Volume No. US-19-03
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:
- Unmarried taxpayers living in the US: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year
- Married taxpayers filing a joint income tax return and living in the US: The total value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year
- Married taxpayers filing separate income tax returns and living in the US: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year
- Unmarried taxpayers living outside the of the US: The total value of your specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year
- Married taxpayers filing a joint income tax return and living outside of the US: The value of your specified foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year
- Married taxpayers filing separate income tax returns and living outside of the US: The total value of your specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year
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.
