You can run, but you can’t hide
The ability of a U.S. taxpayer to maintain an undisclosed “secret” foreign financial account is fast becoming non-existent. Recent U.S. legislation and intergovernmental agreements will increase the flow of foreign account information into the Internal Revenue Service (IRS), making it less likely that offshore financial accounts will go unnoticed.
What is FACTA?
In an effort to improve tax compliance, the Foreign Account Tax Compliance Act (FATCA) was passed in the U.S. in 2010. FATCA is intended to detect “U.S. persons” who are evading U.S. tax using financial accounts held outside of the U.S. Under FATCA, non-U.S. financial institutions are required to report relevant information to the Internal Revenue Service (IRS) about financial accounts held by identified U.S. persons.
Canada’s response to FACTA
In response to the burden of compliance imposed under FACTA and the risk of unintended consequences to Canadians, the Government of Canada (in early 2014) entered into an Intergovernmental Agreement (IGA) with the U.S. under the existing Canada-U.S. Tax Treaty (the Treaty). The IGA provides an alternative means of meeting the U.S. objectives under FACTA by relying on existing provisions for information exchange under the Treaty. The agreement requires Canadian financial institutions to identify financial accounts held by U.S. residents and U.S. citizens or by entities that are organized in the U.S. or, if organized in Canada, controlled by certain U.S. persons, and to report that information to the Canada Revenue Agency (CRA) rather than directly to the IRS. The CRA then exchanges the information with the IRS through the existing provisions and safeguards of the Treaty.
Who is impacted?
To meet the requirements of the IGA, Canadian financial institutions are now required to verify whether a new or existing account holder is a “U.S. person” for U.S. tax purposes, such as a U.S. citizen (including a U.S. citizen who is a resident or citizen of Canada), U.S. green card holder, or U.S. resident. Indicators that someone may be a U.S. person include U.S. identification used to open an account or a U.S. address associated with the account. The financial institution may ask an account holder to self-certify that he or she is not a U.S. person by requesting additional documentation. Depending on the situation, if this additional documentation is not provided, the financial institution may be required to send account information to the CRA which may share it with the IRS. The information about the account holder that is collected and shared with the IRS includes the name, address, and, in most circumstances, the individual’s U.S. taxpayer identification number, and certain financial information about the account.
Which accounts will be disclosed?
Canadian financial institutions have to report most bank accounts, mutual funds, brokerage accounts, custodial accounts, annuity contracts (including segregated fund contracts), and some life insurance policies with a cash value that are held by U.S. persons. An account is not reportable if it falls within an exempt category, which includes such accounts as an RRSP, RRIF, RPP, TFSA, RDSP, and RESP. Also, the financial institution may not have to identify and report on certain accounts if their value is below certain thresholds.
All-y all-y in come free
As automatic account reporting is to begin in 2015, now may be the time to take advantage of certain IRS voluntary disclosure programs that allow taxpayers with undisclosed income from offshore accounts to become current with their tax returns and information reporting obligations. These programs encourage taxpayers to voluntarily disclose foreign accounts now rather than risk detection by the IRS at a later date and face more severe penalties and possible criminal prosecution.
Following the “success” of several targeted offshore voluntary disclosure programs that began in 2009 and 2011, the IRS initiated (in 2012) streamlined procedures for certain U.S. taxpayers who were able to certify that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part. These new procedures recognized that some U.S. taxpayers living outside the U.S. failed to timely file U.S. federal income tax returns or related forms, but only recently became aware of their filing obligations and now look to come into compliance with the law.
A taxpayer who is eligible to use these streamlined procedures and who complies with all of the requirements of the procedures will not be subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or Report of Foreign Bank and Financial Accounts (FBAR) penalties.
If you have a concern about the IRS becoming aware of undisclosed income or have a need to become current with your U.S. tax filings, please call your DMCL tax advisor.