Now I know why people fear the taxman here

I posted a short while ago about what worked for me and what I wish I knew in advance when it came to taxes/finances and moving to the U.S. I mentioned noticing from my own searches that the penalties for not knowing that you have to file an FBAR are nothing short of draconian.  I’d heard that penalties were as high as 50% of the account value. While I can understand these incredibly punitive measures for active tax evaders that moved money out of the U.S. to cheat on their taxes, taking half of an account because someone didn’t know they had to file a form seems downright ridiculous. The only reason I discovered this requirement is because co-workers were complaining about it on the internal list for Canadians.  If I worked at a different company, or hadn’t subscribed to the Canadians mailing list, I might not have discovered this at all until the tax man came knocking.

I still believed that the stories I read online must have been worst case scenarios that represented the exception, rather than the rule.  Then I read about the 2011 OVDI – Offshore Voluntary Disclosure Initiative, a program to allow people to voluntarily disclose foreign assets that they hadn’t previously declared.  I’ll scale the numbers for effect, but let’s say you left Canada in 2003, and left $10,000 in a bank account there that earned $500 in interest each year through the end of 2010.  In 2011, you learn about your mistake and voluntarily disclose the account to the IRS. How much do you think you’d pay? How much do you think you’d pay if the IRS discovered this and you didn’t voluntarily disclose the information?

If you voluntarily disclosed the error, you’d pay $5,180 – over half the original balance in the account.  If you did *not* voluntarily disclose the error, you’d pay $45,430 in penalties.  On a $10,000 account! That’s because the FBAR penalty of 50% of the account value applies for every year that you failed to file an FBAR!  So if you lapse by two years, they take everything; if you lapse by four years, they take twice what you had overseas.  The IRS uses large numbers in it’s examples – $1,000,000 in a foreign account, resulting in a $4,543,000 penalty – which makes it pretty clear that they’re thinking about rich people evading taxes – but the law itself applies to every immigrant that left $10,000 or more in their country of origin.

Next year, when mailing my FBAR forms (I do still have an RRSP in Canada), I think I’ll send duplicates and ask for signature confirmations :).