OVDI FAQ #17

[kal2]

As I read Q17, it seems to say that if tax liability has been reported and paid on world income, including on income pertaining to foreign accounts, then taxpayers should not go into the OVDI and should simply file their information returns with information per department guidelines.

What I cannot figure out is whether a taxpayer who has filed timely tax returns on such foreign account income in their country of residence (not the US) later files US tax returns on such foreign account income late, and has no liability on any such returns due to the application of foreign income tax credits, is also governed by Q17: That is, should such a taxpayer also simply file their information returns with the relevant departments following their guidelines, as in Q17?

Such a situation would appear to be functionally the same as the Q17 scenario.

Q52 Situation 3, Examples 1 and 2 appear similar to this scenario, but differ in one key regard: The taxpayer does not seem to have attempted full reporting of the foreign account income in the US before filing late information returns, but seems to have just gone directly into OVDI.

Q51.1 also seems similar, but it differs in another regard: It involves a taxpayer who filed an original US return that did not originally report foreign account income, then filed an amended return reporting it and establishing that there was nil US tax liability due to foreign income tax credits, and then has the choice of remaining in OVDI and paying high penalties vs opting out and paying penalties only for failure to file information returns. This scenario is silent as to whether the amended US return was filed before or after going into OVDI.

Would it be correct to view the situations in Q52 and 51.1 as being substantively factually different from the scenario in Q17? If so, then it seems to me that even if an original US return is filed late, if the late returns reveal nil liability due to the application of foreign income tax credits claimed and used earlier in the country of residence to offset US income tax liability regarding foreign account income, that would be a Q17 situation, and the taxpayer should simply file then late information returns directly with the relevant department.

I would appreciate knowing the validity of this reasoning.

[madhoa]

I think the IRS position is that you need to have reported all income, even if there was no tax due because of NOLs, tax treaties, foreign earned income exclusion etc. to qualify for simply sending in information returns.

That's the official position. Unofficially, what they would do if there was no tax due (especially if the person involved is an expat with few US assets) is another matter. Probably nothing

One guideline is that in general, the has to be SOME tax due for the US Justice Department to bring a criminal case. That's why one of the first things defense attorneys do in such a case is to see if their client's tax returns could be amended (correctly) to ensure zero tax liability for unreported income. [ Civil audits have lower standards for penalties though]

[kal2]

That does make sense. So when you say 'have reported' etc., that would not have to have been in the form of a filing made by the original filing date (such as by Apr. 15 2009) -- the taxpayer could 'have reported' in a late return filed after that original filing date, in which nil liability resulted from the application of foreign tax credits.

Thanks for pointing out the criminal vs civil contexts and what they involve.

[nelsona]

Unofficiallly or Officially, in practice, no USC resident in canada that I know of has ever been dinged by simply pro-actively back-filing. 3 years if no tax owed, six years if tax owed.
Neither for denial of foreign tax credit, FBAR or RRSP/trust reporting.

[Pathologic1]

I emailed the IRS the following with a reply you may find of interest.

=============================================

Hello Sir/Madam,

I am very confused about this FBAR requirement, which I just learned in a local newspaper.

I have been living and working in Canada for over 25 years and have reported all of my worldly income (all from Canada) and filed my taxes every year in Canada as required here. It was my understanding that Canada and the US had tax agreements and that, if anything, the taxes in Canada are higher than the US and thus I would have no taxes owing in the USA. Hence I have not filed in the US for many years but I plan on doing so from now on.

The question is, if I file my last 8 years of US income taxes and have nothing owing can I then file my FBARs back over the same time period without entering the amnesty program as suggested in the IRS's "2011 Offshore Voluntary Disclosure Initiative Frequently Asked Questions and Answers" section 17 ?

Is this what I should do if I owe no taxes?

I certainly didn't move to and work in Canada to avoid taxes.

Thanks

=============================================
From: Ellen.White@irs.gov
To:
Subject: RE: FBAR Canada
Date: Wed, 13 Jul 2011


Dear Sir :

Yes

The Statue of Limitation is 6 years

Filing a late or delinquent FBAR

When filing delinquent FBARs, attach statement to each report explaining why your filings were not made timely. Keep copies of the FBARs and statement for your records. For prior calendar years, use the current version of the Form TD F 90-22.1, but you may rely on the instructions what were in effect during the reporting period of the delinquent FBAR in determining whether you are required to file the FBAR. Mail you delinquent FBAR and explanation to:

Department Treasury
Post Office Box 32621
Detroit, Mi 48232-0621

The maximum value of account is the largest amount (not the average amount) of currency and nonmonetary assets that appear on any quarterly or more frequent account statements issued for the applicable year. If periodic account statements are not issued, the maximum account value is the largest amount of currency or nonmonetary assets in the account at any time during the year. Convert foreign currency by using the official exchange rate at the end of the year.
Though the FBAR instructions direct filers to use the official exchange rate, the Internal Revenue Service has no official exchange rate and generally accepts any posted exchange rate that is used consistently. For exchange rates, check the U.S. Treasury Web site or other commercial sites.


Ellen White
Bank Secrecy Act (BSA)
Tax Law Specialist
Small Business /Self Employed
BSA Compliance Department

[Concerned Cdn]

I heard back from my US tax attorney earlier this week.
We are filing 8 years of 1040, all zero balance, nothing owing on the small amount of investment income from Canada. They have prepared the OVDI letter, its actually quite simple as most of the stuff is non applicable or common sense type stuff for Canadians, (ie: I opened the foreign bank account cause I live in Canada and need to deposit my paycheque!!) but it will say that there is no unreported income for any years and hence no penalty. The position is that the returns have been filed reporting all of the foreign investment income before the FBAR and OVDI goes in. The IRS position is so unclear nobody really knows what they will do. Its probably less risky than relying on FAQ #17 by itself. This gets it into OVDI, at zero penalty. if we're wrong then the 5% penalty would apply to the income generating assets, or possibly do an opt out. Contrast that with using OVDI #17, if your wrong, could possibly face some huge FBAR penalties, but as nelsona points out, probably will not be levied.

[madhoa]

Has the attorney actually used this argument successfully ? This seems to be worse than quiet disclosure to me, because you have now officially joined OVDI and are in the 'system', so are subject to the mechanical 5% penalty. After all, any one (including someone with a $5M account, and maybe 30 K of unreported income per year) could file returns or amend them, and then claim there was no unreported income and avoid a 5% or 25% penalty on the large account. This would seem to be a loophole you can drive a battleship through if the IRS accepts it.

[Pathologic1]

It isn't really clear to me that you have joined OVDI. If you did the minimum finne you are entitkled to is 5% of the balance of your accounts. Joining OVDI really puts you at risk. The agents are not allowed to use their discretion but must apply the fines by the book.

FAQ 17 is the way out if you have been paying taxes all along. This has been confirmed to me by the IRS and several lawyers and accountants.

Unless you are guilty of some crime or almost crime entering OVDI may be a very costly mistake. I would certainly not recommend it for the vast majority of Canadians.

[nelsona]

I agree 100% with patho on this.

[madhoa]

'Concerned' said he/she had prepared an OVDI letter, so I presume that means that is like formally joining OVDI ?

I agree that OVDI is not applicable for the vast majority of US expats/dual citizens living in Canada. It might still be an option for a Canadian citizen/US GC living the in US with significant US source income and some Canadian passive income unreported in US tax returns (even if tax liability is minimal due to tax compliance in Canada).

[nelsona]

It definitely applies to US residents, even Cdn ones, since non-resident tax on passive income in canada is almost always lower than even the lowest marginal tax rate on 1040.

For interest and cap gains NR tax is zero, and for dividends it is 15%.

So, since there would be tax liability, the OVDI door is forced open. Quiet disclosure would not likely be accepted.

[Pathologic1]

I'm doing quiet disclosure for my son even though he owes some US taxes because of Canadian dividends.

I have concluded that since all of his income was duly reported in Canada, and he has now paid his US taxes and now owes nothing he satifies FAQ 17 and the email above. He was also born in Canada and has never worked or lived in the USA and never intended to avoid any known tax obligation.

I know the more paranoid out there will say what about FBARs and OVDI but I am of the opinion that the US knows it would be unwise to treat its expats so harshly and not expect problems. Why would anyone come forward? Why wouldn't one renounce citizenship? I do not expect any problem from the IRS.
I think they are actually after real tax cheats, not kids and retired people with little income that might include some dividends which are taxed differently in Canada. If Canada were a tax haven it would not be overlooked by the IRS.

I certainly would resist any payments related to the FBARs and OVDI if they were to demand them. These are NOT part of the US Canada tax agreement and the Canadian government has indicated it is not happy with the whole thing and will not help collect them, if the taxpayer was a Canadian citizen when the "infraction" occurred.

Expats may not be a political force in the USA but they certainly are in Canada with 600,000-1,000,000 of us. The Canadian government will respond to those kinds of numbers and the rest of Canada likely won't be happy about Uncle Sam demanding payment from fellow Canadians that may have never even lived or worked in the US.

[nelsona]

"I'm doing quiet disclosure for my son even though he owes some US taxes because of Canadian dividends. "

I'd be hard-pressed to come up with a scenario where a Cdn with dividends would owe money in US, after all the deductions, etc.

[Pathologic1]

Its income from Small Business, a type of Canadian Controlled Private Corporation which has special tax implications. Dividends from a public corporation are much less likely to owe anything.

[Concerned Cdn]

it is definitely OVDI. Its using the letter, and its being filed before the Sept 9 deadline.

The way the attorney sees it is that many of the IRS agents are lazy, they have so many of these OVDI cases, it may get just thrown out because somebody looks at it and decides it doesn't belong in OVDI. That it looks like a FAQ #17 case.
According to pathologic 's post he has an actual email from IRS saying FAQ #17 should apply in this case.

If they decide its wrong then maybe get hit with a 5% penalty, can also possibly opt out and go for the FBAR penalty and hopefully get it minimized.

Attorney says this is less risk than doing quiet disclosure because IRS might not take it very lightly that you do quiet disclosure. Then thinking about it what tax attorney is going to advise their client to do quiet disclosure?