Beginning in 2013, the I.R.S. will obligate offshore financial institutions to report all accounts that current and former U.S. citizens, residents and green card holders have with the institutions under the U.S. Foreign Account Tax Compliance Act. In anticipation of the new requirements, the I.R.S. announced its 2011 Overseas Voluntary Disclosure Initiative in February 2011 in an effort to give those who failed to meet their Foreign Bank Account Report requirements an opportunity to become current with their tax obligation before offshore financial institutions disclose the existence of their accounts.
The U.S. requires citizens, residents, and green card holders to declare sources of foreign income and the existence of foreign accounts on income tax returns, regardless of where they live. The I.R.S's new push regarding FBAR enforcement has important implications for U.S. citizens who reside in Canada.
FBAR Requirements
The I.R.S. requires any "United States person" who has signatory authority over or any financial interest in an account in a foreign jurisdiction to file a Report of Foreign Bank and Financial Accounts form by June 30 if the aggregate amount of all the foreign accounts exceeds $10,000 in a calendar year. Failure to file an FBAR could result in criminal penalties and substantial civil fines.
The I.R.S. defines a "U.S. person" as any U.S. citizen, resident, green card holder, tax resident, partnership, corporation, estate or trust.
Implications of FBAR Requirements for U.S. Citizens in Canada
Many U.S. citizens living in Canada, such as those with dual citizenship, are not aware of their FBAR obligations and the need to report to the I.R.S. - and pay taxes on - accounts they hold in Canada. Given that the aggregate threshold reporting amount is $10,000, many with Registered Retirement Savings Accounts, Registered Educational Savings Plans or Tax Free Savings Accounts could easily have FBAR obligations of which they were unaware.
Some Canadian officials believe that the U.S. Foreign Account Tax Compliance Act is unnecessarily burdensome for countries like Canada and U.S. citizens who are living there. Canadian Finance minister Jim Flaherty argues that Canada is hardly a tax haven; people who live there already pay substantial taxes to the Canadian government. The Act does not distinguish, however, between those living in foreign countries in an effort to evade tax obligations and those living abroad for other reasons.
Participate in OVDI?
One option for U.S. citizens living in Canada who wish to become current in their tax obligations is to participate in the 2011 OVDI. If a taxpayer can show that his or her failure to file an FBAR was for a good reason and not willful, the penalty that the I.R.S. assesses may be dropped to 12.5 percent of the total value of the overseas accounts, rather than the 25 percent that most who participate in the program have to pay. Accountants and tax lawyers caution people thinking of disclosing their Canadian accounts under OVDI to evaluate their U.S. tax liability before disclosing, since paying taxes in Canada does not absolve taxpayers of their U.S. tax obligations. Filers should be prepared to pay back taxes and penalties.
I.R.S. reporting requirements can be difficult for those living abroad. If you are considering participating in the 2011 OVDI, do not hesitate to contact an experienced tax attorney who can discuss your situation with you and advise you of all of your obligations and options.
