Let’s deal with the hard problem: Form TD F 90-22.1. It is a hard problem because of the penalties you might face.

Form TD F 90-22.1 is a form that all U.S. residents and citizens file to report ownership of or control over foreign “financial accounts.” An RRSP is without doubt a financial account that must be disclosed on this form.

Penalties for late filing, non-filing

If you do not file Form TD F 90-22.1, it is possible that you might escape detection and get away with it. But if the IRS finds that you have not filed Form TD F 90-22.1, there are two possible outcomes:

• They might require you to file Form TD F 90-22.1, then send you a letter saying “No penalties for you this time, but don’t make this mistake again.”
• They might require you to File Form TD F 90-22.1 for prior years, and want to impose penalties on you for failing to file Form TD F 90-22.1 on time.

Penalties come in two varieties, depending on whether your failure to file Form TD F 90-22.1 was “willful” or “non-willful.”

• If your failure to file Form TD F 90-22.1 was “willful,” the penalty can be as much as 50% of the balance in each account that was not disclosed, per year.
• If your failure to file Form TD F 90-22.1 was “non-willful,” the penalty imposed can be anything between zero and $10,000 per undisclosed account per year.

There are guidelines in the Internal Revenue Manual that are intended to be followed by the IRS agent handling a case of late-filing or non-filing of Form TD F 90-22.1, and I have attached an excerpt of these provisions in the Appendix. This will give you an understanding of “willful” and “non-willful.”

So what will happen?

While the IRS has talked up a “we’ll be reasonable, trust us” posture (as of the date I am writing this, which is July, 2010), the indications are that they are in fact reflexively harsh and mechanical in imposing penalties in the arena of international tax reporting matters.

Are you at risk for penalties? I can’t say. Certainly you would almost no risk in normal times. But these are not normal times. The IRS upper management in our experience has a desire to impose harsh penalties on everyone.

Assessing your risk of penalties is an area where you need to talk to an experienced professional. Sorry. I can’t give you any specific guidance here since the downside is so large, and the outcome is dependent on your particular facts. Let’s hope that the IRS comes to its bureaucratic senses, and discovers that the Inquisition did not make people true believers, and applying tax penalties like guillotines will not encourage widespread honesty.

I am a firm believer in “clean up your messes and move forward.” Assess your situation with the help of an experienced tax practitioner, make your decision, and take action.

How to prepare the forms

Use the most current version of Form TD F 90-22.1 for all prior years. File for 2004 through 2008. I suggest you wait until July 1, 2010 to file all of the late forms, because on that day the IRS can no longer hit you with penalties for a late-filed 2003 Form TD F 90-22.1.

It goes without saying, of course, that you will be filing the 2009 form on or before June 30, 2010.

Cover letter

The purpose of a cover letter is to position yourself as someone who falls within the “non-willful” failure to file category, and as someone who affirmatively fixed the problem and will be keeping things straight from now on—someone for whom a penalty is not appropriate. You want the person who opens the envelope at the IRS to make a decision to not pursue penalties against you.

There is no guarantee this will work. But give it a shot. In the Appendix is an excerpt from the Internal Revenue Manual that deals with waiver of penalties for reasonable cause. Although it is not directly applicable to this situation, the concepts are close enough to give you guidance about what the IRS will and will not accept to put you in the “non-willful” category.

Send everything to Detroit, and hope for the best. Send me an email to report your results—-anonymously if you like. I’d like to know how things turn out.