Monday, September 26, 2011

Update on RRSPs in OVDI (9/26/11)

This blog entry reviews a Tax Notes Today article -- Marie Sapirie, Clarification of Retirement Plans Need in OVDI, 2011 TNT 186-4 (9/26/11):

1. RRSPs are similar to U.S. IRAs permitting Canadian tax deductions and reporting of income upon subsequent withdrawal. For persons also subject to U.S. taxation, deferral requires the filing of a Form 8891, "U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans."  U.S. persons residing in Canada were often unaware of the implications of the RRSP and thus did not file the Form 8891. Late filing of the Form 8891 requires filing a private letter ruling request for relief under under Reg. Section 301.9100-3.

2. The issues raised by RRSPs are (i) whether, absent the Form 8891, the RRSP will be included in the in lieu of penalty base in OVDI; (ii) whether the income earned inside the RRSP is subject to current U.S. taxation in the year earned or whether the taxpayer may get some retroactive Form 8891 relief; and (iii) whether the U.S. sourced income inside the RRSP will be considered in determining the $10,000 relief.

3. There are other types of Canadian accounts with similar questions - "registered education savings plans, tax-free savings accounts, registered retirement income funds (RRIFs), and non-qualified deferred compensation arrangements." There is an issue here with the tax treaty technical explanation reference to a revenue procedure which in turn refers to, inter alia, RRSPs.  These types of issues are also present for residents of other countries, atlhough they may not have the treaty technical explanation language.

4. Finally, the article says:
How to deal with RRSPs is on the IRS's radar, but it has not yet issued a consistent policy. As recently as a month ago, IRS staffers on the OVDI hotline said that account balances in RRSPs would be excluded from the base amount on which the miscellaneous offshore penalty is assessed if the taxpayer filed a timely Form 8891 or requested section 9100 relief for a late Form 8891. But the week of the original OVDI deadline (August 31), the message from hotline staffers apparently changed. They told callers that Forms 8891 filed with a request for section 9100 relief would not be enough to exclude the high RRSP account balance from the base for the offshore penalty but that it would be effective in deferring recognition of the investments in the account.

For now, the IRS seems to be considering its options. Ward [Robert E. Ward, principal of Robert E. Ward & Associates PC] said that in response to questions about the treatment of RRSPs, OVDI hotline personnel told him that "practitioners should make their best arguments as to what should or should not be included in the offshore penalty base, what should or should not be subject to U.S. income taxation, and what was or was not U.S.-source income."

79 comments:

  1. My reading of this (perhaps optimistically) is that RRSPs would not be excluded automatically from the penalty base, but the practitioner can make an argument for excluding them, and it would be considered (and hopefully granted) on an individual basis. And so expats and other genuine cases could get relief.

    The pessimistic viewpoint is that this is not decided yet, and the IRS may chose to include RRSPs in penalty base. But perhaps political pressure from the Canadian side could prevent that (although the Canadian pressure seems to be more for people not in OVDI).

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  2. And that's just Canada. What about the other 190 or so countries on the face of the planet?

    Many other countries beside the US and Canada have government regulated and tax deferred retirement plans. What about German citizens now living in the US, or US citizens living in Germany, who hold IRA-equivalent plans in Germany? What about Belgians? French? Irish? UK? Dutch? South Africans? Australians? ...?

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  3. For most taxpayers who missed filing f8891,
    the key is tax deferral on undistributed earning from RRSP.

    If IRS grants late f8891 election, that bascially makes RRSP tax compliance. FBAR penalty should not apply.

    On the otherhand, if IRS denies late election on f8891, that basically force taxpayers into unintentional tax evastion on RRSP which they thought tax deferral.

    It should be easy for IRS to come up a consistent policy on RRSP. The fbar penalty should apply on only if
    1. RRSP has been cashed out without reporting, or
    2. The source of RRSP fund was tax non-compliant

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  4. Jack,

    When I called OVDI hotline a few months ago, a lady first told me that "if you have never cashed out your RRSP, you should exclude it from base penalty", but later, she said she needs to confirm it with technical advisor. A day later, she called me back and said "there is no clear rule on RRSP, and it depends on other tax compliance issue". She also suggested that I just go ahead exclude it first on my own penalty calculation and let OVDI agent to rule later.


    So it seems IRS has no clear/simple answer how to deal with RRSP.

    I believe the key is if/or not they grant late filing of f8891 on tax deferral election.

    In the past, they have always granted such a late election if the taxpayers show good faith and come forward to correct it before IRS discovers, and there should be no tax loss on the gov if late election is granted.

    Inside OVDI, because this is a huge profit for IRS on base penalty -- so they have incentive not to grant such an election --even though it looks bad on IRS side as they bascially force taxpayers into tax evasion on supposed tax deferal retirement plan.

    A good case to TAS, I think

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  5. Unfortunately, other countries have no equivalent of form 8891, so their residents really have no legal recourse unless there is a specific treaty provision.
    ij -- I agree completely with your proposed algorithm (although I'm not sure what happens if its funded from another unreported account -- is it non compliant income or not?)

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  6. Anno of September 26, 2011 9:31 AM,

    In my view, all retirement plans (anywhere) should be excluded from base penalty if they are tax deferral --- because taxpayers will have to report income later when they decide to cashing out.

    It is really hard to take on 25% penalty on retirement plan which are not totally owned by taxpayers -- for example, Canada gov will impose 25% tax on US residents when they cash RRSP out.

    For people with low/middle income, this retirement plan (in my case only 40K) is prepared for basic means when too old to work. How could our gov (for the people if it claims to be) impose such hash penalty on technical error ?

    I came to this country with belief of fairness (to rich or poor), and I can lose my money -- I really do not want lose my faith.

    God, please help America !

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  7. Anon of "September 26, 2011 11:07 AM",

    "I'm not sure what happens if its funded from another unreported account -- is it non compliant income or not?) "

    Good point, in OVDI 2011 -- it covers year from 2003 to 2010. I would say if the taxpayers can prove the unreported acccount source is tax comliant except its interest related earning, that account has been imposed penalty already -- it does not make sense to add another 25% penalty. As for early years before 2003, IRS has to assume the source was tax compliant --otherwise, they should open for years back.

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  8. 'n my view, all retirement plans (anywhere) should be excluded from base penalty if they are tax deferral --- because taxpayers will have to report income later when they decide to cashing out.'

    Foreign retirement accounts may be tax deferred in their home countries, but they are almost always not tax deferred in the US, so there is income to be reported every year. Canada is actually very much the exception rather than the rule.

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  9. To Just me,

    1. Do I have to opt out from OVDI in order to get help from TAS ?

    2. $10K non-wilful penalty per year/per account seems a lot money if IRS impose such penalty for opt out

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  10. here is a link worth to read

    http://hodgen.com/questions-i-answered-for-a-reporter-about-rrsps-and-ovdi/

    "DIY filer
    September 23, 2011 | 5:07 pm
    FWIW, on our recent (last Saturday) phone conversation with the OVDI hotline we were told that they will allow a late election for RRSP no problem (no PLR required) but they will include the RRSP amounts in the penalty base"


    So IRS is going to impose 25% penalty while granting tax deferral on RRSP. What is the logic here ? if tax deferral is granted, while still imposing 25% penalty on non-tax issue assests ?

    This is not consistent with OVDI FAQ which states "only unreported income accounts should be subject base penalty.

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  11. by the way, IRS seems to be "fair" to all on FBAR penalty, CAN/US treaty does not give Canadians a better treatment.

    Maybe this is what in IRS's mind.

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  12. And yet outside of OVDI not a single Canadian has been compelled to pay any FBAR fine ever. Such paranoia induced by the likes of Mr Ward, I assume to drum up business.

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  13. Assume the RRSP is just an asset that does not yield income. The question is when such an asset would be considered non compliant. I don't know if RRSP funding from an account in which the interest has not been declared is considered non compliant or not .

    On another topic, I doubt very much the IRS will be able to assess a penalty of 10K per account per year except in really egregious case. I think the worst you can assume is 10K per year with a violation. More likely worst case might be 5 K per year in opt out, going by IRS manual. Or you might even be to get off with $500 or so per year. I think you appeal to TAS as soon as you get a proposed closing statement from the IRS. Assuming you aren't bothered by the prospect of a full audit. Look at mitigation guidelines in IRS manual. I think you did not fill Schedule B, so you are in better shape to argue reasonable cause since you did not fill out the Schedule B question incorrectly.

    besides, I wouldn't count this as confirmation of how iRS might treat RRSP unless other (non anon) people confirm it.

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  14. To ij...

    Regarding your questions.


    "1. Do I have to opt out from OVDI in order to get help from TAS ?"

    No, that was not my experience. I was in the position of having to make a choice in that regard. The Examiner had sent me a letter giving me 20 days to either Opt Out, or get Kicked out. That came in a form letter, and is SOP. So with 10 days left, I went to the TAS, as I did not think I should have to do either! Now that option might change, if the OVDI "Opt Out" gets clearer, I just don't know. I would call the TAS and ask.

    “2. $10K non-wilful penalty per year/per account seems a lot money if IRS impose such penalty for opt out.”

    Yes, I agree, and I have commented on that in other threads below:

    http://federaltaxcrimes.blogspot.com/2011/09/experiences-inside-ovdp-ovdi-91411.html

    but will summarize here. In an Opt Out, the IRM discretion allows a lot of flexibility with agent discretion. In my TAO negotiation, they settled for one unified FBAR penalty, not multiple accounts. I would think, that such a reasonable approach like that might be taken with Minnows in an Opt Out, but do not know that for certain. If they tried to stick you with multiple accounts penalties, or double count transfers for high aggregate balances, I would consider that unreasonable. Depending on your facts, my opinion would be that an appeal to the TAS might be appropriate. Although, I quickly would add, I don't know how that would fit into standard civil audit appeal process, and I am not really one to provide that kind of advice. That would be something I would turn to a professional Practitioner for advice and help to determine best course of action for you. Of course, no harm in just calling the TAS and inquiring. All they can say, is “No”, and then you know.

    Hope that helps.

    .

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  15. To Anonymous September 26, 2011 4:42 PM

    Well, I would caution making such categorical statements. In fairness, you can not possibly know that to be true. You assume it, but don’t know it.

    However, let's state for argument sake, that what you say is true. You should know "past performance is not indication of future results". So in this case, "past is NOT prologue". It is still early since the OVDI has closed. Impacts from Quiet Disclosures are still not known. IRS intentions and how they will handle QD discovery is very uncertain. If they do nothing, then those entering the OVDI will feel like dupes, and paid a very high price for peace of mind. I would point out there isn't a "clearing house" that I know of, where all outcomes and actions and penalties are reported. It would be nice if there was, and then we wouldn't all have to speculate so much. It is this uncertainty that leads to some bad or should I say, difficult decision making.

    Just my opinion, I could be wrong.

    Sleep well. FATCA is coming. :)
    Cheers

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  16. "And yet outside of OVDI not a single Canadian has been compelled to pay any FBAR fine ever."

    Maybe, but they certainly have inside it. Consider the message this fact conveys. No, really, consider it carefully. What does it tell you about how much people will trust the US and the IRS in future? About how little thought went into planning the OVDI? And about how utterly, utterly self destructive, how mind-bogglingly stupid, and how counterproductive these US tax policies are?

    Given the outrageous grandstanding and demagoguing by both govt and the IRS over the OVDI program, I'm more than willing to give Mr Ward the benefit of the doubt. Far from trying to "drum up business", he seems to be expressing frustration with the silliness of the IRS's stance. And who can blame him?

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  17. if I understand correctly, FBAR penalty outside OVDI has nothing to do with tax non-compliance at all.

    FBAR penalty is IRS nuke option, they can impose it as they wish, and it is in the name of enforcing law.

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  18. Another reason that I expatriated is that TFSA account (like US Roth IRA, the contribution is after tax income but the earnings are tax free), is not covered under the CDN/US treaty. So a nice little account for saving on taxes in Canada, and the US wants to take its unfair share.

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  19. To "Sleeping Well",

    my RRSP source fund was from my Canadian employment income before I became a US person. So it is fully tax compliant. The only technical error is missing the tax deferral election (f8891) and FBAR. Otherwise it should not be in this topic at all.

    Hard to take this hit. 25% on the highest point of 8 years (you know what this crazy market is when money is in mutual fund), plus another 25% tax from Canada gov when cashing out.

    All in the name of enforcing law (from IRS) and doing the right thing (on my side)

    Whom to blame, I hate myself being so stupid and naive.
    I guess I am not ready for the worst yet...

    To "Just me", thanks for your response, I will contact TAS as soon as I get my OVDI ruling.

    I wish I could sleep so well that I will never wake up again to think about this.

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  20. ij,

    Well, it is not really divorced from the tax non compliance. It is one of the factors, and part of the decision making process the examiner uses when exercising discretion outside the OVDI.

    The point is, outside the OVDI, the IRM rules the civil audit. (or at least we think it does) That provides wide discretion from just an admonition to “go and sin no more”, to all account FBAR penalty assertions. Although it seems highly unlikely that the later assertion would happen, for lots of reasons I won’t go into here. During the time I spent trying to educate myself on FBAR penalties, I read an internal IRS council document, where the attorney cautioned agents that that applying multiple FBAR penalties would lead to “absurd results”. I used that quote a lot in active discussions with my Examiner!!

    Read IRM 4.26.16.4 (07-01-2008) concerning discretion.

    "4. Penalties should be asserted only to promote compliance with the FBAR reporting and record keeping requirements. In exercising their discretion, examiners should consider whether the issuance of a warning letter and the securing of delinquent FBARs, rather than the assertion of a penalty, will achieve the desired result of improving compliance in the future."

    And there are also cautions in the IRM regarding the appropriate nature of the penalties.

    “5. FBAR civil penalties have varying upper limits, but no floor. The examiner has discretion in determining the amount of the penalty, if any. Examiner discretion is necessary because the total amount of penalties that can be applied under the statute can greatly exceed an amount that would be appropriate in view of the violation.”

    And this…

    "6. Examiners are expected to exercise discretion, taking into account the facts and circumstances of each case, in determining whether penalties should be asserted and the total amount of penalties to be asserted."

    Further it says….. “The examiner must still consider whether a warning letter or a penalty amount that is less than what would be called for under the mitigation guidelines would be more appropriate given the facts and circumstances of a particular case”

    Finally, notice the mitigation language. It is always in conjunction with “guidelines”, so “mitigation guidelines” are just that “guidelines”, not “absolutes”. It doesn’t say you have to apply the “Mitigation rules” as strictly outlined.

    So there is wide discretionary latitude outside the OVDI, unless there is something about the OVDI Opt Out that restricts it and isn’t apparent yet. I hope OVDI Opt Out results become public quickly to remove anxiety for your decision. There is the cynical suspicion, that they will use subtle coercion to try to keep you in the OVDI program to maximize their revenue collection. That needs to be dispelled.

    If you haven’t read the IRM FBAR Penalty section carefully, I would encourage you to do so.

    http://www.irs.gov/irm/part4/irm_04-026-016.html#d0e529…

    To your 2nd statement: It certainly is fact, that it is the FBAR Statutes that gives the IRS the “nuke option” as you say. However, the language of the Statute uses “May’ in relation to penalties, and not "Shall", so it really isn’t as nuclear as it could be. But, true enough, without that FBAR Statute for them to use, you might have gotten the special Geithner treatment. Lovely thought, eh?

    Disclaimer statement: I am way out of my depth here, and have no expertise, so check with a good Practitioner for their guidance should Opt Out decision time arrive. I am just passing on to you what my arguments were with my Examiner and the TAS, as I pleaded for the discretion not allowed. It is good to quote their rule book back to them, I think. It lets them know, that you didn’t fall off the turnip truck yesterday, and you are not intimidated by what they tell you. This knowledge is especially helpful if what they say is in conflict with you can plainly read from the IRM.

    PS, “Sleeping Well” provides some good insights on likely penalties to consider.

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  21. Ironically I spoke to the hotline on this issue yesterday. I was told : a) OVDI executive committee has determined that RRSP balance will be included in the penalty calculation; and b) they will consider .9100 relief upon a showing of "reasonable cause."

    QUESTION: if the "reasonable cause" argument for .9100 relief is based on the same facts that occasioned the taxpayer's non-willful FBAR delinquency, wouldn't the granting of .9100 relief necessitate full abatement of the FBAR penalty?

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  22. ""And yet outside of OVDI not a single Canadian has been compelled to pay any FBAR fine ever."


    I don't know how anyone without detailed access to internal IRS data could make that statement about no FBAR fines being imposed on Canadians (I assume Canadian Americans) in the past, since audit data is all internal (and anyway this policy was not enforced in the past). In any case, Canadians covers a very broad spectrum of people, from long time expats to accidental Americans to immigrants to the US to (lets face it) a few genuine tax evaders.

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  23. To Roy Berg,

    Is this 9100 relief for RRSP base penalty or just RRSP tax deferral ?

    If it is just for tax deferral (but still imposing base penalty on RRSP), then it does not mean anything -- it is the base penalty that can kill a taxpayer.

    If it is for base penalty (that certainly also includes tax deferral), then it seems a good news -- and at least, taxpayers can make their case as "reasonable cause"

    To "Just me", thanks for your comments, you have been always very helpful. I may just stay in OVDI and seek help from TAS. I just want have this over soon. RRSP penalty will add another between $20K-$30K. I feel sorry for my wife who would be happy to take $4/hr job while I am going to give up that much for no crime (no sin) at all.

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  24. "During the time I spent trying to educate myself on FBAR penalties, I read an internal IRS council document"

    'Just Me', is this a public document (you did say it was internal) ? Could you post it or send it to Jack for posting if he agrees ?

    Roy Berg: if the hotline reflected formal OVDI policy (and it looks like that if it came from the executive committee), that looks like bad news indeed for people like ij. I hope for their sake (and for generally maintaining the good name of the US in Canada) that such a general policy is not applied, and the IRS looks to the facts of each situation individually (in which case I think the vast majority of RRSP accounts would be exempted).

    "QUESTION: if the "reasonable cause" argument for .9100 relief is based on the same facts that occasioned the taxpayer's non-willful FBAR delinquency, wouldn't the granting of .9100 relief necessitate full abatement of the FBAR penalty? "

    That is a very good legal point, and is worth making (for ij and the like). Its also worth pointing out that if this relief is granted, there is no unreported income, hence by the OVDI FAQ there should be no penalty. I suppose the legal counterargument might be that reasonable cause is not being considered in the OVDI, but would be considered on opt out.

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  25. If a Canadian resident wanted to cheat on taxes by moving money offshore (0% tax) he would have to first reconcile with Canadian Revenue. Canada has reporting requirements too, but less stringent (over $100,000).

    If he was also an American citizen, then that gets complicated because he would have to pay penalties on both the offshore money and the Canadian money.

    For a while, Canadians were keeping money in the US to save on taxes, because Canadian taxes are generally higher. Obviously there is no penalty in the US for that, but there might be a penalty in Canada.

    Canadians generally pay higher taxes than US residents (though argue they get better services, like national health care). This is also true for most European countries. The taxes are higher in Europe.

    So how is it that someone who wants to cheat on taxes moves his money to a higher-tax jurisdiction, and pays more taxes? How is he a tax-cheater?

    This is one of the reasons why expats are particularly riled up.

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  26. 'So how is it that someone who wants to cheat on taxes moves his money to a higher-tax jurisdiction, and pays more taxes? How is he a tax-cheater?'

    M, this is probably the first post I read from you that was coherent enough for me to understand, and that I actually agree with completely. [ although if someone were not an expat, and just had money in Canada, I suppose they might be taxed at lower rate if they are taxed only on canadian source income).

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  27. To "Just me"

    I just called TAS and was told "if the penalty is based on regulation and law", TAS can not help to change it. It does not seem to me much help.

    I do not seem opt out a good choice for me either, as I have a lot small accounts (saving, mutual funds) even the total is not much. Even if $500 for each account/year -- that would add up to the same amount.

    What can I say ? Am I ready for the worest ?

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  28. my wife said to me "at least you won't go to jail, and at least we won't be thrown into street".

    Think it positivley, that is right approach...

    America is a free society full of mine filed (tax law, etc...). Just have to be extra careful and smart.

    We are blessed if compared people lived in Nazi, Soviet and China in Mao's era.

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  29. ij, I think you may need to wait till the penalty is assessed and then appeal to TAS. I wouldn't lose hope just yet.

    I think TAS can only take real cases where a penalty seems to have been asserted, and seems too heavy, not just general complaints. I'm sure they get a lot of calls from nutcases who insist that the tax code is unconstitutional, that they are sovreign citizens, that the IRS is criminal etc. etc. They may have got the impression that you were making a general complaint about tax laws or penalties.

    You should also mention that you're involved in the offshore compliance initiative, since the TAS is looking at those cases.

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  30. To Anonymous September 27, 2011 11:02 AM

    There are some terminology issues that readers should be aware of. I assume the penalty is the "in lieu of" penalty inside OVDI. That penalty is not assessed until the taxpayer has agreed to it and signed the requisite documents binding him or her to the penalty. Hence, the taxpayer cannot wait until it is assessed, but should have a window of opportunity to consider TAS at the time the IRS presents him with its calculation of the penalty on a take or leave basis. If TAS is desired, do not sign the documents. Of course, TAS may well require that the taxpayer opt out and see what happens there, with TAS only getting involved if the opt out IRS demands are not fair, just and equitable under the circumstances.

    Best,

    Jack Townsend

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  31. Anon of "September 27, 2011 11:02 AM"

    Thanks a lot, your and other comments mean a lot to me.

    I did mention that I was in OVDI, and I also told the lady (TAS) that if RRSP being imposed for FBAR penalty that TAS is the right place to seek help.

    She told me "no", instead, she refered me back to OVDI hotline -:)

    I guess there is no consitency everywhere inside IRS.

    I have a friend who had same problem of RRSP (with much more money) recently contacted to IRS (after I told him the problem), he got a very simple answer "send FBAR to the Tresurey, and f8891 to IRS" --- so he just sent year 2010 only -- although it should be done with at least 3/6 years with f1040x (QD).

    Being that "ignorant" on IRS rule may give him a free pass -- who knows.

    I thought it was a right approach to get into OVDI -- so it can fix problem years back to 2003.

    Being that "diligent" now seems a suicide, time will tell.

    Again, thanks for all the moral/tech/info support, I may not love this country as much I used to, but I love you all..

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  32. To Anon: September 27, 2011 8:44 AM
    and ij.

    Sorry for the delay in response. I am away from home, and don't have access to all the piles of paper I printed and read as I was going through this process.

    I had to do some searching around and finally found the quote I have referenced related to "absurd" results.

    http://www.hbtlj.org/v07p1/v07p1_sheppard.pdf

    I would suggest you start reading on page 23 through 25 at a minimum. That should put everything in context. (Although, recommend the entire article to you, if for no other reason than FBAR educational purposes.)

    Start where it says...

    3. Will the IRS Exercise Discretion?

    Below is the quote, but you will want to read it in full context...

    "There is no requirement to assert a separate FBAR penalty for every possible technical violation encountered and doing so could lead, in some cases, to an absurd result."

    Hope that helps you.

    ……………..

    ij,

    You really need to read this document too, as it might help you see more clearly what discretion should apply, if the IRS is, as Jack says, being "fair, just and equitable under the circumstances".

    Unless you are hood winking all of us about who you are and the type of offender you were, there doesn't seem to be anything additional to be gained from heavy penalties outside of the OVDI to make you more compliant than you are already trying to be. To me, you are the model of what Congress wanted. I think it is obviously clear, that they did not want penalty results that undermine the purpose of encouraging voluntary compliance. Unfortunately, in cases like yours, IRS administration of the OVDI seems to be doing just the opposite of congressional intent. It is just plainly wrong headed, in my opinion.

    I would continue to consider that you "might" have some real potential in an Opt Out situation if the IRS is really applying discretion appropriately, so pay close attention to what Jack says above. It goes without saying, that it is very good process insight and advice.

    Finally, I wouldn't get hung up on the multiple account issue just yet until you fully read and think about the link above. I had a lot of multiple accounts too, with the various CDs, and ultimately it came down to one unified FBAR penalty at $5k each, not multiple ones. Like I have said before, it was not what I wanted, but was what I could live with, and certainly better than the "absurd" OVDP "in lieu of" result. :)

    Hang in there. We’re rooting for you!

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  33. ij.

    Let me restate for better clarity... "ultimately it came down to one unified FBAR penalty at $5k each year, not multiple account FBAR penalties per year."

    Sorry

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  34. "Just Me",

    Thanks a lot for your kind support !

    I have nothing to hide, and I welcome full audit IRS, FBI, DOJ whoever.

    The problem of opt out is uncertainty, and the whole reason of joining OVDI is for certain what a taxpayer will get, of course I was not prepared for RRSP penalty. If opt out, I may need a pro help, that will add cost. So adding RRSP penalty will cost another 20-30K (due to base change from 12.5% to 25%), is it worth to fight?

    By the way, when I talked to TAS lady, she even used "fraud" on me, I guess the whole IRS has such a lable on people in OVDI. She told me" if you want to clear your name, reduce your penalty, go to the court, we can not help you"

    I do feel like a criminal now -- just two/three days ago I was dreaming a "baged of honor"

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  35. "I came to this country with belief of fairness (to rich or poor), and I can lose my money -- I really do not want lose my faith."

    Very eloquent.

    I can lose my money by risking in a business, stock market and i can stomach that.
    But what i am subjected to is robbery. Will we allow a private enterprise to do this and get away with it?

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  36. After reading the comments of IRS lady (IJ's post), alleging fraud, we must get the media involved. If ordinary citizens are being taken as hostage by government agencies, how can we expect justice for the people? IRS is losing it's meaning and relevance, and it's time to highlight this in public forum and media. I can't think of any other way to draw attention to the issue of citizens having foreign accounts being treated so disproportionately compared with domestic account holders. If the same penalty applied to non compliance for domestic accounts, I bet there would be a revolt and uprising America.

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  37. "So adding RRSP penalty will cost another 20-30K (due to base change from 12.5% to 25%), is it worth to fight?"

    But is it worth the fight for the government too? Government lawyers are not cheap either. If they spend $30,000 to maybe recover $30,000, it will not be worth it for them either.

    And if they lose, they lose face, you just lose money, because you already have honor.

    And if they lose, it would set a precedent for losing penalties on other filers' RRSP accounts, which they would be afraid of.

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  38. ij: you are not the criminal. You are a law abiding person being persecuted by evil government. The bureaucrats who claim that you have committed fraud don't understand the first thing about natural law and they desire that you relinquish your God-given rights enshrined in the US Constitution and the Declaration of Independence.

    ReplyDelete
  39. 'But is it worth the fight for the government too? Government lawyers are not cheap either. If they spend $30,000 to maybe recover $30,000, it will not be worth it for them either'

    But government brings legal cases for their deterrent value as well. To take an extreme example, most tax criminal cases might not be worth bringing because the actual value of any recovered tax loss may be smaller than costs. Even many audits are likely not worth doing purely for that audit by itself. The idea is to serve as a deterrent. Or to put it into other terms, mere cost to the government of pursuing a case may not stop them, whereas it would stop most people who are not big tax evaders. Its much easier for people sitting on the sidelines to suggest that others take the risk of a US government lawsuit.

    ReplyDelete
  40. ij, I think you should contact a pro before deciding whether to opt out or not. Maybe even Jack if you live in his area. Pros should have an idea by then how fairly the IRS is conducting opt outs. The sum involved in your case seems large enough that you might need a pro just to decide what to do. It may be that TAS is a little overwhelmed and jaded with requests by 2009 participants, some of whom (lets face it) may be genuine tax frauds. Maybe if the pressure lets up a little, they may be more willing to consider genuine cases (at least, as long as you don't start quoting 'natural law' and 'God Given rights' to them
    :-). It may be that you need to contact the Washington TAS office.

    Items you could bring up either on appealing to TAS or on opt out
    1) You did not fill Schedule B, so no question of wilfulness should apply. Also, how you filled out your forms yourself, with no preparer.
    2) All your accounts were funded with post tax money (it would be even better if all were funded with money before you became a US person)
    3) The ratio of FBAR penalty to tax owed -- higher than 10 in your case
    4) Your willingness to undergo a full audit.
    5) the fact that you came forward voluntarily
    6) The incoherence in the IRS position of accepting late elections for RRSPs, but not exempting them from penalty base.
    7) Your status as an immigrant (more recent is better).
    8) The IRS's inconsistent position in allowing quiet disclosure of RRSPs with NO penalty, but penalizing OVDI participants heavily.
    9) Any other personal circumstance (family condition, financial hardship, retirement savings etc.).

    This is obviously not an exhaustive list, but those are my thoughts.

    Good luck,

    [ Changed my posting name to Sleeper, 'Sleeping Well' seemed too flippant for serious matters']

    ReplyDelete
  41. We are talking about Canadian IRA accounts. You would not report American IRA accounts to the IRS because they are non-taxable, why would one report Canadian ones.

    And second, why does the US want to "tax" those tax-free accounts by 25%?

    The IRS has enough trouble understanding US rules, never mind Canadian rules. But if it starts to get involved with collecting taxes abroad, it should read up on all tax laws abroad as well.

    ReplyDelete
  42. Sleeper...

    Excellent comments. When I appealed to the TAS, I went through a similar checklist deliberation. Pros and Cons. Items 1-6 were heavily emphasized in my consideration. Getting Professional input before I decided, helped me balance risk versus reward, but ultimately, I had to decide myself what to do. I pursed it without additional Council. So, if expense of Legal fees is the concern, it all depends on how active or how passive you want to be in your own TAS appeal. I was hyper active, maybe because, I am basically cheap! LOL Also, the more you read and educate yourself, the more you become confident of your own analysis of your situation. But you have to set aside emotion and fear, and Council is real good at helping you do that.

    PS... and I strongly agree with you that you need to stay away from the fringe arguments like "Natural rights" and "God given Laws", “Sovereign Rights”, etc. That gets you absolutely nowhere, and labels you in the “crackpot” category, rightly or wrongly, and you certainly do not want that now. Also, I went through the Washington Office, as they were more sensitive to the issues related to the OVDP.

    Thanks for your valuable additions to this discussion.

    ReplyDelete
  43. Sleeper,
    Many thanks for your detail post. One concern on opt out is that IRS may go back all the way to 1999 when I first became US person. Although nothing to hide, but f8891 was only after 2003, before there were some other kind form (3502?) dealing with foreign trust --very confusing to me. And the penalty on failing to file this form was huge.

    All my penalty I thought it should be based on non-RRSP accounts, so the balance was less than 75K. RRSP (in mutual fund changes from high at
    50K to low at 40K now), is a big hit when adding into penalty -- because the base change. Even so, it would still be around 20K-30K more.

    I have been in US for long, so I don't think I can any excuse for being uninformed. I did do tax all myself -- usually just one quick afternoon job, that should not make an excuse for not reporting what should be reported.

    Other concern is opt out would take much longer time, and I really want to move on. I want be "no sin more" ASAP.

    To "M", thanks and points well taken, to fight with IRS costs my money but also costs other taxpayers money -- Gov pays good money to its lawyers, where the money come from ? it is from us, it seems the gov needs huge penalty to make it up as tax is not enough to support the current spending. So it comes hurt back to all.


    FBAR was supposed to deal with money laundry, drug traffic, terrorist acts,and other criminal acts. But now it is used to rip off taxpayers
    with offshore (what is so ridiculous to be used on expat Americans --where the hell they can put money if not where they live ?) That is something really bothers me even thought it does affect me.

    OVDI was supposed to make people into offshore tax compliance. But now it is used to robber taxpayers retirement where there is no tax
    evasion at all for RRSP).

    And all these are under the name of law, clear written law.

    We need to deep think of our system.

    ReplyDelete
  44. Poser,

    Thanks for your kind words. Your comment has a profound impact on the way I think of this country.

    Growing up in a country where "Government not by consent", I often bind the government to the country.

    I should change the way of my thinking of this country,

    this country is a beautiful land govern by the Constitution, not ruled by the government. We may not trust/lose faith on the government, but we should never have doubt on this country.

    Thanks again, for bring this up..

    ReplyDelete
  45. "Just me" and other supporting opt out,

    There is a major difference between expat American and US resident, in my view, US residents are really responsible to report/file all the forms by IRS rule. So in opt out situation, IRS will treat them very differently.

    Not filing Schedule B can be used by IRS as "willful avoidance", plus not reporting offshore income, that will be a strong case for willful fail to file FBAR. So it is very risky for anyone who chooses to opt out.

    ReplyDelete
  46. IRS treats offshore retirement accounts (e.g. RRSP) as investment accounts, which results in double taxes on the earnings of offshore retirement accounts: first time before the distribution, second time when taking the distribution. Isn’t that unfair?

    ReplyDelete
  47. Hi ij,

    I'm also a recent immigrant (<10 years) who joined the OVDI after learning about the FBAR requirements. I did not know that I had to declare my world wide income, I never filed a Schedule B, and I got wrong advise from my tax preparer. So each year I filed a US tax return and a tax return in my home country. Now after amending all tax returns from 2003-2010, I owe nothing, but face a FBAR penalty of >50K. I know that I have no one to blame but myself. If I had not been so ignorant and educated myself about the US tax law, I could have known about this. But I feel strongly that it was a mistake and not willful at all. But you might be right, in the eyes of the IRS, I am a tax cheat and fraud.

    ReplyDelete
  48. "IRS treats offshore retirement accounts (e.g. RRSP) as investment accounts, which results in double taxes on the earnings of offshore retirement accounts: first time before the distribution, second time when taking the distribution. Isn’t that unfair? "

    Just to clear up,

    Do you mean "first time before distribution" tax this 25% penalty ? if so, i would like to correct, it is not tax. It is the penalty for failure to make disclosure and election (FBAR and f8891).

    Can/US tax treaty does protect taxpayers from being double tax. But it is not by default (this is something really bothers me too), instead taxpayers have to file f8891 and make a timely tax deferral election. It adds more work for taxpayers -- also to IRS, but that is what these smart CPA/lawyers cook up something like mine field to let taxpayers trap into.. then they can robber you -- under the name of enforcing law..

    ReplyDelete
  49. 'IRS treats offshore retirement accounts (e.g. RRSP) as investment accounts, which results in double taxes on the earnings of offshore retirement accounts: first time before the distribution, second time when taking the distribution. Isn’t that unfair? '

    No, foreign retirement accounts in general (excluding RRSPs) are treated as regular accounts -- taxed on earnings, but not on 'distribution'. Distribution is a meaningless concept in this context. RRSPs are different in that (if properly elected), they are taxed ONLY on distribution.

    ReplyDelete
  50. Ela,

    Speaking of Schedule B, on 1040 it says "attach Schedule B if applicable", for a lazy ass like me, i would never bother to attach anything.

    As a result, I did not attache Schedule M in tax year 2009, however IRS corrected and sent me $800 that I did not ask for.

    They are fair too when they see you did not take something you entitle too.

    You are right, blame nobody but ourselves -- for being lazy/stupid

    ReplyDelete
  51. "IRS treats offshore retirement accounts (e.g. RRSP) as investment accounts, which results in double taxes on the earnings of offshore retirement accounts: first time before the distribution, second time when taking the distribution. Isn’t that unfair? "

    Let me clarify my meaning in the above statement:

    Suppose you have $1000 in an offshore retirement account and you earn $30 interest each year. The IRS requires you to pay tax on that $30 each year. After 10 years, you have $1300 in the account (for simplicity’s sake, the interest is not compounded) and you take the distribution (withdrawal). IRS will ask you to pay tax on the $1300 which includes the earnings, not just on the principle $1000, right? That means you pay tax on the earnings ($300) twice.

    ReplyDelete
  52. @anonymous September 29, 2011 10:36 AM

    "IRS will ask you to pay tax on the $1300 which includes the earnings, not just on the principle $1000, right?"

    I believe that may not be the case. The IRS would I think allow you to make the additional $300 the a basis in the account, so that you wind up only paying tax on the initial untaxed $1000.

    Where true double-tax does come in, I think, is if you pay tax to the IRS on this $30 annually and then return to your home nation before you take a distribution. At that point your home country is extremely unlikely to give you a tax credit for tax paid in past years to the US -- for one thing it falls in a different year -- so you may be fully taxed on the withdrawal even though the US took a slice earlier.

    An even worse case may be the "exit tax" on an IRA for an expatriate or green card holder who leaves the US and returns to their home country. Here the US would take perhaps 35% of the entire IRA as it is "deemed distributed" even though no withdrawal, and then on withdrawal the non-US country will again tax it all as if untaxed income because that's the treatment specified in the tax treaty. Put another way, the US "exit tax" rides roughshod over parts of tax treaties, negating significant chunks of them in likely unconstitutional ways. (But since it only applies to evil foreigners the US government doesn't seem all that worried about this detail.)

    ReplyDelete
  53. ij @ September 28, 2011 5:18 PM

    It is a very narrow interpretation of non-willfulness. What if you didn't know about global income rules and didn't file schedule B or got the foreign account question wrong *unknowingly*. Sounds like laws of nature prevent this situation.

    ReplyDelete
  54. "Suppose you have $1000 in an offshore retirement account and you earn $30 interest each year. The IRS requires you to pay tax on that $30 each year. After 10 years, you have $1300 in the account (for simplicity’s sake, the interest is not compounded) and you take the distribution (withdrawal). IRS will ask you to pay tax on the $1300 which includes the earnings, not just on the principle $1000, right? That means you pay tax on the earnings ($300) twice. "

    if you have paid each of these $30 tax as income, they should not be counted again later.

    Let say you become US person in year 1 with $1000 retirement plan. after 10 years, if you have paid tax on each $30 -- and no compound gain on these each $30. After 10 years, you take out $1300. You do not pay to IRS any tax at all. You only pay tax of $1300 to the country where the retirement plan is.

    Because, this $1000 was earned before you became US person. IRS has no right to tax on it. $300 gain has been taxed.

    So no double tax.

    What the treaty is to prevent double tax of two countries.

    I hope I get it right.

    ReplyDelete
  55. ij,

    In my opinion, I think you might be getting too intimidated by the "Willful" issue, and of course, that is exactly what the IRS wants.

    There is willful, lazy and stupid as you say, but no criminal intent and very little benefit considering the different country taxation rates, IE the Jay walker just wanting a short cut to get across the street. You should have gone down to the cross walk and waited for the lights, but you were in a hurry. That still doesn't mean we need to lock you up in cell with the bank robber in a uniform penalty application.

    …and then there is real Willful Evasion IE, the USB client using actual evasion schemes to avoid and hide income. They were the actual Bank Robber or criminal that this whole damn program was designed for.

    The OVDI penalty lumps you all together, as there are no provisions for de minimus rules or degrees of “willful” behavior.

    I just can't imagine, that in an Opt Out, where discretion does apply, (and hopefully there is some justice and grace as Jack says), you would not be as harshly treated as you think you will. True it is a bit unknown right now and that uncertainty bothers you. I can understand that. Ultimately, the decision is yours, of course, and only you know the facts of the situation. I think I would still pay for professional advice come decision time with a good Practitioner. I think "Sleeper" pointed out some good things for you to consider. However, if you would rather pay a BIG uniform penalty, you can live with the financial hit, just to put it all behind you, that is your choice. The IRS will love you for helping out the US deficit in such a voluntary manner.

    Best wishes come decision time.

    ReplyDelete
  56. "It is a very narrow interpretation of non-willfulness. What if you didn't know about global income rules and didn't file schedule B or got the foreign account question wrong *unknowingly*. Sounds like laws of nature prevent this situation. "

    English is my 3rd language (and I started to learn when I was 22". So my English has never been good.

    Believe it or not, when I first read FBAR it says

    "This form should be used to report a financial interest in, signature authority, or other authority over one or more financial accounts in foreign countries,.... over $10,000 ...."

    No kidding, I thought only offshore bank interest over $10,000 needs to report. I was confused with "financial interest" as bank interest -- what that be consistent FBAR should be used on "fat cats" ?

    And I even asked some my friends to interpret the financial interest term to me. Why IRS uses such a fancy word instead of "bank balance" or market value of your investment etc. Anyway, that was the first time I read FBAR form. I would have had same understanding even if I had read it over 10 years ago following schedule B.

    Would I be able to use this argument for "non willful" ? Of course, I would be lying.. because I had never read this FBAR form until I saw this OVDI news.

    Anyway, it is just too uncertain what is the outcome when you put up your argument, just like IRS label us in OVDI cheats, fraud, the fact is that I have lived in this country over 13 years -- never have got any trouble -- even not a speeding/parking tickets.

    ReplyDelete
  57. "Just me", Many thanks!

    I have not yet decided and I wait to hear from my examiner. If RRSP is indeed included, I will consider opt out, but for now, I do want to have quick ending. Otherwise, I can not plan my life here, buying a home is my American dream -- at my age it is way too late... but if another 20-30K can end my nightmare, it might be worth.

    ReplyDelete
  58. ij

    It is just so wrong how the IRS is going about this OVDI, and while you do have to pay your taxes on foreign earnings, there is no additional benefit in compliance objective, by separating you for $30K, so you can get on with your life. It is so wrong, but what can you do?

    I keep sending off emails trying to stir interest, (some marginal success) and think I will be writing Congressman Charles Boustany, Jr., MD Chairman, Subcommittee on Oversight to night.

    I hope you saw my post over at...

    http://federaltaxcrimes.blogspot.com/2011/09/irs-promotes-success-of-ovdi-and.html

    He is asking Geinther the type of questions that need to be asked about the OVDI, and he needs to be looking at FATCA which was passed by the Congress he belongs to. I think I will encourage him...

    ReplyDelete
  59. "Just me, Sleeper and other",

    Thank you all for kind support, valuable tips..

    Say if IRS does impose penalty on RRSP, that will cause my penalty rate jump from 12.5% to 25%. And due to the fact RRSP are invested in growth mutual fund (even it is low now but it had some peak time), that would add around 20-30K penalty -- it will wipe out all my RRSP (based on the current value and adding another 25% Canadian withhold). My 8 years work in Canada retirement saving will be confiscated for missing f8891/FBAR. If IRS is comfortable of doing this, what can I say ? what can I do ?

    There is a saying "One crow is not any more whiter than another", who can expect IRS outside OVDI will be more reasonable/compassionate given the wide range of FBAR penalty they can impose ?

    The opt out will certainly add pro fee (I saw ads $20K flat fee), which would not much less (if not more) than the additional penalty.

    My valuable time for my life (as well as my family), it has been worst time in my life ever since I knew this FBAR/OVDI. Sooner ending better for all.

    I can take comfort on the fact, all the offshore retirement plans are treated the same -- no exception for Canadians. That is again fair out of harshly unfair on my own.

    ReplyDelete
  60. Jack and all, I have a question about the RRSP.

    For the past 20 years I have been living in Canada. Before my retirement, my income was
    far below the Foreign Earned Income Exclusion limit, i.e. I did not have to pay US tax on my income. However, I used part of that income to purchase an RRSP (e.g. $10000). When I take distribution, is the principle ($10000) also excluded from taxation? If not, doesn’t that mean I have to pay tax on the income that was originally excluded, i.e. my nontaxable income ($10000) in effect has become taxable income?

    Thanks.

    ReplyDelete
  61. Anno of October 1, 2011 9:43 AM

    You may try to post your question on

    http://forums.serbinski.com/viewforum.php?f=2

    and ask nelsona who seems very knowledgeable on US/Canada tax/accounting.

    ReplyDelete
  62. 20K is outrageous !! That is the sort of fee that would be needed for someone with serious risk of criminal prosecution. I surmise that all you would need is 2 meetings with a good practitioner with experience in what happened to clients after opt outs. Maybe Jack if you're in his area. Currently, its not clear how IRS is conducting opt-outs, but we should have more information by then. There are various reasons I think the IRS will be more reasonable under opt out, its the same reason almost all countries have a traditional VD policy -- without a reasonable policy, very few would disclose.

    ReplyDelete
  63. Sleeper,

    Thank you..

    For those who have only RRSP problem, QD would have done the job, and if OVDI imposes penalty, they can certainly choose opt out.

    All missing Schedule B and FBAR can have a very strong reasonable cause argument (as we just never look at our IRA earning in US, plus the f8891 is unknown to many)

    My key problem is the non-RRSP, not reporting income from offshore is tax evasion (even small amount tax due), as a long time US person (from temp visa worker to green card holder), I am a lot more guilty than short term (those still on visa). OVDI penalty on non-RRSP is fair, particularly when enjoying 12.5% penalty rate.

    If OVDI binds me non-RRSP and RRSP together for penalty, that will be harshly unfair. Jump out OVDI, I may lose fair part of OVDI on non-RRSP problem.

    That is my dilemma.

    ReplyDelete
  64. Sleeper,

    Here is my logic,

    If OVDI impose penalty on all RRSP (regardless purely RRSP problem or not), that will affect a lot taxpayers and it will cause a big outrage for those who are simply unaware of f8891/FBAR, and it will force those who are still outside OVDI and those who plan to go QD to keep in dark. That is unlikely happen unless OVDI is really about to declare war on those future retirees who are otherwise tax compliance.

    My hunch is they will impose penalty on someone like me, who is in such a dilemma. And if so, it is well calculated move, and have me box into OVDI for high penalty on all.

    ReplyDelete
  65. ij, I would say its almost irrelevant whether the penalty is fair or not. In a way, when you count tax and interest for the years before 2003, a 12.5% or even a 25% penalty might not be unfair for some people if they have had an offshore account for long. However, you don't seem to fall into that category. Certainly the penalty is far higher than would be put on a US undeclared account. So it is unfair, and it makes sense to fight it if possible with opt out.

    Dr. Ahuja (who seems to be clearly a tax evader) is claiming his innocence with a straight face and fighting in court. You are not a tax cheat like Dr. Ahuja, but if he can fight such a clear cut case, surely someone like you should do so as well ?

    ReplyDelete
  66. ij,

    Thank you for you advice. The following is the answer from Nelsona.

    “As a US citizen, your personal RRSP contributions form the investment in your RRSP, and as such will not be taxable in US when you take RRSP withdrawals.

    You need to have kept track of the year-by-year contributions you have made, in then-current USD. It is up to the taxpayer to be able to prove how much of a pension income is non-taxable, or he must report the gross as fully taxable.”

    ReplyDelete
  67. Dear Sleeper,

    thanks for all the kind words.. really appreciated !!!

    Dr. Ahuja and I are same tax cheats under the tax code (tax due). He is a big time cheat while I am small time cheat.

    The key is the criminal intent. People may argue, small amount should not make the taxpayer more guilty than the big amount. I do not agree, it is more on the relative value to the taxpayer's wealth.

    Charge Dr. Ahuja on amount of $2K tax due may not make sense as he makes tons of money being a well-known doctor, who would be doing that in his level of wealth ?

    As a guy living pay check to pay check, $2K may be a motive for missing report and taking that risk (I swear under Chairman Mao, I was not that type of risk taker)

    The other difference of course, Dr. Ahuja is facing criminal prosecution, he is fighting for his name and he has a troop of good lawyers on his defense.

    What is the best way to get out of this mess for the small time ? It seems not a bad choice to say "here are my life saving retirement, please take it and let me go". So this small time can rebuild his life on whatever left..

    ReplyDelete
  68. correction on previous post,

    When I say "tax cheat under tax code", I only refer that can be accused of tax evasion under the tax law.

    Dr. Ahuja (and myself) is still innocent until being proved guilty in the court.

    ReplyDelete
  69. Sleeper,

    "ij, I would say its almost irrelevant whether the penalty is fair or not. In a way, when you count tax and interest for the years before 2003, a 12.5% or even a 25% penalty might not be unfair for some people"

    Very good point here. It is not that I made a lot money on interest, but when I left Canada in 1999, Canadian dollar was really low (0.66USD), of course, I did not predict Canadian dollar would go up to keep the money in Canada, it was because I had to pay child support in Canada.

    I might have no FBAR problem and lost a lot more (on exchange rate) had I brought all non-RRSP into US in 1999.

    In that sense, it seems fair penalty on 12.5% or even 25% considering I would have one choice between losing exchange rate value or FBAR penalty.

    Of course, adding RRSP FBAR penalty does seem harshly unfair due to base change plus peak value of the mutual fund.

    ReplyDelete
  70. A bear and a Squirrel --- Bedtime Story

    They are close neighbors sharing one food storage. One day, the squirrel found out that he had been taking the food of the bear. The squirrel went to the bear and returned more than twice as much as he had taken from the bear.

    "Not enough, you have to give me back of all your food for the winter", the bear said to the squirrel.

    "That is not fair, I was not aware that was your food, and I had given you twice as much after I found out that I was indeed "stealing" your food".


    "Okay, you have an option, come to our bears' rule committee, let's see what punishment you will get for stealing our food"

    The squirrel gave up all his food for the winter, he decided to find food in this very very cold winter.


    "I hate the bear!", said my 4 years old, whose favorite stuffed animal is ironically -- bear !

    ReplyDelete
  71. http://www.agtax.ca/canada-us-tax/reporting-of-non-compliant-canadian-rrsps-and-rrifs/

    It says

    "If your Canadian RRSP holdings predate the new reporting regime established effective the 2003 taxation year you were required to file Form 3520 as a beneficiary of a foreign trust and Form 3520A as the grantor of a foreign trust. If you failed to file these two forms you are subject to penalties set out in Section 6677 – up to $10,000 per year. The three-year Statute of Limitations clock does not start to tick until Forms 3520 and 3520A are filed. Taxpayers that were required to file these two forms in taxation years 2002 and earlier should be aware of the fact that the IRS can examine all years for which the taxpayer failed to file Forms 3520 and 3520A. If these taxpayers failed to file FBARS there could be no limit on how far back the IRS can go. The best thing that a taxpayer can do at this point is file amended and delinquent reports with an explanatory letter and hope for the best."

    So, if opt out, IRS would go to years before 2003 for penalty on failure to file 3520/3520A.

    That does not seem a good news for people who have RRSP before 2003 and fail to file 3520/3520A

    ReplyDelete
  72. Why IRS won't let RRSP go easy on base penalty ? I think the reason is "tax compliance".

    In OVDI 2011, all offshore assets (land, art work and even cash) are subject to base penalty if they are related tax non-compliance. So RRSP should be included in base penalty based on this policy.

    Now 9100 relief (extension on f8891 election) does solve one part of tax non-compliance, that is to make RRSP just like cash/land that earns nothing during the period of 2003-2010. However, IRS still needs to be convinced that the source of RRSP is tax compliance, just as those art work, land and cash in offshore.

    So, IRS can't give a simple answer if or not RRSP should be included in the base penalty.


    For a taxpayer who has RRSP in OVDI, he must do two things.

    1. Get 9100 relief -- IRS is easy on that.

    2. Prove RRSP source fund is tax compliance, that seems hard if the money has been accumulated many years. IRS put the burden of proof on taxpayers.

    ReplyDelete
  73. IJ,
    I am in the same boat as you. Just found out OVDI last weekend. I am ready to pay 27.5% of penalty to get over with it. But how to avoid penalty on RRSP? Would you please elaborate a bit based on your experience? Can I just retroactively fill out past F8891s? Many thanks!

    ReplyDelete
  74. Anonymous...

    Before you just hand over your money, you need to do some personal drudgery and increase your knowledge base. It is good you are here asking questions, as this is one of the best blogs on this subject, but you proably have a lot of reading yet to do. Be sure to check out the more recent thread on Opting Out considerations. That might be an option for you that you have not considered.

    Also, I would recommend The OVDI Drudgery for Minnows commentary I wrote over at Isaac Brock... If you were not a willful tax cheat hiding illicit funds in secret Swiss accounts you need to reconsider just paying 27.5% to get it over with. That is a huge penalty, and you should ask yourself, do you look like the target the IRS had in mind when it started these programs? If not, then don't be railroaded or driven by fear. Read how Moby approached the problem. Some very good advice there.

    http://federaltaxcrimes.blogspot.co.nz/2011/12/opting-out-of-ovdi-and-ovdp-what-is.html

    http://isaacbrocksociety.com/2012/01/28/the-ovdi-drudgery-for-minnows/

    Slow up and spend some time building up a good knowledge base, and then contact a good OVDI attorney for advice, but only then.

    ReplyDelete
  75. "RRSPs have the
    protection of the treaty (article XXI(3)) because they are for
    retirement income, thus cannot be reclassified as PFICs"

    Can someone comment if the above statement is true?

    thanks

    ReplyDelete
  76. True, but only if you have filed f8891

    ReplyDelete
  77. See also Phil Hodgen's post on late filing Form 8891.

    http://hodgen.com/rrsp/get-private-letter-ruling-file-late-form/

    Jack Townsend

    ReplyDelete
  78. Thank you both.

    What is one's strategy if the lawyer advised a QD?
    File amended returns after obtaining the PLR?

    ReplyDelete

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