RRSP stands for Registered Retirement Savings Plan. RRSPs are Canadian accounts, and are used to hold investment assets and savings. In October of 2014, the IRS updated its RRSP policies to make filing requirements simpler for US taxpayers, and under the new procedures you could qualify automatically for tax deferral. However, there are still important filing requirements which haven’t changed, including Form 8938 and FBAR.
Updated Rules for Form 8891: Qualifying for Tax Deferrals
If you have an RRSP, there’s good news. In October of 2014, the IRS (Internal Revenue Service) introduced new and improved reporting requirements for US taxpayers who have RRSP accounts — and even more importantly, retroactive relief for taxpayers who qualify. To begin with, the rules and reporting requirements pertaining to Form 8891 have changed significantly.
Before the 2014 changes, taxpayers could defer paying tax obligations by submitting Form 8891 along with their income tax return. However, the IRS reports that many qualified taxpayers failed to take advantage of this option. If a taxpayer who missed this tax deferral opportunity wanted to retroactively reap the benefits, he or she would have to go through the inconvenience of spending time and money on requesting a private letter ruling (i.e. written decision) from the IRS. In light of the updated policy, taxpayers with RRSPs qualify automatically — and no longer have to file Form 8891 — provided the following two requirements are met:
- You must be either a resident alien or a US citizen.
- You must have filed US tax returns for all and any years in which you held an interest in an RRSP. You must also have included distributions as income on these returns.
Essentially, if you meet the criteria above, you can defer (i.e. delay) tax on income contained in your RRSP until it is distributed.
Exceptions to Form 3520-A Filing Requirements
Form 3520-A (Annual Information Return of Foreign Trust With a U.S. Owner) is used to supply the IRS with information about:
- Foreign trusts.
- US beneficiaries of foreign trusts.
- US persons who are treated as owners of any part of a foreign trust for tax purposes.
Normally, US owners of foreign trusts must annually file Form 3520-A with the IRS. But as of October 27, 2014, the IRS revised its 3520-A reporting requirements to include an exception for holders of RRSPs. To quote revised IRS policy directly:
Custodians of Canadian registered retirement savings plans (RRSPs) and Canadian registered retirement income funds (RRIFs) are not required to file Form 3520-A with respect to a US citizen or resident alien who holds an interest in a RRSP or RRIF.
Additionally, RRSP holders under Section 3 of Rev. Proc. 2014-55 do not have to file Form 3520-A for owners or beneficiaries who are resident aliens or US citizens.
Form 8938 and FinCEN Form 114
While the revised 2014 IRS procedures simplify or eliminate filing requirements for Forms 3520-A and Form 8891 pertaining to RRSP account holders, there are still two major reporting requirements which have not been modified or otherwise affected: FinCEN Form 114 (commonly referred to as FBAR, or Report of Foreign Bank and Financial Accounts), and Form 8938 (Statement of Specified Foreign Financial Assets).
The purpose of FBAR is to crack down on US taxpayers attempting to evade US tax obligations by concealing assets with foreign banks or other foreign financial institutions (FFIs). In years past, taxpayers made FBAR disclosures with TD F 90-22.1. However, this procedure has since been replaced by FinCEN Form 114, an online report which must be filed via the BSA E-Filing System.
With some exceptions, you must file an FBAR if both of the following statements apply to you:
- You are a US person — which includes citizens, residents, business entities, trusts, and estates — who has either a financial interest in, or signature authority over, one or more foreign financial accounts.
- The total value of your foreign assets exceeded $10,000 at any point during the year to be reported.
Provided these filing requirements apply to you, you must file FinCEN Form 114 by June 30.
The purpose of Form 8938 is to report foreign financial assets, which makes it similar to FBAR. However, filing Form 8938 does not relieve you of your FBAR filing responsibilities, nor does it act as a substitute for filing an FBAR. Form 8938 should be enclosed with your US income tax return.
What if I Didn’t File? Penalties for Nondisclosure
It’s important to be aware that there are serious penalties for failure to disclose foreign assets or comply with other applicable reporting requirements. If you fail to file an FBAR when required to do so, you could be subject to both civil and criminal penalties.
Civil penalties for failure to file and FBAR depend on factors like the precise date of the violation, and whether the violation is deemed willful by the IRS. The IRS defines willfulness as “an intentional wrongdoing with the specific purpose of evading a tax believed by the taxpayer to be owing.” Potential civil consequences of FBAR nondisclosure include:
- Willful violation, before October 23, 2004 — A penalty which equals or even exceeds the balance of the account involved in the violation, up to $100,000, or $25,000, whichever penalty is larger.
- Willful violation, after October 22, 2004 — A penalty of either 50% of the account balance, or $100,000, whichever penalty is larger.
- Non-willful (accidental) violations — A penalty of $10,000 per violation. Therefore, if you had eight violations, you could be penalized with a fine of $80,000. Be cautioned that it can be extremely difficult to persuade the IRS that a violation was non-willful, so you should strongly consider working with an experienced CPA who can negotiate effectively with IRS agents.
In accordance with 31 U.S. Code § 5322, the criminal penalties for FBAR nondisclosure include:
- A maximum fine of $250,000.
- Up to five years in prison.
Additionally, failure to file Form 8938 by the final due date, including deadline extensions, can be penalized with a fine of $10,000. The first time you miss the deadline, the IRS will send you a written notice with instructions for how to pay and come back into compliance. If you disregard these instructions and do not pay as required within 90 days of receiving the IRS notice, you can be fined with yet another $10,000 for every 30-day period of nonpayment (up to $50,000).
If you have an RRSP, CPA Ted Kleinman can help you navigate your filing requirements, catch up on unfiled tax returns, reduce or avoid penalties, and take advantage of credits, deferrals, and deductions. To set up a private case evaluation, call US Tax Help at (800) 810-9312 today.