The long arm of the Internal Revenue Service will get you no matter where you live in retirement.
The IRS recently announced that it was offering a streamlined version of its amnesty plan for a variety of people who owe U.S. taxes on money they have in foreign bank accounts or who have failed to file the correct paperwork telling the IRS about the accounts.
For instance, if you retired to the Caribbean or Panama and opened a bank account there, you probably owe U.S. income taxes on it. At the very least, you are required to file a Report of Foreign Bank and Financial Accounts (FBAR) reporting it. People who have brokerage accounts, mutual funds and other types of foreign investment accounts are also required to file an FBAR.
Failure to do so can mean that the IRS will fine you. How much depends on several factors, says attorney Jay Nanavati, counsel at law firm BakerHostetler. "To be criminal, you have to do this willfully. Most people aren't looking at that. But on the civil side, if the government can show that you should have known better, it can take 50 percent of the total value of the foreign accounts per violation, per year. There's no cap. The fines can be much higher than the value of the accounts. If the IRS thinks you just messed up, it will take $10,000 per account per year," Nanavati says.
Ouch. This could be a retirement planning nightmare.
Nanavati says people look at this law and think it couldn't possibly apply to them, but it affects more people than you might imagine. Lots of ordinary working people are tripped up by the accounts they set up in order to send money home to a relative in whatever country their family hails from. If you are a signer on a foreign account that you set up with a family member so it's easier for you to send and for them to access the money you're giving them and you don't file an FBAR, the IRS could seize the account and you could be facing these penalties.
This law also affects Canadian citizens who live in the U.S. -- who maybe retired to Florida -- and who haven't been reporting their Canadian Retirement Plan income. Unless these Canadians file Form 8891, attaching it to a U.S. federal income tax return, the earnings in these plans become subject to U.S. income taxes. "The new streamlined procedure allows a retroactive application for income tax deferral," Nanavati says.
Enforcement is scheduled to ramp up. The Foreign Account Tax Compliance Act, enacted in 2010, takes effect Jan. 1, 2013. It gives the IRS some powerful tools to compel foreign banks to identify and report U.S. account holders.
If you think you might be subject to these new rules, do something about it before the end of the year. Talk to a knowledgeable accountant or an attorney who specializes in tax law. "This is a politically potent issue and the IRS is under a fair amount of pressure to enforce these rules," Nanavati says.