My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Wednesday, October 26, 2011

The Outrageous Penalties that can be assessed for not filing IRS Information Forms

The recent U.S. tax amnesty program that concluded in September was controversial to say the least. Even Finance Minister Jim Flaherty weighed in saying that “U.S. authorities are spreading unnecessary stress and fear among law-abiding Canadians in their aggressive pursuit of offshore tax cheats.”

In the last week or so there have been a couple articles stating that the IRS may be softening its position in regard to Canadians, however, in the meantime, the filing requirements remain unchanged.

There has been much written about the requirement to file U.S. returns. However, in this blog I want to discuss other U.S. forms that may be required for Canadians who have to file U.S. tax returns whether as U.S. citizens or deemed U.S. residents.

As I noted in prior blogs, I used to file U.S. tax returns, but have not done so for almost two years. Thus, this blog is just for information purposes; please see your U.S. advisor to ensure compliance with your filing requirements and confirm any penalty provisions applicable to you.

Form TD F 90-22.1

This form was front and centre in regard to the amnesty filing program. This form is required to be filed by any U.S. citizen or resident who has a financial interest in, or signature authority on, a foreign bank account (i.e. any account in Canada, whether a bank account or investment brokerage account).

Failure to file this form could result in penalties ranging from $500 for a negligent violation, to $10,000 for a non-willful violation to a maximum of $100,000 or 50% of the value of the account for a willful violation. The potential penalties seem absurd for not filing an information form. Some think the hidden agenda of this form is to provide the IRS full disclosure should you die and be subject to U.S. estate tax.

Form 8891

This form is used to report any Registered Retirement Savings Plan (“RRSP”) or Registered Retirement Income Plan (“RRIF”) you hold in Canada and the related income from your RRSP or RRIF. Before you have a heart attack, the income does not need to be reported if you elect to defer recognition of the income on your RRSP or RRIF until the time you receive it. By making this election you should be able to offset any U.S. tax by claiming a foreign tax credit for the Canadian income tax you pay upon the withdrawal of funds from your RRSP or RRIF. This form must be filed each year for each RRSP or RRIF you hold.

There is interestingly no penalty set out on Form 8891. I have been told by some that the penalty for not filing this form is up to 35% of the value of the RRSP or RRIF, however, I have seen others speculate that since no penalty is specified, the penalty could be as low as $135. In either event, I would file the form and not chance the higher penalty.

Form 5471

This form must be filed by Canadians filing U.S. returns who own at least 10% of the stock in a Canadian corporation. There are different filer requirements, so speak to your advisor as to which category you fall into. Under some filer requirements, you are basically required to translate your corporation’s Canadian financial statements into U.S. financial statements. This is a lengthy and very expensive exercise.

The penalty for non-compliance is $10,000 per missed filing and a reduction of foreign tax credits.

Form 3520

This form is required to be filed by any U.S. person who received a distribution from a foreign trust. For estate planning purposes many Canadians create family trusts that include themselves or children who are U.S. citizens or residents and thus fall under this filing requirement.

In addition, and more relevant for most Canadians, some U.S. tax specialists think that this form must be filed to report both Registered Educations Savings Plans (“RESPs”) and the Tax-Free Savings Accounts (“TFSAs”).

The penalty for not filing this form is equal to the greater of: (1) $10,000, (2) 35% of the property transferred to the trust, (3) 35% of the gross distributions from the trust, and (4) 5% of the gross value of the trust assets.

The above discusses some of the U.S. information forms U.S. citizens and residents may be required to file. The penalties do not seem proportional to the importance of the forms, so for the sake of Canadians required to file U.S. returns, let’s hope the IRS truly does soften its position on penalties for at least past transgressors.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.