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When you
hear about the Internal Revenue Service cracking down on
those who hide money in offshore accounts, well,
you’re probably not thinking much about Canada.
But tax
preparers are warning clients in other states that they
must pay far better attention to reporting foreign
financial assets. They may even want to take advantage
of a newly opened voluntary disclosure program for
people hiding money in offshore accounts.
Canada?
Offshore? You’d be surprised.
“Here
in Detroit, we share this really close border with
Canada,” said Jeff McCann, international tax director
for Moore Stephens Doeren Mayhew in Troy, Mich. “It
really affects more people than people would think.”
It’s
not just Canada, of course. It’s also a reflection of
our global workforce, as well as the melting-pot nature
of the U.S.
Consider
a manager in the auto industry who maybe was assigned
for five years to work in a facility in Toronto.
The
manager or executive might have opened accounts for
retirement in another country. It wasn’t about
intentionally hiding assets.
Or
consider someone who moved to the U.S. 30 years ago but
inherited money that was in an account in England when
the person’s mother died. Sometimes, people never find
time to move that money to another account.
People
can have accounts in other countries that must be
reported for reasons that don’t involve trying to
evade taxes.
For
example, McCann lists: foreign work assignments,
immigrating to the U.S. from a foreign location for
work, a shared account with a relative in Germany or
elsewhere, or inheritances.
Or
consider someone with a checking account in Canada,
maybe because the person has a cottage there and uses
that bank account to pay bills in the summer.
“These
people don’t even think about it,” said Stella
Moulton, tax manager for Gordon Advisors in Troy.
Yet they
could face steep penalties if they don’t report
foreign accounts that totaled in aggregate more than
$10,000.
Tax
experts say that it’s important to file Form TD F
90-22.1, the Report of Foreign Bank and Financial
Accounts, by the June 30 deadline. It would apply, for
example, if a person had $7,000 in one checking account
in another country and $4,000 in another account
overseas.
“The
accounts have to be disclosed, if you’re considered a
U.S. resident,” McCann said.
Some new
rules hit for 2011 tax returns, too. Some developments
involve new reporting rules, as well as another program
that allows individuals to cut the cost of some
penalties if they come clean.
—Beginning
with the 2011 tax year, some taxpayers with larger
investments will need to report specified foreign
financial assets or foreign accounts via a new Form
8938.
This new
rule doesn’t apply if you have $100 or $500 sitting in
one or two accounts. But a married couple living in the
U.S. and filing a joint tax return would be required to
file Form 8938 once total specified foreign assets
exceed $100,000 on the last day of the tax year, or more
than $150,000 at any time during the tax year.
Maybe
someone has built up a significant value in a retirement
account in Canada or elsewhere.
“Just
because you do not owe tax doesn’t mean you don’t
have to do the financial reporting,” said Matt W.
Smith, leader of Global Employer Services Canadian
Market Place for Deloitte in Halifax, Nova Scotia.
For
example, he said, U.S. citizens in Canada might not have
any taxes to pay because they get a foreign tax credit
on their U.S. return for taxes paid to Canada. But those
citizens might still need to file the new form because
they’re still required to file a U.S. income tax
return.
“Canadians
need to appreciate that if they’re spending
substantial time in the U.S., they can get caught by
this web as well,” Smith said.
Yes,
experts said, there are people hiding money to avoid
paying taxes, and something needs to be done to make
sure they’re paying their fair share.
“It is
unfortunate, however, a lot of people who just do not
understand their disclosure obligations are being tarred
with the same brush as tax evaders,” Smith said.
We’re
talking about a $10,000 penalty for a failure to file
that Form 8938 — plus an additional penalty up to
$50,000 for continued failure to file after being
notified by the IRS.
The
requirement to file a Form TD F 90-22.1, the Report of
Foreign Bank and Financial Accounts, by the June 30
deadline remains for smaller accounts and large
accounts, too.
“If you
have any financial interests outside of the country, you
really need to examine them,” Smith said.
—The
IRS has reopened the Offshore Voluntary Disclosure
Program, following some success with similar 2009 and
2011 programs.
People
with foreign accounts can get current with their taxes
in this third program, which has an indefinite end date.
But terms could change at any time, and penalties could
go up.
The
overall penalty structure for the new program is the
same for 2011, except for taxpayers in the highest
penalty category. Penalties can range from 5 percent to
12.5 percent to 27.5 percent of balances at a set point.
The IRS
said it has collected more than $4.4 billion so far from
those programs.
“You’re
much better off to go to the IRS and make a disclosure
than have the IRS come after you,” Smith said. Experts
in this area say many people would want to have an
attorney involved in such disclosures.
IRS
Commissioner Doug Shulman said the IRS effort to focus
on offshore tax evasion continues to produce strong
results.
“As
we’ve said all along, people need to come in and get
right with us before we find you,” Shulman said in a
statement. “We are following more leads, and the risk
for people who do not come in continues to increase.”
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