Reporting Foreign Bank Accounts – Tax Implications for Canadian Citizens Living in the USA.
The Desert Cities are home to many part-time and full-time Canadian and other foreign citizens who are either United States citizens or permanent residents.
Recently, the IRS has increased compliance efforts in the area of foreign asset reporting for US tax residents. The IRS is zealous in prosecuting those who avoid compliance with reporting requirements. We believe that many compliance deficiencies stem from lack of understanding of compliance responsibilities. This post will describe general foreign asset compliance rules, explain two categories of filing requirements and provide practical tips to ensure taxpayers avoid hefty penalties and vigorous prosecution for misreporting or underreporting. Generally there are two major reporting classes and corresponding reporting requirements. One is a requirement to report foreign bank and financial accounts; the requirement is also known as FBAR reporting. Relevant information is reported on Treasury form TD F90-22.1.
The other is a requirement to report specific financial assets held in foreign countries (IRS Form 8938). FBAR is the requirement to report existence of bank or brokerage accounts taxpayer owns or controls at financial institutions with account balances that equal or exceed 10,000 USD. The account balance is determined at foreign exchange rates in effect at the end of the tax year and the reporting threshold applies if the balance exceeds 10,000 at any time during the year. We encourage strict compliance with reporting rules given that the penalties for failure to comply are steep: up to $10,000 penalty is failure to report was unintentional; if failure was willful, the penalty is the greater of $100,000 or 50 percent of account balance in the unreported account. Criminal penalties may apply for intentional failure to file. Treasury form F90-22.1 is due by June 30th of the year following the end of the reporting year and no extensions of time to file ate allowed. In contrast, form 8938 reporting requirement has to do with total value of assets held abroad. The taxpayers must file and report total assets that equal or exceed $50,000 in on the last day of the tax year or $75,000 at any time during the tax year (higher threshold amounts apply to married individuals filing jointly and taxpayers living abroad).
The requirement applies to assets owned or effectively controlled. Form 8938 is prepared and submitted along with the tax return by the tax return deadline including any extensions. Like FBAR, penalties for not filing form 8938 are substantial. Non-filers may be subject to penalties up to $10,000 for failure to disclose assets plus an additional $10,000 for each 30 days of non-filing after IRS notice is issued for a failure to disclose. Potential maximum penalty is $60,000 and criminal penalties may also apply. For a compliance viewpoint, reporting does not necessarily entail taxation but certainly makes it easier for the IRS to track potentially taxable proceeds related to conversion, dispositions or other change of ownership of reported assets or accounts. Both reporting rules are intended to improve information reporting which may lead to higher tax collection rates. So far we believe the strategy is working well for the IRS. Keeping silent about foreign assets is extremely risky as IRS is very serious about criminal prosecutions. What should you do if you find yourself behind on compliance responsibilities? The IRS offers an Offshore Voluntary Disclosure Program (OVDP). The IRS began it’s current open-ended offshore voluntary disclosure program (OVDP) in January 2012 following strong interest in the 2011 and 2009 programs. The IRS may end the 2012 program at any time without notice. The IRS is offering taxpayers with undisclosed income from offshore accounts another opportunity to become current with their tax returns. The 2012 OVDP has a higher penalty rate than the previous program but offers clear benefits to encourage taxpayers to disclose foreign accounts now rather than risk detection by the IRS and possible criminal prosecution. The window of opportunity to take advantage of OVDP may close very quickly as one may become ineligible for OVDP if the IRS serves John Doe summons or makes treaty or similar request that identified the taxpayers noncompliance. Once the taxpayer is identified as noncompliant, the IRS will deny OVDP benefits to that taxpayer. If you have foreign assets or income and you are uncertain whether or how you should report them, please contact us for a complimentary virtual or in-person consultation.