The Internal Revenue Service recently released several Private Letter Rulings which offer hope to U.S. taxpayers with unreported Canadian Registered Retirement Savings Plans – RRSPs for short. There are tens of thousands of Americans living in Canada. Many hold RRSPs as a way to save for retirement and defer taxes. As the IRS ramps up its already aggressive search for unreported foreign accounts, many Americans are learning for the first time that their Canadian accounts must be reported to the IRS.
Much like an American IRA, a Canadian RRSP allows taxpayers to deduct contributions made into these accounts. As the account grows in value, the earnings are also tax deferred. When the account holder retires, any distributions become taxable.
Americans living in Canada (this includes dual nationals) are subject to both U.S. and Canadian tax law. A special treaty between the two nations allows Americans to elect to defer the growth within an RRSP. Unfortunately, the initial contributions are not deductible in the U.S. (although U.S. tax rates are generally lower than in Canada.)
IRS Form 8891 and FBAR Form
To take advantage of the special treaty, taxpayers must file IRS form 8891, U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Savings Plans. The RRSPs also must be reported annually on an FBAR form, Report of Foreign Bank and Financial Accounts. Failure to file either form carries penalties. Unfortunately, the FBAR penalties are severe; they can be as high as $100,000 per year or 50% of the highest value of the unreported account.
Those extreme penalties scare away many taxpayers. Rather than come into compliance, they simply ignore the problem, hoping to avoid getting caught. Beginning next year, however, foreign banks will be required to identify accounts owned or controlled by Americans. Hiding from the problem won’t work for long.
Fortunately, the IRS just released a series of Private Letter Rulings that suggest the agency is willing to waive penalties if taxpayers can demonstrate they were otherwise in compliance and come forward first.
Private Letter Rulings are not binding on the IRS. They only apply to the very specific set of facts presented. By releasing and publishing several rulings, however, the IRS is sending strong signals about how they propose to handle Americans coming forward for the first time with unreported RRSPs.
In each of the rulings, the facts show the taxpayer was timely and complete in all prior filings. If you are simply missing the 8891 and FBAR forms, but all other returns were filed when due, a penalty waiver may be appropriate.
The rulings also suggest that penalty waivers are only appropriate when the taxpayer comes forward first. The IRS has long operated on a first contact policy. If they find you or your foreign account first, all bets are off.
The worst idea for anyone with an unreported offshore account is to do nothing. You will get caught.
Simply filing all missing forms and FBARs is also a bad idea. The IRS views filing past due offshore returns with the IRS Service Center as a “quiet disclosure.” Remember when you were a kid and tried to sneak in after curfew? That is how the IRS views quiet disclosures.
So what should one do?
Need for Competent FBAR Attorney
Contact an experienced FBAR attorney immediately. He or she can contact the IRS and potentially negotiate a waiver of all penalties including the onerous FBAR penalties. Even if your case doesn’t fit within the facts of the recent revenue rulings, there are other alternatives including a streamlined reporting option for ex pats living in Canada and an amnesty plan for taxpayers who have more than just unreported RRSPs.
Need more information on unreported RRSPs or other offshore accounts? Give us a call. Let an experienced IRS attorney help you get back into compliance with minimal penalties. In most instances our services can be handled for a flat fee. For more information contact attorney, Bethany Canfield at or by telephone at (414) 223-0464. The author can also be reached at or by telephone at (414) 704-6731 (direct). All inquiries protected by the attorney – client privilege.
Post by Brian Mahany, Esq.