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The IRS has been trying for years to get Americans with money offshore to disclose these accounts and report the income. On February 8, the IRS announced a new voluntary disclosure initiative to get non-compliant persons – US citizens, residents, and green-card holders – into the system and compliant.
To participate, a taxpayer must file all tax returns, information returns, and foreign bank account reports (“FBARs”) for 2003-10 by August 31, 2011.
Many Canadians have at least a passing acquaintance with the Canadian Voluntary Disclosure Program. This is a program that actually works, because a voluntary disclosure protects against criminal prosecution and penalties; sometimes even interest is waived. It’s such a good deal that even former Prime Minister Brian Mulroney used it to own up to the cash payments he received from Hans Schreiber (http://www.theglobeandmail.com/news/national/article791663.ece).
In contrast, the IRS does not guarantee there will be no criminal prosecution (although generally it will recommend against it), and the taxpayer will be required to pay a penalty of 25% of the highest total balance in his/her foreign financial accounts during 2003-10 (in limited circumstances, the penalty can be reduced to 12.5% or even 5%). If US tax is owed, ordinary underpayment penalties apply (generally 5%/month up to 5 months, plus 0.5%/month thereafter). Interest is also charged.
This program is worse than the 2009 version, because the penalty is higher, and taxpayers have to file 2 more years’ returns. However, in some very important ways, this initiative is better. For instance:
The penalty is particularly problematic for Americans living in Canada, who, almost without exception, have not been avoiding US tax – Canada’s not exactly a tax haven – they just didn’t know they had to file in the US. In most cases, there is little or no US tax involved, only missing filings.
A Canadian-resident American who has filed US tax returns (form 1040), but missed the supplementary filings can catch up without penalties. But it’s still unclear whether someone who didn’t file the returns, but still has no tax to pay, would still be responsible for the 25% (or reduced) penalty.
Someone who doesn’t follow this voluntary disclosure could be hit with substantially larger penalties. The civil penalty for non-willful failure to file an FBAR is $10,000 per account. Didn’t report ownership of a non-US corporation? $10,000. Have a trust? 35% of the value of the assets. Receive a gift from a non-American? Up to 25% of the gift received. The list goes on. These foreign disclosure penalties are abated under the new initiative.
Furthermore, under the Foreign Account Tax Compliance Act (“FATCA”), beginning in 2013, Canadian financial institutions will be doing this work for the IRS. They’ll be asking for clients’ US status, and sending information directly to the IRS.
For more information, please contact myself or see the IRS questions and answers.
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