By Howard Epstein, CPA Director

Canada and the United States have signed a tax information sharing agreement, months ahead of implementation of a new U.S. law to help the IRS crack down on offshore tax avoidance.

The so called intergovernmental agreement (IGA) was made in an effort to address Canadian government concerns about the reach of Washington’s Foreign Account Tax Compliance Act (FATCA) that will go into effect in July 2014.

FATCA would have forced Canadian banks to provide the IRS information on accounts held mainly by U.S. citizens and residents with accounts in excess of $50,000.  Additionally, it would have automatically imposed a 30% U.S. withholding tax on non-compliant foreign businesses.  To date Washington has signed 21 other agreements with other individual countries, including Hungary this month and Italy and Mauritius in December.

Under the terms of the IGA, Canadian tax authorities will be allowed to collect information from the country’s banks and share it with the IRS under an existing bilateral tax treaty.  Government officials indicated that the IGA narrows the scope of information required to be collected from account holders in Canada.  Some smaller financial institutions will be exempt as well as certain registered savings vehicles such as Canadian Registered Retirement Savings Plans.

Recent estimates show that about 1 million U.S. citizens reside in Canada and many may be affected by the new agreement.  Canadian banks will start collecting information in July of this year and the Canada Revenue Service will begin reporting to the IRS in 2015.

FATCA provisions were originally scheduled to take effect on Jan. 1, 2013. In 2011, the start-date was postponed to Jan. 1, 2014 and then in the middle of last year the start date was pushed back again to July 1, 2014.  In the meantime, the U.S. Treasury and IRS are rushing to finish FATCA rules and associated forms that financial institutions need to avoid the law’s tax penalty.

With the implementation of FATCA and the government entering into these IGA’s, the IRS continues to tighten the net they are casting on US citizens residing in US and abroad that have ignored their Foreign Bank Account Report (FBAR) filling requirements. The penalties for willfully choosing to not file the Form 114 by June 30th each year can be devastating, but there are programs in place for taxpayers to come forward voluntarily and remediate or eliminate potential penalties.

If you are someone who has not been compliant with their FBAR filings you should contact a tax professional as soon as possible to discuss your options.