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Why Is It Important For Canadian Expats To Disclose Foreign Based Accounts to the IRS?
Many US residents are beneficial owners of foreign accounts that generate investment income. The IRS (US Internal Revenue Service) has a policy that taxes the worldwide income of US residents. In order to collect on this mandate, the IRS has instituted various policies and procedures to ensure that its residents are in compliance. In fact, the majority of foreign accounts must be annually disclosed and are subject to taxation by the IRS. Also, it is important to understand that the disclosure rules include RRSPs (Registered Retirement Savings Plans), pensions and bank accounts. Please note that disclosures do not automatically necessitate any tax liability.
Unfortunately, many US residents and their advisors are not aware of the preceding IRS requirements. It is critically important for US residents to understand that the IRS can assess substantial civil and criminal penalties for noncompliance. In fact, the IRS has been increasingly aggressive with both willful and non-willful violations. Importantly, the IRS regularly communicates with the CRA (Canadian Revenue Service) in an attempt to expose tax evaders and other illegal activities. Also, the IRS uses the FBAR (Report Of Foreign Bank and Financial Accounts) and will use FATCA (Foreign Account Tax Compliance Act) to gain additional information and transparency.
The FBAR requirement has been around for decades. The purpose of an FBAR is to expose US resident tax evaders and other illegal activities. According to the IRS, an FBAR is required for US persons who have a financial interest or signature authority over at least one financial account located outside of the US. Also, the aggregate values of all foreign financial accounts exceeding $10,000 at any time during the calendar year are to be reported. The definition of a "person" includes corporations and trusts. The FBAR Form TD F 90-22.1 should be filed annually and the IRS has become quite strict on this disclosure.
FATCA was introduced in 2010 and will become effective in 2013. It was part of the Hiring Incentives to Restore Employment (HIRE) Act. The goal of FATCA is to enhance the compliance of foreign-based accounts, which are owned by US residents. Only certain accounts with minimum balances will be subject to FATCA reporting. If subject to FATCA, the US resident will need to file tax form 8938. It will need to be submitted with a US resident's federal income tax return. Additionally, FATCA will require foreign financial institutions to communicate directly with the IRS. These communications will require inclusion of detailed information regarding the foreign account holdings of US residents. The foreign institutions will also be required to report on entities that are substantially owned by US residents.
US resident account owners who have never reported their foreign-based accounts should not believe they have evaded the IRS reporting requirements. It is advisable to consult a qualified cross-border accountant to determine the best course of action for disclosing these accounts when past omissions exist. Noncompliance to the above rules can be very costly especially if the IRS makes the discovery. To combat this scenario, US residents have the option to work with the IRS in order to become compliant retroactively. Many taxpayers have elected to come forward on their own through the OVD (Offshore Voluntary Disclosure Program.) On January 9th, 2012, the IRS announced a third iteration of the OVD program. It was created to assist those US residents who have not followed IRS guidelines and want to become compliant. It is important to note that tax penalties exist for both willful and non-willful violations under OVD. However, criminal prosecution no longer applies under OVD and the penalties are lower.
In summary, it is important that US residents review the proper tax filing requirements for their foreign-based accounts. Additionally, foreign accounts can prove problematic when considering double taxation, country specific investment options and estate planning. There is no "one size fits all" cross-border financial planning strategy. Therefore, it is important to partner with a qualified team of tax, legal and investment professionals who specialize in Canadian and United States cross-border transitioning and asset management. Please contact Cardinal Point Wealth Management at http://www.cardinalpointwealth.com/US/contactus.html to review your unique situation.