This week the IRS released statistics on the number of returns
it received in 2010 from US citizens with foreign trusts. The
results are startling (you may find the report by clicking here). In all of Canada only 324 returns were
filed that report ownership in a non-US trust, which likely means
hundreds of thousands of US citizens residing in Canada had not
filed the appropriate returns. This is important for two
reasons: first, the penalties for not filing are draconian (but
waivable); and second, last week the US Government Accountability
Office (GAO) issued a report that encouraged IRS to pursue those
taxpayers who file late returns using a technique known as
The US State Department knows of more than 687,000 US citizens
residing in Canada but most experts agree that the actual number is
several times that number. Many common Canadian retirement
and savings vehicles are considered foreign trusts under US law.
These vehicles include registered education savings plans (RESPs),
tax free savings accounts (TFSAs), registered disability savings
plans (RDSPs) and the like. Of course, typical Canadian trusts used
for income splitting and succession are also considered foreign
trusts and carry the same reporting obligations. Any US citizen who
owns, contributes to, or receives a distribution from any of these
trusts must report that interest on the appropriate form at the
appropriate time or face severe penalties.
Penalties for Failure to File
Contributions to or distributions from any of these trusts
triggers the obligation to file US tax form 3520 on or before the
due date of the US income tax return (form 1040). The failure to
file penalty for the form 3520 is a minimum of $10,000. In
addition, an ownership interest in any of these vehicles triggers
the obligation to file the US form 3520-A on or before March 15.
The failure to file this form triggers a minimum $10,000 penalty.
Both of these penalties can be waived if the taxpayer has
"reasonable cause" for not having filed.
2010 Filing Statistics for Foreign Trusts
The following is a summary of the number of returns filed in
respect of Canadian trusts and the income and financial information
about the trusts:
Number of Forms Filed
Average Net Assets
Total Net Assets
Number of Forms Filed
Average Value Transferred
Total Value Transferred
Given the size of the asset values and the value transferred it
appears that the trusts and owners that filed the forms were likely
typical Canadian trusts, and not TFSA, RESP, RDSP, etc.
IRS hates "Quiet Disclosures"... and they really mean
When a taxpayer has missed a return or two there are basically
three options to bring these filings current. First he may
participate in one of the IRS's voluntary disclosure programs.
Second, if he qualifies, he may participate in the new Streamlined
Filing Procedure. Third, he may simply file the late returns or
ignore the late returns and become compliant prospectively. This
third option is commonly referred to as a "quiet
disclosure." The IRS hates quiet disclosures.
On April 26, 2013 the GAO released a report (which you may find
by clicking here) that encouraged the IRS to seek out
off-shore filers who have circumvented the IRS's recent
Voluntary Disclosure programs in favor of quite disclosure.
The IRS agreed with the Report's recommendations and, as a
result, those taxpayers who have or plan to engage in quiet
disclosure likely face significantly increased risk of IRS
The IRS's statistics on foreign trust filings for Canadians
are shocking, but they are a bit out date. The figures reflect the
2010 compliance year, which was before the big media splash made by
the 2011 Offshore Voluntary Disclosure Initiative and subsequent
programs. Even so however, there are likely a lot of taxpayers who
have yet to get caught up on their filings. There are options for
bringing these filings current but, as the GAO report indicates,
quiet disclosures should not be one of them.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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