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FOIA Response Suggests Canadian Bank & Tax Information was Improperly Sent Directly to the IRS

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    American expats living in Canada, U.S.-Canadian dual citizens, and other U.S. taxpayers living in Canada have long been advised of their duty to report foreign accounts. Independent obligations to report covered accounts exist in the form of the Foreign Account Tax Compliance Act (FATCA) and Report of Foreign Bank Accounts (FBAR). Taxpayers who fail to file these reports when they are required can face huge fines. If the investigating or auditing agent comes to believe that the failure to file was willful, he or she may even recommend criminal tax penalties.

    Despite the threat of disclosure of foreign accounts presented by FATCA’s automatic information sharing provisions, some taxpayers have nevertheless banked on the fact that the U.S. government would not discover their secret accounts. Unfortunately, this type of position that relies on secret account remaining secret is no longer tenable under the current banking regime characterized by international information and record sharing under FACTA. However, even individuals who were aware of the international government agreements between the U.S. and Canada have been surprised by the methods and scope of data collection and sharing.

    What Type of Tax Information Sharing Did the U.S.-Canada IGA Provide for?

    Since June 30, 2014, the inter-governmental agreement between the U.S. and Canada permitting the sharing of tax and financial account information has been in effect. The agreement signed by the nations was what is known as a Model 1 IGA. Under a Model 1 IGA, a nation’s covered financial institutions are required to provide tax information to their domestic tax agency. In the case of Canada, this is the Canadian Revenue Agency (CRA). The domestic tax agency then, in turn, provides relative account information to the U.S. government. This type of IGA is intended to increase privacy and security for Canadians.

    Financial institutions are encouraged to make these reports due to a potential 30-percent withholding penalty that can be imposed for noncompliance.  Therefore, taxpayers simply cannot rely on financial institutions protecting the secrecy of their accounts.

    Questions Exist Regarding Whether Canadian Financial Institutions Are Directly Reporting to the IRS

    According to information obtained by the CBC under the Freedom of Information Act, it appears that at least some Canadian financial institutions may be reporting account holder information directly to the IRS. This raises the possibility that the terms of the IGA intended to promote privacy and data security is not being respected. It also means that account holders with a U.S. FBAR or FATCA disclosure obligation face an unexpected increased risk of discovery.

    The CBC states that the first transfer of taxpayer records occurred in September 2015. This transfer provided tax and financial account information pertaining to the 2014 tax year. In 2016, 315,160 taxpayer records were transferred to the IRS in the United States. This totals to 469,827 records submitted to the United States during the relevant time period.

    However, the information obtained by the CBC indicates that he IRS received 501,401 records “from financial institutions registered out of Canada” over the past two years. The CBC states that roughly 17,000 additional records were transferred to the U.S. government for the 2014 tax year and about 15,000 additional records were transferred for the 2015 tax year.

    These additional transfers at least raise the possibility that some taxpayers may face an unexpected disclosure of their accounts to the IRS. According to an IRS spokesperson, this can occur because “The laws governing FATCA reporting contemplate that filers not covered by an Intergovernmental Agreement (IGA) will file directly with the IRS. For example, direct reporting non-financial foreign entities (NFFEs) would file reports directly with the IRS even where there is an IGA (in) effect in their jurisdiction.”

    However, the representative did conspicuously stop short of saying definitively that this is what happened in this instance. This is important because the wording of the documents received under the FOIA seem to suggest that it is financial organizations and institutions sending this information and not non-financial foreign entities (NFFEs).” In any case, U.S. expats, dual citizens, and Canadians with U.S. tax obligations should reconsider their risk and approach to foreign account disclosure in light of this new information.

    Concerned About Undisclosed Foreign Accounts?

    If you have failed to disclose foreign Canadian or other offshore accounts through FBAR or FATCA, your risk of facing tax charges may be greater than you believe. However, if you take action before coming under investigation or audit, many taxpayers are able to mitigate the consequences or penalties they face. However, these are not one-size-fits-all programs and a botched filing can have real consequences. Taxpayers who are interested in leveraging OVDP or Streamlined disclosure should first consult with a tax lawyer before taking any action.

    The tax attorneys, CPAs and EAs of the Tax Law Offices of David W. Klasing can assist with an array of offshore account disclosure concerns. To schedule a confidential and reduced rate initial consultation, please call our Los Angeles or Irvine law offices at 800-681-1295 or schedule an appointment online today.

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