Americans living in Canada risk facing massive tax penalties
By Don Cayo, Vancouver Sun
An Aug. 31 deadline looms for an untold number of Americans living in Canada — certainly many thousands, and possibly hundreds of thousands — who are at risk of massive penalties from the IRS, even if they have no U.S. income, owe no back taxes and haven’t lived in the States for years.
Huge numbers of Americans don’t know the IRS requires all U.S. citizens living abroad to file annual tax returns. They must disclose their foreign bank accounts and other holdings even if they have no American tax liability. So says Warren Dueck, an accountant whose Richmond-based firm specialized in U.S.-Canada tax issues.
And, although the law has been on the books for years, the issue is being brought to a head by a new push to enforce this provision much more vigorously than in the past.
The Aug. 31 deadline is for an Offshore Voluntary Disclosure Initiative introduced last winter to encourage non-resident Americans to make the required disclosures. For those who meet the deadline, it provides for reduced — but still hefty — penalties, although it also holds out at least some hope that the penalties could be waived.
But Dueck, who says he and his colleagues are swamped with requests for help from new clients, thinks it may already be too late for many to meet the complex filing requirements in time.
The only alternative that will be left, he said, is a provision called “quiet disclosure.”
Although it amounts to little more than confessing and then begging for mercy, he recommends it for anyone who doesn’t get the proper paperwork filed in time for the deadline. It offers at least some hope of being better than the alternative.
The alternative may be grim. Among the penalties the law sets out for failure to disclose such things as bank accounts, or “trusts” like RESPs and TFSAs, Canadian corporations and partnerships, or Canadian mutual funds, are fines of $10,000 per offence per year. (That is, for non-wilful offences. The penalty is $100,000, or can go as high as 50 per cent of a major asset, if the IRS thinks there was deliberate attempt to cheat it of revenue.)
But even with ordinary accounts held by people who innocently failed to file, “Say you have four of them you haven’t disclosed for six years,” Dueck said. “That’s $10,000 times four times six — $240,000.”
And, “It doesn’t matter if the undisclosed account is a $5,000 TFSA or a $5-million investment, you still have maybe 10 pages of filing that needs to be done.”
The Offshore Voluntary Disclosure Initiative could reduce the penalties by as much as 90 per cent, but it comes with three conditions. To be eligible, American citizens must establish that they lived outside the U.S. from 2003 to 2010, that they made a good-faith effort to comply with tax laws in the country or countries where they’ve been residing, and that they had less than $10,000 of U.S.-source income. People who meet those criteria may be able to apply for an extension to get all the paperwork done, Dueck said, but it is not automatically granted.
It’s hard to get a count of how many Americans live in B.C. or in Canada, but the consensus is that the number is big. Published estimates range from 600,000-plus to a million or more nationwide, and the American consulate in Vancouver estimates 90,000 in this region alone.
Dueck said that, based on his considerable experience, he believes about half of these don’t know they have to file annual returns, and as many as half of those who do file don’t know they also have to disclose their bank accounts and holdings.
Even more chilling, he said, Canadian-born children of American citizens may not realize they may automatically get U.S. citizenship without ever making any effort to apply for or acknowledge it. So some may be at risk of penalties without even realizing they’re dual citizens.
Several Americans who have suddenly realized they are not in compliance declined to be interviewed for this story. But David Perrin, an American citizen who teaches chemistry at the University of B.C. and who has had professional help filing to the IRS every year since he arrived in Canada in 2000, said the filing can be complicated.
“And the more complicated your finances get, the more onerous the filing gets.”
The Canadian tax on most job-related income is higher in Canada than in the U.S., so there’s generally no money owing to the IRS on wages or salary. But certain investment income is treated differently in each country, and there are other cases — lottery winnings, or capital gains on the sales of a home — where the U.S. collects tax but Canada does not.
“The same thing can happen with end-of-life issues, or winding down investments for retirement, and that sort of thing,” he said.
In past, the IRS has had no reliable way to track down most American citizens living in Canada, but that seems likely to soon change.
The U.S. Foreign Account Tax Compliance Act, which comes into effect in 2013, will require non-U.S. financial institutions to tell the IRS about any clients who are American citizens.
Dueck said the IRS has the clout to pressure Canadian institutions that do business on both sides of the border into doing this. So the only way for Americans living in Canada to avoid being identified would be to have no dealings with any financial institution, or to commit perjury — an option he emphatically advises against — when their bank asks about their citizenship.
The IRS did not comply with The Sun’s request for an interview, and it did not send, as its spokesman promised, background information on the issue. But some fairly detailed information is available on the IRS website at
http://tinyurl.com/ovdiinfo
Read more here:
The Windsor Star
The following from the
IRS
Depending on a taxpayer’s particular facts and circumstances, the following penalties could apply:
- A penalty for failing to file the Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts, commonly known as an “FBAR”). United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign accounts exceeded $10,000 at any time during the year. Generally, the civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.
- A penalty for failing to file Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under IRC § 6048.This return also reports the receipt of gifts from foreign entities under section 6039F.The penalty for failing to file each one of these information returns, or for filing an incomplete return, is 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.
- A penalty for failing to file Form 3520-A, Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b).The penalty for failing to file each one of these information returns or for filing an incomplete return, is five percent of the gross value of trust assets determined to be owned by the United States person.
- A penalty for failing to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046.The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
- A penalty for failing to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C. The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.
- A penalty for failing to file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.
- A penalty for failing to file Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A. Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.
- Fraud penalties imposed under IRC §§ 6651(f) or 6663. Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.
- A penalty for failing to file a tax return imposed under IRC § 6651(a)(1). Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.
- A penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2). If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.
- An accuracy-related penalty on underpayments imposed under IRC § 6662. Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty.
