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September 23, 2011 - Phil Hodgen

Questions I answered for a reporter about RRSPs and OVDI

I got an email from a reporter, asking some questions about the OVDI and RRSPs.  Here is my email back to her.  I will be talking to her on the phone as well.

Phil,

I am working on another OVDI article. This story is about foreign retirement plans, RRSPs in particular. I know that you have written about this topic on your blog, and I am hoping that you might have some insight into how these plans are likely to be treated within the context of the OVDI. Have you had any discussions with agents or the OVDI hotline regarding the treatment of RRSPs? If you are interested in speaking with me, my principal questions are below. I would be happy to give you a call later today. E-mail is okay too, if that is more convenient.

Thank you,

(Name)

1. Have you received inconsistent guidance regarding RRSPs from the OVDI hotline?

No.  We haven’t asked them about RRSPs.

2. What were the reasons that US taxpayers with RRSPs failed to file theForm 8891 to report their accounts?

No one knows.  Not even accountants.

Funny story.  If you look at the way the 8891s were introduced originally, there was a strong push to not even require the paperwork at all.  There were people inside the Service who favored just making RRSPs qualify for treaty protection by default.  Apparently some clever folks at Treasury thought that it was a dumb idea and paperwork should be required.  So this tripwire could have been avoided.  Meanwhile, you have to ask the obvious question — who at the Service is going to process 100,000 or 500,000 Form 8891s?

3. If the IRS were to issue a work-around similar to the one they issued for PFICs, what would you like to see in it?

At the moment in order to clean up a problem with non-filed Form 8891s, the only solutions are to apply for a Private Letter Ruling or to skip any attempts at remedial cleanup.  The Private Letter Ruling process is under Regs. Section 301.9100-3 and applications have been routinely granted for years.  It seems unnecessary to put taxpayers to this expense.

The better way would be to allow taxpayers to simply file amended returns with Form 8891 attached, rather than force them to go to the PLR process and the associated expense.

The best way would be to dispense with the filing requirement for a treaty election entirely.  If a Canadian living in the USA has an RRSP, it automatically qualifies for treaty protection and that Canadian gets taxed when the RRSP makes a distribution.  The same would be true for an American living in Canada.  An IRA would qualify for treaty protection automatically.

The Form 8891 problem is only half of the headache with RRSPs. The other half is the Form TD F 90-22.1 problem.  If you’re doing remedial filings for an RRSP you are declaring the existence of foreign financial accounts for the first time.  There should be an explicit statement by the Service saying “We will not impose FBAR penalties on late-filed FBARs which report RRSPs.”

4. What would be the result if there is no work-around?

If there is no workaround you will continue to see stressed and weeping taxpayers, like the ones who call me, who enter the OVDI program fully expecting to give up 25% of their retirement savings because they were unaware of an obscure piece of paperwork.

5. When would a work-around need to be issued in order to avoid opt-outs by taxpayers with RRSPs? On a related note, do you have any idea or estimate of how many taxpayers in the OVDI have this issue?

When?  How about now?  I know of a couple living in a town of 9,000 population who entered the OVDI purely because of RRSPs.  Not high balances — under $250,000.  And they hired a Very Expensive Washington DC law firm to do it for them.  This is an insane result.  I know of another taxpayer who entered the program purely because of his RRSPs which contain the rollover of his life’s pension contributions to date — under $600,000.  If the IRS decides to penalize him he’s leaving the country, he says.  Are these the tax felons that Mr. Shulman is looking for?

6.  Related.  You didn’t ask, but. . .

You think RRSPs are the problem?  Nope.  The Canadians are better off than everyone else.  The British have ISAs.  The Australians and New Zealanders have superannuation plans.  Almost every country has small retirement accounts similar to our IRAs.

For RRSPs and for all of these plans, you have a scary problem — they are technically “foreign trusts” requiring annual Form 3520 and Form 3520-A filings.  For RRSPs, at least, the Form 3520 and Form 3520-A filing requirements have been replaced by Form 8891.  Not so for every other country.  So anyone coming here from Britain or Australia faces doing late compliance for a foreign trust.  This is an order of magnitude more complicated than dealing with Form 8891.

The IRS should extend the same thinking that they developed in the RRSP situation to similar pension plan arrangements from other countries.

RRSPs Voluntary Disclosure