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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@bubblebustin, that’s because anything outside the US is considered criminal and suspect – our bank accounts, and our very selves – just by virtue of geographic location.
I’m beginning to suspect that the real reason they cancelled all in person IRS information sessions at the consulates and embassy here in Canada is because we might have gotten up to challenge them and ask difficult and embarassing questions – like asking why we can’t be treated like Geither and Ryan – and get a free pass for any tax sins we might commit now or in future; “Yes thanks, I’ll have the Geithner no-penalty special “I didn’t know I had to report that – Turbotax did it” with a side of Ryan – “oops we forgot to report our trust”. Funny that Canada, the country which has the second largest number of US persons abroad (after Mexico) has zero IRS in-person assistance.
@animal, this was a question I asked the lawyer, and he said that the Canada-US extradition treaty does not cover tax crimes. And I’ve read the treaty myself and it does not have a provision for FBAR crimes either.
12. Obtaining property, money or valuable securities by false pretenses or by threat of force or by defrauding the public or any person by deceit or falsehood or other fraudulent means, whether such deceit or falsehood or any fraudulent means would or would not amount to a false pretense. – This part appears to be deliberately vague. Wouldn’t tax evasion fall under this statute? By failing to file we are retaining (obtaining) money by false pretenses which in turn would make the government think that we are defrauding the public by falsehood. Not trying to give them any ideas, but the way this stands right now and the way I see it and considering how a lawyer could twist the law into the shape of a pretzel. (No I do not trust lawyers as far as I could throw one!) Tax crimes do not have to be specified to fall under the extradition treaty.
@animal, actually that (12.) covers fraud, not tax evasion. Remember, too, that an extradition hearing would be in Canada not in Washington D.C. and you would have a much better chance of having a sympathetic court.
The evasion treaty only covers specified crimes. Tax evasion is not specified in the treaty. I think what we need to be concerned about is what the law says, or eventually, what the law has already been twisted to say. I cannot worry about a future in which the laws and their precedents have no meaning.
Now bear in mind, that the United States can go after a non-Canadian using the US-Canada tax treaty. But still, it is not something that happens very often, and I know of no cases where US has gone after a person in Canada who incurred such a tax liability as a result of TFSA or other legal trust in Canada. That would be interesting to see the US go after a US person in Canada for a tax liability when all the person’s income is from Canadian sources and has already been taxed here according to our laws, and for this, I’ve never heard of single instance. If anyone knows of case, do tell.
@ bubblebustin
Taxes will not be refunded for those who “opt out” of OVDI/OVDP and into Streamlined.
We have had many clients pursue this route and receive a refund of all penalties, though.
@Roy Berg
This proves that I would have been better off having become a ‘wilful’ tax evader and waited to begin filing US taxes. With the lack of attractive options for those considering entering the US tax system today, and knowing that the IRS has a propensity for moving goal posts, I suspect this will be reason enough for many to stay away and wait for further improvements like the US moving toward residency based taxation (which they are currently considering doing).
@Bubblebustin
It is becoming increasingly clear that those who made the earliest entry into the compliance process will be the ones hurt most.
@USCitizenAbroad
Waiting is a dangerous game, when a switch to residency based taxation is so far from becoming a reality. In the meantime, what should someone do? If one takes measures to mitigate some of the negative effects of compliance (aka sophisticated tax planning), or they are willing do so and continue to remain non-compliant until the SOL on audits runs out, they are surely entering the realm of wilful tax evasion. Waiting in itself would raise a red flag because in 8 years you will have had to have been in a coma to not know about your tax filing obligations. The IRS is trained to smell cover up. Worse yet for those who have never filed a US tax return, there is no SOL!
@BubbleBustin
Yes, waiting is dangerous. All I am saying is that those who made the earliest entry into compliance are the ones who will be/are most hurt. Look at the people who entered OVDI. At this point, all courses of action carry their risk. But, we are now beyond the point of earliest entry. The panic level is no longer where it was. Hence, lawyers/accountants will not be able to extort what they could in the past.
@USCitizenAbroad
The best thing I can do right now is to stall in OVDI as long as I can to see where this residency based taxation movement is going…
@ The Animal
I agree with Mr. Vajina, the mentally disabled are not targeted by the IRS. They have no desire to “expatriate to protect themselves from this predatory nation.” They do not rationalize and I find your reference to the mentally disabled offensive. No one is preventing them from renouncing to escape the apocalyptic US tax phenomenon that seems to constantly occupy that little mind of yours.
Bashing Roy isn’t going to help solve your concerns. He’s one of the few that actually care about Canadians subject to US taxation. He’s gone before the US Treasury to look out for your interests, which is a far cry from your comment stating that Canadians subject to US tax “have no representation in Congress and homelanders could care less.” Last time I checked, predators don’t care about their prey, they want to kill it (in case you don’t get the analogy, think of lawyers as the stereotypical vampire, or just nod your head and think happy thoughts).
By the way, the proper phrase is “couldn’t care less.” Learn the English language, it might help lend credence to your argument the next time you decide make some angry, offensive, illogical, and childish comment on an internet forum (on second thought, you’re probably beyond hope). Check your Kool-Aid and “smack” yourself upside the head.
Michael Hunt, actually “could care less” is the North Americanization of the Brit idiom “couldn’t care less”. While the former does indeed convey that the person does still care a bit, they are both idiomatic, so who cares? English is a living language, a fact that is demonstrated by the way it changes from one country or region to another.
But to address Animal’s main point, the mentally disabled are kept from renouncing for the same reason that teenagers aren’t allowed to renounce until they hit that magic 18 – the USG doesn’t consider them capable of making an informed choice. There is no mechanism for a parent or guardian to make the decision on behalf of a child or mentally disabled person despite the fact that the US does recognize the right of parents and guardians to make all manner of decisions in the best interests of dependents in a multitude of other life altering circumstances.
I think you are overly hard on Animal. He is a frustrated parent who is frightened for his disabled child. Going after him on a picky grammar point and belittling his legitimate fears for the long term care and well-being of his child isn’t exactly the pinnacle of great debating skills either.
I tend to agree with Petros, who believes that Berg is not a predator and that he is sincere in wanting to help those duals who want to stay USC’s. However, the compliance industry either scares the crap out of people or misleads them about the benefits of remaining a USC. For a lot of USC’s outside the US, remaining a dual is pointless hard work that could cost them significant money over the long haul.
@Michael Hunt,
I beg to differ with you regarding your statement. And, by the way, Mr. Berg will know that I am in NO WAY slamming him.
Call it what you may — I could care less!
The mentally disabled are not targetted — THEY ARE ENTRAPPED INTO US CITIZENSHIP BY THE US DEPARTMENT OF STATE AND THE IRS, entrapped into pointless administration fees for compliance for NO TAXES OWED for the rest of their lives and at great cost from the monies intended for their well-being:
Can you at all comprehend what that means for a Parent, Guardian of Trustee of such a child in Canada (or any other country) to be told they do not have the RIGHT to have their child released from the clutches of the US and its unfair “citizenship-based taxation” law and Department of State regulations?
I just met with my Canadian Member of Parliament this morning and just finished emailing her this additional information:
Calgary411 – isn’t it ironic that I can choose to make my child a dual citizen of any country by applying as a family when she is a minor (and has no say) but I can’t relinquish a citizenship on her behalf? It’s a double standard with no real justification.
I can make all sorts of decisions that will dramatically impact my child life’s without any need to clear it with anyone – government or otherwise – except rid her of the citizenship of a country she won’t have grown up in and has no allegiance to.
Oh for the simpler days when taking on a new citizenship meant automatically giving up the old one.
@yoga girl
We once before had a debate here about ‘could vs couldn’t care less’. Both are acceptable, but the proper use is not ambiguous, imo.
If Roy Berg was a predator he wouldn’t be warning Canadians not to take advantage of any new visa that would allow Canadians to spend too much time in the US. Mind you, it doesn’t hurt to have your name in circulation.
We’re a tough audience Roy, hang in there 🙂
@ bubblebustin
I appreciate it. I try to do what’s right and stay on the high road. I’m not as successful at these as I’d like to be but, when I am, I sleep better at night.
@ Yoga Girl
“I could care less” – read it, does it make sense to you? If “I could care less,” implicitly I may care a great deal about something. In fact, I may feel that something is the most important thing in the world. Yes, “I couldn’t care less” has dropped the “n’t” by some, but butchering the original phrase has destroyed it’s meaning. English “lives,” but we shouldn’t give weight to words and phrases that make no sense.
@ The Animal
I apologize for my comments, they were overly harsh and disrespectful. I too feel very passionate about this topic, I only disagree with your means of achieving a solution. We can’t “win” by protesting and fighting the US tax monster online – we need action. That said, you have every right to make your voice and feelings heard here. If you don’t like my view, tell me, I won’t take offense. I believe that Roy has our interests at heart, as evidenced by his actions on our behalf and services for those who cannot navigate the IRS’ dragnet on their own. Yes, he is paid for his services, and rightly so. His services are valuable to his clients and protect their welfare. However, there are much more lucrative careers available, he doesn’t have to be a US tax lawyer that helps folks fill out their tax returns. We shouldn’t condemn him for notifying people of their potential US tax problems, we should applaud him.
@ calgary411
Point taken. If I were you, and my son couldn’t renounce his US citizenship, I wouldn’t comply with the US tax filing requirements. The US government can be incredibly stupid at times, but I don’t think they are stupid enough to go after a mentally disabled person resident in Canada that doesn’t comply with his tax obligations – no good could come from it (and I can’t see it being financially feasible for them to do so). There are much bigger fish to fry. I sincerely hope that your situation has a good ending, and that you and your son can put this whole mess behind you.
@Michael Hunt,
Thank you for your more reasoned comment to Animal and your comment for me. If you only knew what his family deals with, knowing their son is entrapped. Yes, we have very strong words in our frustration of knowing our children are entrapped. You say,
I don’t know if we can “win” by protesting and fighting the US tax monster online,” but I do know that this site has preserved the sanity of many (including me) a US Person in Canada (and other countries). There is support; there is real understanding of what each of is going through both here and at Maple Sandbox. There is also education and reports of expatriation and OVDI experiences and horrors — most of what a US Persons Abroad may need and want to know. There will be action offline when the necessary time comes. I’d be interested in what action you have in mind for right now. (Does it include a lot more money for us?)
I absolutely agree with what you say regarding Mr. Berg and the others he works with. Unfortunately, I am one who cannot get through this maze without the help of competent professionals. I absolutely feel that I am paying for expertise and experience. Don’t get me wrong — I also absolutely feel that my retirement savings should not have to go for this / my retirement hours wasted on what is required of my family due to US citizenship-based taxation. I was lulled into complacency and in hindsight perhaps I would have done things differently. The fact is I lived my life as a Canadian only from the time I became a Canadian citizen in 1975 and was told at that time that I would be relinquishing my US citizenship in doing so. My naivety; my mistakes are well documented on this site. I don’t want others making the same mistakes I did.
That is my strategy. However, that having to “not comply with the US tax filing requirements” is a work-around. It shouldn’t have to be done that way. As a parent / trustee of my adult son, I feel (and will to my grave) that I should have the right to renounce the “supposed” US citizenship of my son if I feel it in his best interests — and I certainly do. There is no common sense in the fact that the US does not allow this — that my son and others just like him should forever be entrapped with US citizenship and all the insane compliance administration costs for him, for absolutely no gain to the US. I, too, believe the US “won’t be stupid enough” to go after my son, but do I really know that? Is it safe for him to cross the border with me — his passport says he was born in Calgary, AB; mine says I was born in the USA. Will some nice US border official make the connection that he is my son and subject my son to questions that I have to coach him to lie about — like “Is this your mother? Are you a US citizen? Even, have you filed all your IRS returns?” Just because I am not paranoid, doesn’t mean they’re not after me — and my son. And, yes, I know it’s a stretch, but why do I even have to entertain those thoughts in the middle of the night?
Again, my ‘going on about this’ is not specifically because of my son’s and my family’s situation — it will affect many, many more. No family with a family member with a developmental disability or other mental incapacity should have to “work around” US citizenship-based taxation requirements. They shouldn’t have to waste a minute of their lives, let alone their often meager savings, on this. But there it is, injustice for another segment of US Persons Abroad.
And then, should the Registered Disability Savings Plan (RDSP) “foreign trust” be available and of equal benefit for every Canadian with a disability when a family member for the Beneficiary or that person himself (if no mental incapacity) hold one? For my son and other “US Persons in Canada” that benefit is negated, compared to ANY OTHER Canadian like him. I hold an RDSP for my son as one of the tools to ease my mind that he will be OK when I am gone. Right now there are funding cuts in Alberta for Persons with Developmental Disabilities. I realize that the government funding my son receives through Alberta’s Assured Income to Severely Handicapped and PDD may not forever be there. That is why I hold an RDSP for my son — and I want not one penny to go for administration of his compliance or any US tax that might be due when my estate winds up — my house sold, my RRIF, etc. Will that be the route of getting their “fair-share” portion of what I have earned and paid taxes on in Canada, even though I have now renounced — keeping my son entrapped in US citizenship? I don’t know, but I sure think about it.
@ Michael Hunt,
re your comment; “….No one is preventing them (those deemed incompetent) from renouncing to escape the apocalyptic US tax phenomenon that seems to constantly occupy that little mind of yours…”
Several here at IBS have established beyond a doubt that the US does not and will not allow minors, and those deemed incompetent to renounce or relinquish. That includes children, those with intellectual or psychological disabilities, adults with dementia, some with head injuries, etc. Check the law. Several have paid substantial sums to legal professionals, and made significant efforts to establish this – and hence, speak from actual firsthand experience and solid knowledge about this issue. There is no doubt that US law and policy proactively PREVENTS those deemed incompetent to be rid of US citizenship – and thus, also the concomitant US tax and reporting burden that has become an inseparable and integral part of it.
Whether the IRS ‘deliberately’ targets those with intellectual and psychological disabilities, or whether they suffer merely as the ‘unintended’ end result of oppressive US citizenship and tax laws taken to their illogical and unjust conclusion – the result is the same. If the IRS did not, and does not ‘intend’ that as a result, they are free to use their vast resources and their access to bend the ear of Congress, Treasury and other US departments and politicians to urge a change to that result. They can make public statements urging that (just as they have made deliberate and tactical use of the media to tar all of us abroad as ‘evaders’ and ‘tax cheats’ and threaten us into ‘compliance’ no matter what the cost). It is even entirely within existing IRS and Treasury power to establish ways to provide remedies, and to make their demands less onerous on persons who will never be able to renounce, yet do not have any capacity to understand, comply, or ‘avoid’ US taxes. For example, they could exempt accounts held and registered as non-taxable or tax-exempt in the country where these individuals live. They could exempt individuals deemed incompetent by authorities in their country of residence. The IRS is fully aware of this situation and the plight of individuals in those circumstances. Yet they have done absolutely nothing to ameliorate it. A sin of omission is still a sin. A crime of omission is still a crime.
There is no reason why a non-US family – taxpayers, citizens and residents in another autonomous country should remain shackled for life to the US because one of their family members will never be allowed to renounce or relinquish. A legal guardian must by law look after the best welfare and interests of those in their charge. That might be a minor child or an adult: someone deemed incompetent due to an intellectual disability, a mental health issue, dementia, head injury, etc. It is not in the best interest of that charge to be subjected to the extortionist and confiscatory extraterritorial demands of the US – or the disproportionate legal and accounting costs of annual US tax and reporting ‘compliance’ from abroad – for a lifetime (and beyond – via estates). It is not in the best interest of that charge or their family to be paying tax or penalties to the US on grants, savings, or other income that is entirely generated and held in Canada – merely based on an accident of birthplace or parentage. It is not in the best interest of Canada to allow the US to burden those who cannot defend themselves and spend their limited resources in establishing to IRS and Treasury satisfaction every year forever, that they are not tax evaders, terror funders, money launderers, etc. It is immoral and cruel to force a guardian into a position in which they must defy or ignore the IRS – and rely on the IRS to turn a blind eye – in order to protect those in their charge.
You also said ….”He’s gone before the US Treasury to look out for your interests, which is a far cry from your comment stating that Canadians subject to US tax “have no representation in Congress and homelanders could care less…”;
Laudable though Mr. Berg’s presentations might be, he does not ‘represent’ us. The staken might very well overlap with some of the beliefs of readers and authors here, but if so, that is but a welcome and happy accident. We have no direct input or influence in those presentations. We have no relationship. And, I feel certain that we also have interests and beliefs about these issues which absolutely do not align. That difference is partly rooted in the US laws that control the actions of US tax law and accounting professionals. And possibly also rooted in personal worldview and circumstances. Many of us do not maintain any substantial current US connection – except for some sentimental and family ties. We are duals, or only Canadians. Many of us have never lived in the US. Many had already relinquished decades ago – our lives are here.
On the issue of ‘representation’ in the US on these matters. The laws regarding voting in the US are quite clear, and less than half of the US states allow those born and living abroad to register to vote without any past or present US residence. Thus, we have a situation where a substantial portion of those subjected to US extraterritorial citizenship based taxation for life, have no ability to vote. And those who do, have no dedicated political representation. Though we are happy to have situations in which by happenstance, some of those with personal, commercial and other interests in these matters advocate for positions which align or overlap with ours, that does not ‘representation’ make. Substantial numbers of ex and current greencard holders and other non-citizens outside the US are also subjected to the same extraterritorial US tax demands – and have never even possessed the theoretical or potential ability to participate in US politics – thus have not even symbolic representation – but are subject to US taxation and financial reporting.
It is altruistic advocacy organizations like ACA and AARO and FAWCO who have been truly ‘representing’ our interests. They are active advocates with our direct benefit and welfare at heart; organizations in which we can hold membership for a small and affordable fee and where we can have direct input. That is a far different thing from a situation in which the actions of an individual whose professional and commercial interests and ours have only some area of overlap http://www.moodysgartner.com/credentials/roy_berg/ This relationship is not symbiotic. That is just a pragmatic and realistic observation.
Um, Michael Hunt, if you were to reread what I wrote, you would see that I did understand and merely explained the origin of the two phrases. A quick google will show that both are idioms in current use and taken to mean the same thing. However, you can spot someone who is anal about grammar by their use of “n’t”.
I am fairly certain that anyone monitoring this site couldn’t care less about our grammatical choices. It’s the thoughts that count.
But at least you didn’t miss my main point, which was that you were being a jerk to Animal. Good on you for apologizing.
Just a p.s. Michael Hunt.
In our society, information is highly commodified. It frequently has a commercial component.
Sometimes information is advocacy or public service.
There may or may not be a relationship between the two.
@Roy Berg @bubblebustin – Small correction to Roy’s statement that taxes are not refunded upon opt out of OVDI into the Streamlined Program. If one has been a filer and years are closed upon opt out, taxes for those years are refunded when the opt out is approved by the agent. This is true for both a regular OVDI Opt Out and for those filers opting out from OVDI who are allowed into the Streamlined Program. (Yes that is possible and I am proof of that.) Unfortunately, this does not help bubblebustin as she was not filing.
@Not that Lisa!
This too is what I’ve surmised from what you’ve said earlier. Hence, my comment that I’m SOL on the SOL. So because I had no idea that I should be filing US taxes, I should be punished more than someone who’d already been filing? WOW.
No wonder Timothy Geithner is shown more leniency than a minnow who’s never filed a tax return. Not to say you are a Timothy Geithner, but you can see the absurdity of the situation, can’t you? There do seem to be more means by which to protect current filers than there are for those who’ve never filed before, who may actually be less culpable than those already filing.
Thoughts, Roy?
@not that Lisa
Can you clarify a few things? Can you define “closed”? Are your referring to the years outside of the 3 years for Streamlined as closed, or those closed due to the statute of limitations? Was the tax you had refunded actually tax you owed during those closed years (just to be clear, not a tax ‘refund’)?
Understand this, Michael Hunt. When the United States decided as a “predator” to target my wife’s income by FBAR, that was when diplomacy went completely out the window. When they decided to entrap my autistic child, they declared WAR! If you want to nitpick over grammar, you, sir, can take a hike. As far as I am concerned, all the United States needs to do in this case is go take a long walk off a short pier because they will not get blood out of a stone. I have long since learned in 42 years of life to “not give a shit about pretenses of civility when it comes to attacks on my family”. I believe the operative phrase here is “go piss up a tree!” My apologies to all those who came to my defense. My patience was short to begin with. It has worn down to nothing.