New, official, easy fix to unreported RRSP situations


Posted by:
Phil Hodgen

Written on:
August 21, 2013

Posted in:
RRSPs

Up to now the way to fix an unreported RRSP problem was by incurring brain damage, spending lots of money, or suffering through terminal uncertainty and fear. Or all of the above.

Your Old Choices

I kid, I kid. Your choices were:

  • ignore the past, and start fresh with reporting your RRSP on your current year tax return and cross your fingers for luck (meaning uncertainty and fear that the IRS would come after you for sins of the past);
  • ask for and receive a private letter ruling allowing you to fix the problem for the prior 6 years (meaning you spent a metric tonne of money, and continued to live in uncertainty and fear of penalties for FBAR violations), or
  • did some creative stuff that we advised many of our clients to do in order to take a position that the past was in fact fully handled (but you still had FBAR violation fears).

All of this was required because the IRS would not let you file an amended tax return, attach Form 8891 to report your RRSP, and be done with it.

A Change for the Better

Guess what. Things have changed for the better. I’m serious.

We confirmed today in a phone call with Chief Counsel’s office that amended tax returns will be allowed with Form 8891 attached. You can fix your “Oops I never knew I was supposed to report my RRSP to the IRS” problems easily and simply.

Here is what to do:

  • Prepare Form 1040X for the year you want to fix. All of the numbers (income, deductions, tax liabilities) remain the same.
  • In the “essay answer” part of page 2 you explain you are filing Form 1040X to add Form 8891 to report your RRSP.
  • Attach a correctly filled-in Form 8891, one per RRSP.
  • Mail everything to the IRS–look on the Form 1040X instructions on where to send everything.

Bingo you’re done.

Fear, Uncertainty, and Doubt Remain

Except you still have an FBAR problem. (For those of you who don’t live and die by tax jargon, that means Form TD F 90-22.1). If you didn’t file Form 8891 to report the existence of your RRSP, you probably didn’t list the RRSP on your FBAR forms, if you filed them.

An RRSP is a foreign financial account that should be reported on an FBAR. If you didn’t file an FBAR, you should have. If you filed an FBAR and didn’t report the RRSP, you should have.

You still face potential penalties for this FBAR violation. The Form 1040X fix you just did? It does not eliminate this risk.

I think it is a low probability risk for most people. Let’s say you filed a late FBAR form, and the only thing you put on it was your RRSP. If the IRS sent you a penalty letter for the late reporting, I am highly confident that a diplomatic shitstorm would erupt. And the effluent would be firehosed the direction of 1111 Constitution Avenue NW, Washington DC.

As a practical matter I think the IRS should be unwilling to open the can of whoop-ass that is an assertion of penalties on RRSPs. “USA seizes retirement savings from Canadian retirees.” Imagine that headline in Canadian newspapers.

TL;DR — RRSPs

Fix your unreported RRSP problems with amended tax returns. It’s so simple you don’t even need to hire someone to do it. Thank God for sanity; I’m guessing it arose due to the efforts of someone in Branch 1 (International) of Chief Counsel’s office. Call 202-622-3880 if you want to talk to them and verify this information.

TL;DR — FBARS for Late RRSP Reporting

This is not legal advice to you at all and you’d be a damned fool to listen to me, but for small RRSPs you’re likely safe if you file Form TD F 90-22.1 late. Go hire a lawyer and get specific advice and assess your penalty risk before you do this.

 

 

Comments

Wonderer says:

How many years would you need to go back? From the original year that the RRSP was set up? 6 years? 3 years?

Phil Hodgen says:

I am running around and answering this on my phone, so I would want to check first. But my gut instinct would be to cover the open years only — typically three years.

This doesn’t solve the FBAR problem. Or the Form 8938 problem starting with 2011. For the FBAR requirements it is a six year window, if you haven’t filed and reported your RRSP before.

Get your tax situation reviewed by someone who can give you a definitive answer. :-)

wonderer says:

My RRSP is such a laughably small amount that the 8938 does not apply, and I have submitted the FBAR for all years. I never knew of the 8891, never knew that such a form existed!!!

This is great news for RRSP’s. I can’t find any IRS guidance on RPP’s except for Rev Proc 2002-23 making the election to defer? What’s suggested for late elections? Are forms 3520, 3520-A, 8938 and TD F 90-22.1 required for RPP’s? Any guidance, citations are greatly appreciated.

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