Have a Tax Question? Ask a Tax Expert
Hello and thanks for trusting me to help you today. I am a tax adviser with over 15 years of experience.Because you did not report the accounts or pay any US tax (as a resident alien on the earnings) you are going to need to make a formal request for a ruling from the IRS and to not be penalized for the nonreporting.
Treas. Reg. §(NNN) NNN-NNNN1(c) provides that the Commissioner has discretion to grant a taxpayer a reasonable extension of time, under the rules set forth in Treas. Reg. §(NNN) NNN-NNNN3.I found a private letter ruling that follows your situation (of course their facts were that the professional that filed their returns never told them they could ask to be deferred).If you do this and the IRS allows favorably you will pay US tax on the withdrawals but could avoid the penalties that normally are applied. It does not matter if you take a lump sum or not. If you used a professional to prepare your US returns you may wish to go back to them but make sure they understand what you need now.
If you need to see a copy of the letter here is a linkhttp://www.irs.gov/pub/irs-wd/1336010.pdf
Please know that the letter for them is not binding for you and I only give you the link so you can see how the IRS handles this sort of situation.
You will still need to report this income on your US return of course you are allowed to use the US foreign tax credit on any amount that you pay in Canada tax on the withdrawal.
I sincerely XXXXX XXXXX information assists you as you go forward.
My goal is to give you excellent service. If you are satisfied, please rate me. If you have follow-up questions on this same topic, use the reply box below. To start a new conversation with me on a new topic request me again.
The money was accumulating interest in a sheltered account, like a IRA ,so I havn't been receiving any money from this Canadian account. Does this make a difference?
Not for the FBAR rules. Even if you were not receiving distributions the foreign account was not seen as an IRA like a US IRA.
I found a private letter ruling that follows your situation (of course their facts were that the professional that filed their returns never told them they could ask to be deferred).
Yes, the IRS took under consideration that they had "professional" advice that was at best incomplete
this ruled in their favor
Sorry about that, I clicked on "enter" to double space and then it disappears. Let me try again.
it does that to me too (SHIFT and ENTER to not send) :)
I can't see my last question I submitted to review for accuracy. The only thing I didn't do is I didn't report the accounts to the IRS when I moved to Texas. I received no money directly from those Canadian accounts, it is a tax deferred account. So to confirm what you said, I could make a formal request to have mercy on me, right? Also, regarding this statement: "If you used a professional to prepare your US returns you may wish to go back to them but make sure they understand what you need now." - Do I need to send this formal request now or can it wait til April 2014 tax season?
Correct (on the mercy part). You should request the ruling as soon as possible because if granted it would need to be attached to your return.
I was informed that I will have to take a 25% penalty as a non-resident of Canada, instead of 10% here in US. Ouch!
Penalties are always bad so if you can avoid an additional penalty for never filing that FBAR or filing to defer then that will assist
May I suggest you make sure the tax professional is an Enrolled Agent or use a CPA that has knowledge of teh FBAR and deferring for Canada persons in teh US.
The penalties for not filing the FBAR are pretty stiff
sorry I am new to this site. I just realized I needed to scroll down to see your answers! I just figured this out and am reading what you have given me since your first response. Just a minute...
Please bear with me. I am reading that letter and have a few more questions.
After immigrating to the United States, Taxpayer continued to maintain her RRSP and LIRA, but has not contributed to either account since moving to the U.S. In Years 2, 3, 5, 6, and 7, Taxpayer caused amounts to be distributed from her RRSP. Taxpayer represents that she paid all Canadian taxes assessed on those distributions, reported those distributions on her U.S. joint income tax returns, and claimed foreign tax credits with respect to the Canadian taxes paid. Taxpayer represents that she has not received
any distributions from her LIRA.
Taxpayer represents that she and her husband have timely filed U.S. joint income tax returns for Tax Years. For Years 2 and 3, Taxpayer’s returns were prepared by Tax Preparer, who did not advise Taxpayer to elect to defer current U.S. income taxation on the accrued earnings in her RRSP and LIRA pursuant to Article XVIII(7) of the U.S.-Canada Income Tax Treaty (Treaty). Taxpayer did not report the accrued earnings in her RRSP or her LIRA on those returns.
Electing to defer is done on Form 8891
They were requesting in their letter to make the exlection late
Robin, this is from the letter. The 2nd paragraph seems to contradict the first paragraph. What are they referring to?
that is important because they would not have penalties for not reporting
Let start with the basics on the accounts and reporting
The IRS has not seen these as valid deferred accounts becuas ethe US has no control over them
for that purpose they were foreign accounts and Canadians that were US persons were to report and pay tax on the earnings
Then the US decided that they could be a deferred account (more like an IRA)
so the form 8891 was developed
The Canadian US person could then report the account but not have to pay US tax on teh earnings
If they do not do either then the US has penalties for that
If request the exception and ask to file the 8891 late then you would still be taxed if you withdraw but no penalty for not reporting
Does that explain it a little more clearly?
The couple in the letter did not report either nor did they include the earnings in tax
they requested to be allowed to file the 8891 late and defer the tax
because they did not know about the rule and had used professionals in the US to do the tax the IRS did not see their non action as voluntary
So if I write this formal letter (ie "request the exception" to not penalize me for not reporting) AND ask to file the 8891 late, THEN if they have mercy, would I just pay the one-time penalty (25%) or would I still have to pay back-taxes on the earnings generated each year over 17 years?
You would pay tax at the time you withdraw the money not going back for all the past years.
That 25% penalty is a Canadian tax issue and not US
the amount which is taxable is the increase in value since you moved to the USA.
for US purposes
Let me rephrase
The US will tax you on the increase since you moved to the US
I believe my account 17 yrs ago was $38,000. Now its $51,000. So are you saying they will assess a ONE-TIME tax on the $51,000?
The tax will be on the increase (51000 - 38000 = 13000)
and that is in the year of the withdrawal
You could possibly go back 6 years and amend with just the 8891 as the correction
So if I withdraw all of the RRSP, about $33,000, how would the taxes be calculated?
On the portion that was earned after you came to the US. The earnings would be first so if your earnings were $13000 then that portion would be added to income
So it seems like I will be taxed for any earnings and the US is NOT recognizing the accounts as tax-deferred. I thought that was what the Form 8891was for, to defer the taxes each year I am in the US. So sorry for this trouble...
That is exactly what the form 8891 is for but I was understanding from your statements that you never filed that form either
Deferred means you pay when you take out not while you earn
had you file dthe 8891s then you would have been defrring the tax
had you filed you have been deferring tax
Filing the 8891 is showing the account and requesting to defer
if you do not do that you are supposed to pay tax on the earnings each year
if you pay each year then when you take out you do not pay again
I never filed anything with the IRS. I never told them anything about my Canadian money. I completely forgot about that Canadian account once I moved here. Can I back date the 8891's?
You can start by going back 6 years, file a 1040X for each of those and attach the 8891
I really would suggest you look at least into using a professional near you. Have you been preparing your own taxes each year?
No I have been using a CPA in Texas where I live. I have read its better to talk to tax professionals near the Canadian border because they are used to dealing with the cross-border laws.
Well that CPA bears some responsibility here if you informed them of the accounts.
Did you tell them about the accounts?
I didn't tell her. I never told any one. I completely forgot for years at a time and then when I remembered then I didn't do anything/procrastinated. All I can claim in that formal letter is that I didn't know and wasn't being responsible...
That is a shame. I would still advise that you call her (the CPA). She should know about the procedures, this is not a difficult area for a CPA.
The amended returns may afford you relief without requesting the ruling in a letter.
When I first moved here, my former husband's employer hired a accountant company who may have informed us but I personally didn't know at all what was expected. My husband did all of the paperwork, it was related to his work.
Well it is not as dire as you thought at first I hope (after our CHAT here)
Yes, I am very thankful for your help.... So just to recap, there are two issues I am dealing with. 1)avoiding penalty for non-reporting and 2)trying to minimize taxes on earnings for the past 17 years. Don't I have to have this formal request made to alleviate #1 and then file 8891's back 6 years to minimize taxes?
There is some debate on that. Filing the past 6 years would allow you to show the accounts and that is important because that will then be your reference for not paying tax on all (showing the basis that is not taxable on withdraw). The IRS may accept the amended returns with the 8891s and then you would not have to request the ruling. If they will not you will receive a statement saying that and then can request the ruling based on the facts of the situation.
Rulings take time and there are fees for the private letter rulings.
I would amend my first advice and say file amended returns for the past 6 years. If you withdraw the money in the mean time make sure you include the portion in your tax return that is taxable.
keep copies of all the amendments and each 8891 that you file
The only real change to the amendments will be the inclusion of the 8891 so the explanation of change on the amended return would cover the fact that you were not aware of the requirement
A s I said the iRS will advise if they will not process the amendment
You can do the amended returns yourself but the CPA will be able to handle that for you as they have everything in their records for you.
I probably need to do this asap, right? Also, what do I need from the Canadian mutual fund company to give to the CPA?
Yes, as soon as you can would be better. They will need any statements showing the balances for the previous years.
I believe they provide quarterly reports. Do I need all four reports in each given year? or just the last quarter ending Dec 31st?
As long as the last quarter has the year to date that would be enough
I am almost done :-) If I go ahead and request the $30K lump sum, right now, without having contacted my CPA yet, how do you foresee how I will be taxed on it?
You will still be taxed on it's earnings since you became a resident in the US.
The filing of the 8891s or a letter is just to make sure you have no additional penalties for not reporting
Tax withheld in Canada will still be allowed for tax credit on the US return though so that is a good thing.
I sincerely XXXXX XXXXX our CHAT has been useful.
just a sec. I just called the Canadian mutual fund contact...
still on phone... :-)
I was told the Canadian govt will be withholding 25% in taxes who will then inform the US govt. The 25% then be will be sent to US.
Glad you were able to get through to them and receive info on the distribution
I can not think of anything else that you would need from me on this subject. We have pretty much gone over everything you asked (as well as additional items).
Just make sure you report the distribution and get with your CPA as soon as you can.
please bear with me still...
I am still here
Thanks for your patience. Yes, I think we have covered everything. How can I get a copy of this correspondence?
After you rate the assistance you will see a SHARE button, hover over that and print should be an option. The CHAT is not erased and you will always find it under your My Questions
I really enjoyed working with you – please feel free to request me again when you come back to ask another question.You will find the request feature when you come back under your MY QUESTIONS section.
Thanks. I enjoyed working with you too. Is this chat private or will this be filed for someone else to look at?
You can request that the CHAT not be open for public viewing and remain private if you wish. I believe that too is an option after you rate.
If you do not see it then just click on Customer Support or let me know and I will advise them for you.
Please let me know if you have any difficulty rating the assistance I provided or in contacting Customer Support.
Your positive rating is always thanks enough.