, housing, public accommodations, education, transportation, communication, recreation, institutionalization, health services, voting, and access to public services;
THESE INDIVIDUALS HAVE EMPLOYMENT, HOUSING, PUBLIC ACCOMMODATION, EDUCATION, TRANSPORTATION, COMMUNICATION, RECREATION, HEALTH SERVICES!!!!!, VOTING, ACCESS TO PUBLIC SERVICES IN CANADA — THAT IT WOULD BE DIFFICULT TO PROVIDE FOR THEM IN THE US (WITHOUT THEIR FAMILIES WHO ARE ALSO LIVING IN CANADA).
(4) unlike individuals who have experienced discrimination on the basis of race, color, sex, national origin, religion, or age, individuals who have experienced discrimination on the basis of disability have often had no legal recourse to redress such discrimination;
(5) individuals with disabilities continually encounter various forms of discrimination, including outright intentional exclusion, the discriminatory effects of architectural, transportation, and communication barriers, overprotective rules and policies, failure to make modifications to existing facilities and practices, exclusionary qualification standards and criteria, segregation, and relegation to lesser services, programs, activities, benefits, jobs, or other opportunities;
(6) census data, national polls, and other studies have documented that people with disabilities, as a group, occupy an inferior status in our society, and are severely disadvantaged socially, vocationally, economically, and educationally;
THESE INDIVIDUALS ARE DISCRIMINATED AGAINST ECONOMICALLY; I.E. THEIR CANADIAN BENEFITS ARE DIMINISHED IF THEIR PARENTS / GUARDIANS / TRUSTEES ARE NOT ALLOWED TO MAKE A DECISION FOR THEIR BEST INTERESTS TO RENOUNCE THEIR US CITIZENSHIP, WHICH THEN BECOMES A SEVERE ECONOMIC HARDSHIP FOR THEM LIVING IN CANADA OR ANOTHER COUNTRY. IF THEY HAVE IN THEIR NAME A CANADIAN REGISTERED DISABILITY SAVINGS ACCOUNT OR A TAX-FREE SAVINGS ACCOUNT, IT DOES NOT GIVE THEM THE SAME VALUE FOR THOSE LEGAL TAX-SAVINGS PLANS AS A CANADIAN WITH A DEVELOPMENTAL OR OTHER DISABILITY COMPARED TO THE SAME CANADIAN WITHOUT AN ADDITIONAL US CITIZENSHIP AND ITS RESPONSIBILITIES.
(7) the Nation’s proper goals regarding individuals with disabilities are to assure equality of opportunity, full participation, independent living, and economic self-sufficiency for such individuals; and
THESE INDIVIDUALS CANNOT HAVE ECONOMIC SELF-SUFFICIENCY — IT IS INCOMPATIBLE WITH AN EXTRANEOUS (TO THEIR CANADIAN OR OTHER COUNTRY CITIZENSHIP) US CITIZENSHIP.
(8) the continuing existence of unfair and unnecessary discrimination and prejudice denies people with disabilities the opportunity to compete on an equal basis and to pursue those opportunities for which our free society is justifiably famous, and costs the United States billions of dollars in unnecessary expenses resulting from dependency and nonproductivity.
THIS IS, FURTHER, UNFAIR AND UNNECESSARY DISCRIMINATION BY NOT LETTING THE PARENTS / GUARDIANS / TRUSTEES OF DEVELOPMENTALLY OR OTHERWISE DISABLED CANADIANS RENOUNCE US CITIZENSHIP ON THEIR BEHALF, WHICH DENIES THESE INDIVIDUALS THE OPPORTUNITY TO COMPETE ON AN EQUAL BASIS (IN THE COUNTRY WHERE THEY RESIDE AND HOLD CITIZENSHIP), THEREBY CREATING MORE DEPENDENCY AND MORE RESULTING EXPENSES. THE COST OF ADMINISTRATION OF THEIR EXTRANEOUS US CITIZENSHIP IN CANADA (OR ANY OTHER COUNTRY) CREATES LITTLE, OR IN MOST CASES $0.00, FOR THE US. IT DOES GIVE MONEY TO CROSS-BORDER ACCOUNTANTS AND US TAX LAWYERS IN CANADA (OR ANY OTHER COUNTRY) — NOTHING FOR ANY SERVICES IN THE US.
WHAT ARE THE OPPORTUNITIES FOR THESE INDIVIDUALS FOR WHICH THE US IS JUSTIFIABLY FAMOUS THAT IS BETTER THAN WHAT CANADA, IN THIS CASE, PROVIDES?
@Petros
It’s like the Canadian Bankers Association having links for the IRS on their web page. It is this tacit approval they give to US tax policies by helping the IRS in this way that really IRKS me! What business does the CBA have in leading Canadians directly to the IRS?
My incandescent anger over this BS has caused me to play with Photoshop and meme generators again.
https://fbcdn-sphotos-c-a.akamaihd.net/hphotos-ak-prn1/942862_10151609123005295_789810998_n.jpg
https://fbcdn-sphotos-h-a.akamaihd.net/hphotos-ak-ash3/936462_10151609113540295_803925393_n.jpg
@Roy Berg
Your website states “taxpayers who have completed one of the IRS’s offshore voluntary disclosure programs, such as the 2011 OVDI or 2012 OVDP, may have their cases reexamined under Streamlined. Taxpayers who are eligible for Streamlined will receive a refund of the penalty imposed by those programs.”
Have you heard of anyone also having any tax they paid refunded to them also?
The other flip side to this coin, Petros, my friend, is that Canadian residents (those who haven’t managed to get to the point where they are home-free; renounced and Canadian citizens) is the distinct possibility that a) The United States will take the information that if gleaned by the financial institutions ratting the US taxable account holders to the IRS and charge said US taxable account holders with a crime for “wilful tax evasion” which is a criminal offense according to the US Code 380 U.S. 343, 85 S. Ct. 1004, 13 L. Ed. 2d 882 (1965), If they choose to prosecute, convict, the Canadian resident could potentially be subject to extradition as an indicted and convicted in absentia criminal.
b) “wilful tax evasion” since the United States is the architect of this law, can be defined any way the US wants. They can trump up the charges any way they wish and force extradition. If the country does not co-operate, they can turn around and find a way to get in and get the rail-roaded “criminal” (I’m putting this in quotes because I think that it’s a pile of horse-s***) and kidnap “under the guise of repatriation”.
US citizen and would be VP did not report US trust. No penalty.
……………”Paul Ryan, had amended his 2011 tax return with the IRS and the form 1040X is available online. The return indicates that Ryan and his wife failed to report $61,122 in income – or about 20% of their income – from their 2011 form 1040. The majority of that income was trust income.”……….. http://www.forbes.com/sites/kellyphillipserb/2012/09/23/ryans-amended-returns-offer-more-questions-than-answers/
http://usatoday30.usatoday.com/news/politics/story/2012-08-15/paul-ryan-finances-reports/57078160/1
Yet, it is big news whether Canadians are reporting our ‘foreign’ trusts to the IRS, after having already done all our reporting to the Canada Revenue Agency as required.
Why is a VP contender who is an actual US resident able to correct a whopping reporting omission with an ‘oops, I forgot’, but the IRS produces a report to flag such omissions by those living entirely outside the US – since the IRS deems them to be dangerous and toxic ‘foreign’ trusts? And that is even if zero US tax is owed by us.
Why do we have to pay massive bills for help with the complex 3520 and 3520A, but Ryan just had to say ‘oh sorry, I forgot’ and file an amendment?
@Badger
Because living outside the confines of the US makes us suspect and our lack of representation makes us easy targets. It seems that a willingness to correct the problem counts in your favour, but for those of us with ‘offshore’ activities, any correction effort involves exorbitant cross border tax professional form filing fees.