Jan 19, 2022
As we advised in Tax Tip 20-04 , significant additional disclosure and filing requirements for trusts were announced in the 2018 Federal Budget and are scheduled to apply for trust’s 2021 and subsequent tax years.
There has been much in the news lately about the IRS collecting information about bank and financial accounts held overseas by U.S. persons. We thought this would be a good time to review what are the required disclosures for U.S. persons with offshore assets and what the U.S. is doing with this information.
U.S. persons who have an interest in (direct or indirect), signing authority, or any authority over non-U.S. financial accounts may be required to disclose that interest on FinCEN Form 114, “Report of Foreign Bank and Financial Accounts” or “FBAR”. If the aggregate value of all such interests exceeds US $10,000 at any time during the year then a timely filed FBAR is required. Note that this US $10,000 threshold is not per account but an aggregate threshold. It has been our experience that many taxpayers continue to think that the threshold is per account – that is clearly not the case!
The FBAR is due April 15th but taxpayers receive an automatic extension until October 15th. It is filed directly with FinCEN in the Department of the Treasury and is not part of an individual’s tax return. There are potentially significant penalties for non-compliance. Those found guilty of not filing due to willfulness (in other words they knew they had to file and for whatever reason, choose not to) are potentially subject to a penalty equal to the greater of (i) 50% of the account balance or (ii) US $100,000. Yes, the IRS has imposed these penalties! It is a significant tool the IRS uses when it goes after taxpayers charged with committing off-shore tax evasion.
For those who do not file, but their failure to file is not due to willfulness, they may be subject to a US $10,000 penalty. It has been our experience that this penalty is rarely assessed, however taxpayers cannot rely on what the IRS has done in the past.
Much of the same account information required for the FBAR is also required for Form 8938, which is filed along with a U.S. person’s income tax returns. The Form 8938 requires information on a taxpayer’s “specified foreign assets” which, in addition to bank accounts, also includes foreign pensions, shares of foreign corporations not held in an account, and other foreign assets. The filing threshold for Form 8938 is higher than that for the FBAR and is different for U.S. persons residing inside or outside of the United States. These filing thresholds are:
The Foreign Account Tax Compliance Act (FATCA) was introduced as part of the Hiring Incentives to Restore Employment (HIRE) Act (P.L. 111-147). President Obama signed the bill into law on March 18, 2010.
One of the components of FACTA was the requirement for foreign financial institutions (i.e., Canadian banks and brokers) to disclose to the IRS information on their U.S. customers. The Canadian Department of Finance entered into an Intergovernmental Agreement (“IGA”) with the United States to allow for the enactment of FACTA within Canada. Under the IGA Canadian financial institutions will now disclose the required information to the CRA instead of sending it directly to the IRS. The CRA will, in turn, share that information with the IRS under the mutual information exchange agreement.
It is important to note that banks will only share information on non-registered accounts with a balance in excess of US $50,000. Registered accounts (such as RRSPs and TFSAs) are excluded from this reporting requirement. This greatly reduces the number of accounts subject to the IGA.
On January 23, 2019 the CBC issued an article (www.cbc.ca/news/politics/tax-facta-u-s-canada-1.4988135) stating that, under this agreement, the CRA has shared over 1.6 million banking records with the IRS since 2014. In 2017 alone, 600,000 banking records were shared. The number of individuals affected by this is much less, as many of the individuals had more than one account reported.
Among the items of Canadian bank account information being shared with the U.S. are the names and addresses of account holders, account numbers, account balances or values, and information about certain payments such as interest, dividends, other income and proceeds of disposition.
What is clear is that the ability to hide information from tax authorities is becoming harder to do. U.S. persons in Canada need to be understand what their filing and disclosure obligations are and to timely file these information returns. The IRS will take the information, they received from the CRA, and cross-check it against the returns the taxpayer has filed with the IRS.
Those who file their U.S. returns and tick the no box on Schedule B Part II, Foreign Accounts and Trusts, may be guilty of a willful violation if any accounts are not disclosed. As discussed above, the penalties can be quite onerous.
The staff and Cadesky US Tax can assist U.S. persons in determining what your foreign asset disclosure requirements are and can help prepare the necessary disclosure reports. Please contact us for further information.
U.S. TAX TIP is provided as a free service to clients and friends of Cadesky U.S. Tax.
The material provided in this U.S. Tax Tip is believed to be accurate and reliable as of the date of posting. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither Cadesky Tax nor Cadesky U.S. Tax can accept any liability for the tax consequences that may result from acting based on the contents hereof.