Self-prepared returns

Often taxpayers, weather Canadian or U.S. tax filers are self-preparing their own returns with tax preparation software packages purchased in the market place. Problems arise numerous times in that the taxpayer not being aware of tax law, has omitted to file various required annual foreign information returns. This is likely due to the fact the software is not a professional version and/or the taxpayer-preparer is not reading any of the software return’s diagnostics.

From the U.S. perspective, foreign financial accounts requiring the FBARs (FINCEN114) or IRS Form 8938 are often overlooked. Other IRS forms such as 5471,8865,3520-A/3520 and 8621 for interests in non-U.S. corporations, partnerships, trusts, and passive foreign investment companies are the most critical as they generally carry a minimum $US10K penalty and the statute of limitation for the taxation year is not closed until the information returns are filed.

Canadian foreign reporting forms have specific due dates with no filing extensions as are available in the United States. CRA Forms T1135, T1134, T1141 and T1142 are the current Canadian foreign reporting forms that are often missed and carry penalties for not filing. In some cases, our statute of limitations is extended.

If there is omitted income, say derived from undisclosed foreign investment accounts, additional  penalties and interest would arise. I have seen this occur where one who is resident in one country believes that income received form the other country is not subject to tax  in the resident country.

If you are delinquent on these filings, there are programs in the United States and Canada that allow you to remedy the delinquent filings to avoid the related  penalties . In the United States, the streamlined domestic or  foreign offshore program or the limited procedure for omitted international reporting forms are available. The OVDP is also available but is more onerous and is generally reserved for high risk files. In Canada, the voluntary disclosure program is available to file delinquent returns or correct filings including omitted forms that carry a penalty, that are more than one year past due.