Uncle Sam Wants YOU!US Tax Filings and IRS VoluntaryDisclosures Programs
US Taxes on Citizenship• Most other countries tax based on residency• Since the inception of the Internal Revenue Code (“IRC”), the US taxes “US persons”, which includes US citizens, corporations and US residents.• “Green card” holders (immigration) are considered to be “citizens”, and required to file US returns
Canadian Residents/US Citizens• Until the last few years, many US citizens, resident in Canada, did not realize that a US return was required.• Didn’t live in the US (or arrived as children)• Had no family ties• Had no US income• “Thought” that they had given up their green card, or that it expired.
Additional Forms• In addition to Income tax forms, additional information forms are required.• Not a tax obligation, but imposed by the Bank Secrecy Act of 1970• Information used to be part of the regular income tax filings• In 1972, the Form TD F was born. Now the form was sent to Detroit/tax returns to tax return service centres.• For awhile, there was a double filing – copy with return and a copy to Dept of Treasury in Detroit
Form TD F 90-22.1• Report of Foreign Bank and Financial Accounts• Affectionately known as “FBAR”• Financial interest in or signatory or other authority over any financial account NOT HELD in US.• Report only if the aggregate value of all of the accounts exceeds $10,000 (US$) AT ANY TIME IN THE YEAR
FBAR Reporting• Includes bank accounts, securities accounts, RRSPs, TFSA’s, RESP’s etc.• Not a company pension, unless the employees securities are held in a separate Cdn or foreign brokerage account in their name.• Filing deadline is June 30 • No extensions! • Must be received by June 30; not postmarked.
Penalties for Failure to File FBARS• Civil penalty for willful failure to file is the greater of $100,000 and 50% of the total balance in the account.• Non-willful violations are subject to $10,000 per violation• No penalty for “reasonable cause”• Forms state that criminal penalties may be imposed including jail time
Offshore Disclosure Programs• To ensure US citizens are complying with Federal banking laws• Financial Crimes Enforcement Network (FINCen)• First program was the Offshore Credit Card Program in the early 2000’s
The Monster Grows!!• The first official Offshore Voluntary Disclosure Initiative (OVDI) began in January, 2003• 1,299 taxpayers raised $75 M.• IRS didn’t have the ability to identify and examine non- participating individuals.
UBS Scandal in 2008• The dreaded Swiss accounts• Highlighted the extent of offshore accounts and the loss to the FISC.
2009 Program - OVDP• Offshore Voluntary Disclosure Program (OVDP)• File US returns and applicable FBAR forms – 8 years of each• Fraud – game over.• Filed with the Criminal Investigations Unit.
Second Verse, Same as the First!• The 2010 Program was essentially similar to the 2009 program.• Still not much take up by US citizens
The Fed’s Get Serious• 2011 Program – Offshore Voluntary Disclosure Initiative (OVDI)• Eight years worth of returns and FBARs• Ran until September 9, 2011• Penalty tax had to be paid in order to be part of OVDI• 25% of the highest value of all financial accounts for the 8 year period.
2011 OVDI Continued• If moved funds from one account to another, the same funds were counted several times, although later changed.• Inherited funds• Joint accounts• RRSP’s, RESP’s etc
The 2012 Program• Early in 2012, IRS initiated the 2012 Offshore Voluntary Disclosure Program (“2012 OVDP”)• Terms similar to the 2011 program• 25% penalty tax raised to 27.5%• No deadline for filing
The Streamlined Procedure• June 26, 2012: “Instructions for New Streamlined Filing Compliance Procedures for Non-resident, Non-filer US Taxpayers” – “SFC”• Aimed at “low risk” US citizens – most Canadians!• Came into effect on September 1, 2012• Only 3 years worth of US returns and 6 FBARS
Eligibility for SFC• Lived outside of USA since after 2008• Not previously filed a US return for 2009 or later• Taxpayer must not owe more than $1,500 in US tax on any tax return submitted under the program.• Relief may be sought solely to timely elect deferral of income from RRSP/retirement accounts.
Criminal Prosecution• SFC doesn’t protect against possible criminal prosecution• If worried about criminal penalties, option is to file under the 2012 OVDP program
SFC Requirements• US income tax returns, including all information returns, for the last three years;• Payment of all tax and interest due on the returns;• FBARS for the last six years;• A signed “questionnaire” regarding the taxpayer’s financial accounts, tax advisor, whether any US return was ever filed etc.
SFC Requirements• Additional information required re: failure to timely elect deferral of income from RRSP’s or other retirement programs • Including a form 8891 for each tax year and each Retirement plan
IRS Risk Levels• IRS has notified taxpayers that risk level may rise if any of the following are present: • Any return filed claims a refund • The Taxpayer has not declared all income in the country of residence • Taxpayer is under audit or investigation already • FBAR penalties were previously assessed or taxpayer received a FBAR warning letter
IRS Risk Levels• Taxpayer has a financial interest or authority over financial accounts located outside the country of residence• Taxpayer has a financial interest in an entity or entities located outside the country of residence• US source income exists• “Indications” of sophisticated tax planning or avoidance.
What about the “Quiet Procedures”• Many taxpayers did not file under either the OVDI or OVDP programs, but simply filed returns to the “ordinary” place of filing.• Risk is that the returns won’t be eligible for any protection whatsoever.• Non-filing penalties can be completely waived if the taxpayer has “reasonable cause” – can’t use for OVDI or OVDP• Jury is out on assessment of the “quiet” returns.
Opting Out of 2012 Program (Pre-SFC)• 2011 OVDI penalty presumed “willfulness”• “Willfulness” is the government’s burden to prove.• IRS provided that taxpayers who have reasonable cause may be better off by first applying to the OVDP program then subsequently opting out of the civil settlement structure.
Opting Out• According to the IRS FAQ (“frequently asked questions”), opting out of the civil settlement structure does not affect the status of a taxpayer’s voluntary disclosure under Criminal Investigation’s Voluntary Disclosure Practice so long as the taxpayer is fully cooperative, provides all requested foreign records and submits to all requested interviews, and as long as no new issues are uncovered.
Opt-In/Opt-Out of 2012 OVDP• The National Taxpayer Advocate criticized the current IRS practices in OVDP that hinder voluntary compliance by penalizing taxpayers who are entitled to a reasonable cause exception to “willfulness”• She claimed the opt in/opt out taxpayers are subject to extended resolution times • Avg time was 300 days • Opt in/Opt Out was 550 days
National Taxpayers Advocate• Those who are less compliant move through system more quickly• Higher representation fees• Funds held by IRS longer• Also, IRS is spending funds to punish taxpayers, but not to educate them.
Opting Into SFC• If a taxpayer participates in the SFC, OVDI and OVDP not available, and vice versa• However, the IRS has expressly extended eligibility to taxpayers who filed under the old programs• Opting Out of OVDI or OVDP is irrevocable• Each file is assigned an IRS agent, so can determine the chances of tax or penalties if opt out.
Opting into SFC• Factors to consider: • Additional professional fees • The OVDI and OVDP protect the taxpayer from the risk of criminal prosecution • OVDI and OVDP required 8 years of returns; if opt out, may be required to file several additional years
Opting Into SFC• OVDI and OVDP penalties were fixed – you know what you’re getting • Penalties for years prior to 2009 – the SFC only relates to 2009 to 2011 returns.• OVDI and OVDP don’t allow the “reasonable cause” defense against penalties.• After OVDI and OVDP examination, IRS letter closing the statute of limitations.
Opting Into SFC• Filing late filed elections to defer tax in RRSPs and other Canadian retirement plans outside of OVDI and OVDP is time consuming and expensive.• New SFC actually makes this easier
Other Issues• IRS can change the terms of any of the programs at any time• It could increase the penalties for all or some taxpayers or a defined class of taxpayer• It could end the program at any time – little or no warning
Latest Developments• Filings under the 2011 OVDI • Filed by September 9, 2011 • First responses in February, 2013 – about $518 days • Allowing a reduction to the 25% penalty for RRSPs – separate filing • Allowing deduction for joint ownership of accounts
Latest Developments• BUT are recommending opting out of the OVDI program into the SFC.• Adding in the 2010 and 2011 tax returns, already filed.• The Questionnaire• Have verbally “assured” that the penalty paid with the OVDI filing will be refunded – at least in part • Interest?
Latest Developments• Professional auditors – very common sense and wanting to dispose of outstanding files• Recognize the “US citizen in Canada” issue• Good rapport
Quo Vadis?• The word is out there• Compliance is the watch word• Computers, Nexus, world is getting smaller• Risk of involuntary compliance is greater• The New “FATCA” rules and form 8938
FATCA• Foreign Account Tax Compliance Act• Negotiations in play with France, Germany, Italy, Spain and UK, others• First iteration was to require foreign financial institutions (FFI) to report info on their US citizen clients to their governments who would share it with US on automatic exchange of info
FATCA• Latest negotiations with Japan and Switzerland permits FFI’s to report info directly to IRS• Name and citizenship • Balance in account • Investment income earned by account
FATCA• Requires the FFI to ask each client whether they are US citizens – penalties for false reporting• FFI’s – increased policing duties – may not want to deal with US citizens • Canadians who have never lived in US, Canadian financial institutions are cancelling their accounts?
Form 8938• Beginning for years after March 18, 2010• Report ownership of specified foreign financial assets • Same info as FBAR • Doesn’t relieve taxpayer from filing FBAR, if required
Form 8938• Reporting Thresholds • Unmarried, living in US • Value of specified assets > $50,000 on the last day of the year or > $75,000 at any time during the year • Married, filing joint and living in US • >$100,000 on the last day, or > $150,000 at any time • Married, filing separate returns, living in US • >$50,000 on the last day, or > $75,000 at any time
Form 8938• Living “Abroad” • Bona fide resident of the foreign country for the entire taxation year • Present in foreign country for at least 330 full days during any 12 month consecutive period that ends in the tax year
Form 8938 – Taxpayers Living Abroad• Married Filing Jointly (Taxpayer + Spouse) • >$400,000 on the last day of the tax year or $600,000 at any time during the year• Single or Married filing Separately • > $200,000 on the last day of the tax year or $300,000 at any time during the year
How Lucky Do You Feel?Life is Messy, Clean it UP!