RESP/TFSA: how to fix failure to file form 3520?

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gpancio
Posts: 54
Joined: Sat Mar 29, 2014 8:05 am

RESP/TFSA: how to fix failure to file form 3520?

Post by gpancio »

I am a US citizen living in canada. I have filed my US returns and the FBAR as I'm supposed to, every year I have been in Canada.
However, since 2009, I have had a TFSA and an RESP- I didn't realize that these were 1. taxable 2. required form 3520 to be filed.

I don't mind the taxable part too much, because I have not made too much in these accounts. But there is the penalty of at least $10,000 per year for failure to file the 3520, which I didn't do.

That would mean that if I file it late (now), IRS would now know about this and could fine me $10,000 per year, times 4 years, times 2 accounts = $160,000!

So i'm not sure what to do.

I am considering:
1. getting rid of my TFSA
2. signing the RESP over to my non-US citizen wife
3. Seeking help with Serbinski to figure out how to deal with filing the 3520 for 2009-2012 (late) and 2013 (on time), and likely biting the bullet and paying them to help fix and file all these returns.

Are there any recommendations? I am hoping that by revealing everything voluntarily, before they find out, would result in them waiving the penalty (which they say they will do, under reasonable circumstances).
I am not a tax cheat, I just didn't know!

Thanks.
CdnAmerican
Posts: 245
Joined: Tue Aug 30, 2011 12:15 am

Post by CdnAmerican »

Hi gpancio - I was in a somewhat similar situation about two years ago, when I learned that 3520's and 3520-A's should have been filed for an RESP as well as a TFSA. I sent in these forms late with an explanation. My travails are detailed elsewhere on this board, but the very long story short is that I had no penalty at the end of the day (just a lot of sleepless nights). The guidance that I filed it under was at http://www.irs.gov/Individuals/Internat ... nd-Answers (question 18 applies most to you, probably). Now, this is an old Q&A, and I don`t know if this is still the program that the IRS is using, given that there is now the new Streamlined Procedure (but you don`t qualify for that, since you have actually been filing your 1040`s and FBAR`s each year).

My presumption is that the Q&A referred to on that webpage is still in effect, though honestly that`s just a guess, and someone else might have more up-to-date info than I.

I filed all the back 3520`s (17 of them, yuck) myself, though it was quite horrible, and if I could go back in time I would have turned them over to Serbinski or someone else who knows this stuff. It would have been money well spent, I suspect. These forms can be done by the taxpayer himself, but not easily.

Your thought about just getting rid of the TFSA may make your life easiest in the long run. The gains you make in the TFSA are still income in the US though not in Canada. Alternately, I think you could just turn it over to your wife and be OK for 2015 and beyond.

The only assunrance I can give you is the lack of actual penalties paid by taxpayers which have been noted on this board. I don`t know of any who had to pay after this kind of good faith mistake. That said, the IRS documentation is quite scary, and the process is unpleasant. Good luck & you`ll find lots of good info elsewhere on this board for filing these.
Not a professional opinion.
gpancio
Posts: 54
Joined: Sat Mar 29, 2014 8:05 am

Post by gpancio »

Thank you very much for the reply.
I am going to search the forum for your details and others details.

Also thanks for pointing out that FAQ. It doesn't entirely make sense to me yet. I think it is still in effect, so maybe I can file under it. Part of what is confusing is that there are many penalties listed: various $10,000 penalties for failure to file; other penalties that are up to 27.5% of the account.
But the FAQ (Q18) says that the "IRS will not impose a penalty" under some conditions. So it is hard to they would waive the $10,000 but then take almost a third of the account anyway (which wouldn't be as bad- but still pretty bad).

The thing is, the gains in my TFSA are minimal and would likely result in 0 tax, or in the worst case, still less than $100. In the RESP, there is the CESG of $500/year plus not much gain either for most of the years- it depends on how it has to be reported. It's a mutual fund so I haven't really "made" money there- its value has gone up. Plus it is a joint account, so really only half of it is mine.
In other words my tax liablity, if any, shouldn't be too high. I don't mind paying that, but any penalty that goes into the thousands seems very unreasonable.

During my research I just found that Canada only accepted FATCA in Feb, and in doing so was able to exclude TFSA's and RESP's as reportable accounts. Therefore my accounts aren't necessarily going to be reported to the IRS. This makes it a bit tempting to do nothing- they seem to not know about the accounts yet (they date back to 2009), so why say something now when they can hammer me with penalties?

Having said that it is very stressful to me to just hope they don't find out. Plus, if I get rid of my TFSA/RESP now it would weaken my case that "I didn't know", because now I do. So if they *did* find out, I would be in lots of trouble.

So it still seems like I should bite the bullet, pay someone to do the returns for me, likely get some nasty letters threatening to penalize me a ton of $, sweat through it and hopefully come out with no major penalties but a clean record in regards to tax compliance.

I'll mention one more time that this *is* a good faith mistake. Had I known about these complications, there is no way I would have opened the accounts to begin with. Or, I would have had this panic attack upon learning about this stuff earlier.
gpancio
Posts: 54
Joined: Sat Mar 29, 2014 8:05 am

Post by gpancio »

SO yes, this thread details several members' experiences:
http://forums.serbinski.com/viewtopic.p ... sc&start=0

It sounds like I will go through this too if/when I start filing the 3520's for TFSA/RESP for the years 2009-2012.

:(
gpancio
Posts: 54
Joined: Sat Mar 29, 2014 8:05 am

Post by gpancio »

One more thing: I started this thread in regards to the 3520 (and 3520A, apparently).

But there is one more issue: I didn't report the TFSA nor RESP earnings on my 1040s. (I didn't know, but now that I do, I can't believe how stupid it sounds to think that any income wouldn't be taxable in the US. I was going on something the US-Canada tax treaty said- something about how income that is not taxable in Canada is generally not taxable in the US).

Ok, so stupid mistake. To fix that one, I would bet that I should amend those returns immediately?
gpancio
Posts: 54
Joined: Sat Mar 29, 2014 8:05 am

Post by gpancio »

Holy cow, the more I read the worse it gets.
It seems that if I amend returns to add the TFSA/RESP income that I failed to report, that it is a "quiet disclosure" and that I will be in more trouble!

Is that the case?
rohitkn@gmail.com
Posts: 30
Joined: Sun Mar 30, 2014 1:09 pm

Post by rohitkn@gmail.com »

Well a TFSA isn't always a foreign grantor trust.

Take a look at this linkedin discussion for example.

https://www.linkedin.com/groups/I-have- ... =214128380

The IRS has not officially ruled on whether 3520 and 3520-A are mandatory. I am not saying they aren't but only if your account is set up as a trust. How is one to know? I honestly wish I could answer that. Some people have got away with reporting the accounts as deposit account on 8938 and simply reporting that as income.

I am actually going to visit an IRS office in Manhattan and talk to someone and see what I find out.
gpancio
Posts: 54
Joined: Sat Mar 29, 2014 8:05 am

Post by gpancio »

It would be very interesting to hear what the IRS tells you.

I am admittedly far from an expert on any of this (in fact I know little). It's incredibly confusing. I don't see how a regular taxpayer is to navigate these rules and file correctly.

I have a very simple TFSA- basically a savings account at ING! Is it a trust or not? It's very difficult to tell.
rohitkn@gmail.com
Posts: 30
Joined: Sun Mar 30, 2014 1:09 pm

Post by rohitkn@gmail.com »

There is an IRS office 5 minutes walk from where I work in Manhattan. There's another one about 20 minutes away by subway.

I'll hit both. A lot of people are filing 3520 and 3520-A either late or unnecessarily and getting penalties assessed. May be it's a more conservative and prudent way to do it. Eventually they may all be ruled as trusts. But I don't want to get into filing it until I know. It's bad enough that I have last year's to backfile.

Even if it's a savings account and has no investments or mutual funds (just interest), you will have to file form (8621) PFIC. Just choose the option Mark to Market and report the gain as income.
rohitkn@gmail.com
Posts: 30
Joined: Sun Mar 30, 2014 1:09 pm

Post by rohitkn@gmail.com »

So The Times square location in Manhattan says we only deal with domenstic income returns.

Typical of a federal government employee/agent to give me this response. This person had no idea that a Canadian living in the US even had to file a 1040 much less anything about canada.

Good luck calling 1-800-829-1040 as you'll disappear up your own phone jack.

There are other numbers and I am going to try each one. Worst comes to worst, you just file or backfile the 3520 and 3520-a to the best of your ability with the information you have and cross your fingers. There's a thread here which indicates that these penalty issues have mostly been sorted out since fall 2012.
nelsona
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Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

TFSAs are trusts unless you have specific documentation from the brokerage that it is not. This site is THE source for all this information, as it is seen by many more experts than someone linkedIN account.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
rohitkn@gmail.com
Posts: 30
Joined: Sun Mar 30, 2014 1:09 pm

Post by rohitkn@gmail.com »

Yes TFSAs are trusts by the interpretation of a lot of lawyers and accountants (As I understand it). However there isn't a single mention of TFSA accounts on the IRS website. And they have not made a ruling. I called and they didn't have an answer. That's the only point I was making.
gpancio
Posts: 54
Joined: Sat Mar 29, 2014 8:05 am

Post by gpancio »

You might want to try calling a different IRS number for international help.
267-941-1000

It's actually supposed to be for "international Services" for taxpayers living outside the US. But maybe you could try it.
gpancio
Posts: 54
Joined: Sat Mar 29, 2014 8:05 am

Post by gpancio »

btw I called that IRS international help number to ask about foreign trusts, and they told me right off the bat that foreign trusts are way over their head. They could not help, and told me to seek help from a lawyer or accountant.
gpancio
Posts: 54
Joined: Sat Mar 29, 2014 8:05 am

Post by gpancio »

It seems unclear whether a TFSA is definitely a trust. Various places I look say that TFSAs "can be" considered trusts.

So I talked to my bank about it. They said that they do not hold TFSAs in trust. Furthermore, on the "Account Terms", there was no mention at all that it is a trust.
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