Tag: Tax

The Gift of Education Re: Estate Planning

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Many grandparents want to enrich the lives of their grandkids, but are not sure the best way to accomplish this with their estate plan. I encourage clients to consider helping their grandchildren with the future costs of education. The proper planning can help grandkids avoid hefty loans and be tax-efficient for the donor.

A grandparent may currently gift up to $14,000 per grandchild (or to anyone) per year tax free ($28,000 if a married couple gift-splits). Any gift over that amount requires the filing of a gift tax return.

However, if you pay for a grandchild’s education expenses directly to the provider (i.e., educational institution), the gift is excluded from your annual exclusion amount. For purposes of this exclusion, the term “educational institution” covers a broad range of schooling, such as primary, preparatory, vocational or university institutions. This kind of payment is also exempt from the generation-skipping tax (which is too complicated to explain herein, but can significantly reduce a grandparent’s gifting amount). In short, if you pay $40,000 to cover your grandchild’s tuition directly to the school, you can still gift up to $14,000 tax free to him or her in the same year. Some institutions may even allow a donor to pay upfront the applicable years of education at a locked-in tuition rate, so as to avoid rate hikes.

Another option to consider is a 529 college-savings plan. One of the biggest benefits of this plan is that it can continue operation when the grandparent is no longer around to write checks to an institution. A grandparent can gift up to the annual exclusion per year tax free, or make up to five years’ worth of the annual exclusion gift ($70,000 per single donor or $140,000 per couple) in one year to benefit a single individual. However, this has its drawbacks. If you gift the five year maximum amount in one year, any other annual exclusion gifts to that beneficiary for the next five years will incur gift tax consequences. Further, if you die within five years of the date of the gift, a prorated portion of the gift will be included in the estate tax calculation.

Article by:

Terri R. Stallard

Of:

McBrayer, McGinnis, Leslie and Kirkland, PLLC

Business and Economic Incentives Primer

Womble Carlyle

Competition among jurisdictions to recruit and retain companies is intense. To attract business to their communities, both state and local governmental authorities will often offer discretionary economic incentives for projects that generate substantial tax revenues or create significant employment opportunities. Companies requiring new or larger facilities or facing lease expirations for their existing operations should assess whether they might qualify for an “incentives package” from the various jurisdictions they are considering for their projects. The potential benefits will typically vary depending upon the project’s key capital expenditures, job creation potential and the company’s corresponding wage parameters and associated commitments. Companies with potentially qualifying projects should evaluate how to best leverage their unique strengths to negotiate all available incentive benefits and to maximize those benefits once they are secured.

Business and economic incentives are the tax, cash and in-kind benefits offered by state and local governments to induce a company to relocate to a new community or remain in its existing jurisdiction primarily to create or retain jobs and increase tax revenue. Incentives help businesses mitigate upfront capital and ongoing operating costs for its required projects. Tax incentives include a variety of income and sales/use tax credits, exemptions, reductions and abatements. These can also include other tax-related investment incentives, such as investment and tax credits, research and development tax incentives, and accelerated depreciation of industrial equipment. The Enterprise Zone (EZ), a special kind of tax incentive program (also known as Empowerment Zones and Empowerment Communities), has been used by the federal government and even more widely by many states.

Cash incentives include monetary grants, reimbursements of transportation or infrastructure costs and other financial incentives including alternative financing subsidies. One of the most common benefits in this category is the Industrial Development Bond (IDB) that is used by jurisdictions to offer low-interest loans to firms. A variation on the IDB is the Tax Increment Financing (TIF) districts that are used by many states. A TIF allows governments to float bonds to help companies based on their anticipated future tax impact. In-kind incentives include expedited permitting by the state, county and local municipality and customized worker training programs. Some jurisdictions also offer other in-kind benefits such as watered-down environmental regulations and “right to work” laws that inhibit union organizing. Some states also have federal grant monies they are empowered to allocate towards different programs and projects depending on a project’s possible “public” infrastructure needs and other specific criteria.

In offering incentives, cities and counties are typically driven more by investments that increase the tax base while states focus more on jobs that pay above average wages. Some jurisdictions will provide incentives only for manufacturing projects or for specific statutory lists of facilities such as manufacturing, distribution facilities, air cargo hubs, multimodal facilities, headquarters facilities and data centers. Other states will not provide incentives for retail or hospitality facilities. In general, cities and counties have more flexibility than states in the kinds of projects for which they will provide incentives. Some states have wage tests and require that health care insurance and benefits be provided at the employer’s cost or that at least a portion of the cost be subsidized.

Whether for a corporate expansion or relocation, it is critical for a company to initiate its incentive identification and negotiation efforts early in the site-selection process for its project. Specifically, to achieve the greatest negotiating leverage, a company should begin the pursuit of economic incentives at the same time it is are undertaking its site selection efforts, since it is at this point in the process that competition readily exists between the cities, counties and/or states interested in enticing the company to relocate or remain in their jurisdictions. Since the success of this process is, in part, dependent upon “competing” the relevant state and local jurisdictions, it is important for a company to make it clear to all who are acting for the company that no decision or no public announcement may be made about the company’s plans until the company has evaluated all relevant factors.

To begin the process, a company should form a project team that will work with various economic development representatives from the relevant jurisdictions to achieve the optimal incentives package. The project team should develop a formal incentives negotiation strategy that would include some if not all of the following components:

  • Identifying and analyzing all incentive opportunities available for the project.
  • Determining the company’s short and long term capital and operating costs as well as job creation estimates.
  • Preparing a preliminary “incentives” pro forma.
  • Outlining the plan for securing the incentives and evaluating the related commitments that will be necessary from the company.
  • Identifying and integrating important components of the company’s corporate culture into the negotiation requests and strategy.
  • Determining the essential needs of the project to be included as the non-negotiable points of the company’s business case.
  • Defining the “business case” for why a jurisdiction would benefit from the company’s relocation to that state/county, such as tax (income and sales) revenues to be generated and the jobs to be created by the company.
  • Identifying how to formulate the most productive partnership between the company and the community.
  • Determining how to work creatively within the state and local framework.
  • Considering the use of a third party economic impact study to create an effective business case showing the jurisdiction how to fund the incentives.

A company that is well positioned to benefit from business and economic incentives should engage a seasoned professional who has a successful track record in achieving incentive benefits from the jurisdictions relevant to its business. Working in coordination with the governmental authorities, the right advisor can assist the company in establishing timelines for critical dates, administering applications to secure the incentives, and obtaining formal jurisdictional approvals to ensure compliance is implemented and negotiated incentives are realized. The advisor will also participate, as requested, in presentations for internal and governmental board approval and provide ongoing information and updates to the company during key phases of the incentive pursuit process.

After the final incentives package has been negotiated, the company and the jurisdiction will prepare and negotiate the required incentives agreements and then pursue the formal final governmental approvals. Public relations personnel for the company and the governmental authority are typically involved at this stage to prepare supporting media releases and project announcements. Once all necessary approvals are obtained, the company must establish internal documentation and processes to satisfy the compliance requirements to realize the negotiated incentives, which typically takes the form of a compliance manual.

Business and economic incentives can be valuable tools for a company to reduce costs, increase savings and manage risks as they pursue a signature lease transaction, building acquisition or facility development. To achieve the optimal result, the incentives process must be carefully managed from inception to completion, toward the ultimate goal of creating a meaningful partnership between the company and the community in which the company will conduct its business.

This article originally was published in the August 2013 edition of “Focus on WMACCA,” the newsletter of the Washington Metropolitan Area Corporate Counsel Association. 

This article was written with Scott R. Hoffman with Cushman & Wakefield.

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Government Shutdown Now Over – But What About Sequestration?

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The government may be back up and running and funded under a short-term continuing resolution (CR), but the battle is far from over as Congress heads toward new deadlines to address budgetary matters.  There has been some confusion about what the current budget agreement means in terms of sequestration’s annual cuts to discretionary and mandatory programs instituted in 2012.  The law signed by the President to address the short-term continuing resolution and temporarily raise the debt ceiling does not provide federal agencies flexibility to administer new sequestration cuts at this time.  With the government spending levels remaining at FY 2013 levels for the duration of the CR, a new round of sequester cuts are not set to kick in until January 2014.

The law established a short-term budget conference committee, with a set deadline of Dec. 13, 2013 to outline recommended spending levels and program cuts.  Of note is that the committee deadline is set in advance of when the second year of the sequester will begin.  The deadline provides a window of opportunity for the new budget conferees to address how the sequester cuts are applied in FY 2014.   The conferees may contemplate making other adjustments to entitlement programs (Medicare and Medicaid) to address health care spending issues that will be negotiated during their deliberations.  In addition, Medicare payments to physicians are set to be cut by approximately 25 percent if Congress does not address the cut by December 31, 2013 and offset the cut with a payfor that would likely include cuts to other health care entities. Any of these negotiations and decisions, if ultimately accepted by Congress, could impact the size of the Medicare sequester cuts in January FY 2014.

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A Tip For Dealing with Automatic Gratuities in 2014

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A new Internal Revenue Service (“IRS“) rule, set to take effect in January 1, 2014, may eliminate a common practice in the restaurant industry. Often, an automatic gratuity, normally 18%, is added to the bill of large parties. Automatic gratuities were adopted by restaurant employers as a means for ensuring that servers do not get stiffed on expensive bills. Servers heavily rely on tips to supplement a salary that is often times lower than the federal minimum wage.

Traditionally, automatically-added gratuities have been classified as employee tips. As such, it is up to the employees to report the money as income. Starting in January, automatic gratuities will be categorized as “service charges” – making them regular wages and subject to payroll tax withholdings. Employers will have to track and report any automatic tips and will be required to include the “service charge” payments in employees’ W-2 wages. Further, employers will no longer be able to count these tips as a credit to reduce their minimum wage obligation. It is a lose-lose situation because servers will not see their automatic gratuity money until payday; making it more difficult to survive on a small salary.

Many major chains, like Olive Garden and Red Lobster, have eliminated automatic gratuities in response to the approaching deadline. For restaurants that opt to keep the automatic gratuity system, payroll accounting will become much more complicated. Tips from automatic gratuities will have to be factored into hourly pay rates, which means hourly rates could vary based on how many large parties are served in any given hour.

It would be wise for smaller restaurants to follow the chain restaurants’ lead by eliminating automatic gratuities altogether. Doing so will not only to lessen compliance requirements and tax burdens, but will also keep employees happy by ensuring that the tips they earn can immediately be pocketed.

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IRS Guidance on Employment and Income Tax Refunds on Same-Sex Spouse Benefits

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Employers extending benefit coverage to employees’ same-sex spouses and partners should review their payroll procedures to ensure that such coverages are properly taxed for federal income and FICA tax purposes.  Employers also should review the options in Notice 2013-61 and consider filing claims for refunds or adjustments of FICA overpayments.

Employers that provided health and other welfare plan benefits to employees’ same-sex spouses prior to the Supreme Court of the United States’ June 2013 ruling in U.S. v. Windsor may be interested in filing claims for refunds or adjustments of overpayments in federal employment taxes on such benefits.  To reduce some of the administrative complexity of filing such claims, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) recently issued Notice 2013-61, which outlines several optional procedures that employers can use for overpayments in 2013 and prior years.

String of pearls and champagne glass with wedding rings

In Windsor, the Supreme Court ruled Section 3 of the Defense of Marriage Act (DOMA) unconstitutional.  Section 3 of DOMA had provided that, for purposes of all federal laws, the word “marriage” means “only a legal union between one man and one woman as husband and wife,” and the word “spouse” refers “only to a person of the opposite-sex who is a husband or wife.”

Federal Taxation of Same-Sex Spouse Benefits

The Windsor ruling thus extends favorable federal tax treatment of spousal benefit coverage to same-sex spouses.  The IRS issued guidance in July clarifying that this tax treatment would extend to all same-sex couples legally married in any jurisdiction with laws authorizing same-sex marriage, regardless of whether the couple resides in a state where same-sex marriage is recognized.  This IRS approach recognizing same-sex marriages based on the “state of celebration” took effect September 16, 2013.

Prior to the ruling, an employer that provided coverage such as medical, dental or vision to an employee’s same-sex spouse was required to impute the fair market value of the coverage as income to the employee that was subject to federal income tax (unless the same-sex spouse qualified as the employee’s “dependent” as defined by the Internal Revenue Code).  The employer was required to withhold federal payroll taxes from the imputed amount, including federal income and the employee’s Social Security and Medicare (collectively FICA) taxes.  In addition, employers paid their own share of FICA taxes on the imputed amount, as well as unemployment (FUTA).

As a result of the ruling, an employee enrolling a same-sex spouse for benefit coverage under an employer-sponsored health plan no longer has imputed income for federal income tax purposes; may pay for the spouse’s coverage using pre-tax contributions under cafeteria plans; and may take tax-free reimbursements from flexible spending accounts (FSAs), health reimbursement accounts (HRAs) and health savings accounts (HSAs) to pay for the same-sex spouse’s qualifying medical expenses.  This same favorable federal tax treatment does not extend to employer-provided benefits for an unmarried same-sex partner, unless the same-sex partner qualifies as the employee’s dependent.

Overpayments of Employment Taxes in 2013

Employers that overpaid both federal income and FICA tax in 2013 as a result of income imputed to employees for benefit coverage for a same-sex spouse may use the following optional administrative procedures for the year:

  • Employers may use the fourth quarter 2013 Form 941 (Employer’s Quarterly Federal Tax Return) to correct overpayments of employment taxes for the first three quarters of 2013.  This option is available only if employees have been repaid or reimbursed for over-collection of FICA and federal income taxes by December 31, 2013.

Alternatively, employers may follow regular IRS procedures to correct an overpayment in FICA taxes by filing a separate Form 941-X for each quarter in 2013.  Notice 2013-61 provides detailed instructions for each of the alternative options, including how to complete the Form 941, as well as Form 941-X, which requires “WINDSOR” in dark, bold letters across the top margin of page one.

Overpayments of FICA Taxes in Prior Years

Employers that overpaid FICA taxes in prior years as a result of imputed income for same-sex spousal benefit coverage may make a claim or adjustment for all four calendar quarters of a calendar year on one Form 941-X filed for the fourth quarter of such year if the period of limitations on such refunds has not expired and, in the case of adjustments, the period of limitations will not expire within 90 days of filing the adjusted return.  Alternatively, employers may use regular procedures to make such claims or adjustments.  The regular procedures require filing a Form 941-X for each calendar quarter for which a refund claim or adjustment is made.  Note that under the alternative procedure provided by Notice 2013-61 or under the regular procedure, filing of a Form 941-X requires either employee consents, or repayment or reimbursements, as well as amended Form W-2s to reflect the correct amount of taxable wages.

Employee Overpayments of Federal Income Taxes

Employers who provided benefits to employees’ same-sex spouses in 2013 may adjust the amount of reported federally taxable income on each employee’s Form W-2 (Wage and Tax Statement) to exclude any income imputed on the fair market value of the coverage and to permit the employee to pay for the coverage on a pre-tax basis.

Employees who overpaid federal income taxes in prior years as a result of same-sex spouse benefit coverage may claim a refund by filing an amended federal tax return for any open tax year.  Refunds are available for overpayments resulting from income imputed on the fair market value of the coverage and from premiums paid on an after-tax basis for the coverage.  An amended tax return generally may be filed from the later of three years from the date the return was filed or two years from the date the tax was paid.

Employers that file Form 941-X are required to file Form W-2c (Corrected Wage and Tax Statement) to show the correct—in this case reduced—wages.  Employers that do not file Form 941-X may want to begin preparing for employee requests for a Form W-2c for each open tax year in which benefit coverage was offered to employees’ same-sex spouses.

Next Steps

Employers extending benefit coverage to employees’ same-sex spouses and partners should carefully review their payroll processes and procedures to ensure that such coverages are now properly taxed for federal income and FICA tax purposes.  In addition, employers should review the options in Notice 2013-61, and consider filing claims for refunds or adjustments of overpayments of FICA taxes for any prior open tax years and issuing Form W-2c to allow employees to claim refunds of federal income tax.  Most importantly, by acting promptly, employers can correct the 2013 over-withholdings for both FICA and federal income tax and overpayment of the employer portion of FICA tax, without the necessity and burden of filing a Form 941-X.

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Dewonkify – Hastert Rule

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Term: Hastert Rule

Definition: An informal governing principle used by Republican Speakers of the House of Representatives since the 1990s to only allow bills to come up for a vote on the House floor that have support from the “the majority of the majority” of Members of Congress. In practice, if Speaker Boehner follows the Hastert Rule it would mean that he would not bring legislation for a vote unless it would have the support of the majority of the current House majority party, the Republicans.

Used In a Sentence:  “That’s what the Hastert rule is really about, Feehery, now a lobbyist and consultant, told me recently — political survival. It’s just common sense: The speaker is elected by a majority vote of his caucus; if he does things a majority of his caucus doesn’t like, they can vote him out.” From “Even the Aide Who Coined the Hastert Rule Says the Hastert Rule Isn’t Working,” by Molly Ball, The Atlantic, July 21, 2013

History: According to John Feehery, the staffer who coined the phrase, former Speaker Dennis Hastert is often credited with inventing the rule but Newt Gingrich, who preceded him as Speaker, followed it as well.

Why It’s Relevant: Following the Hastert Rule makes it is very difficult to have legislative successes if the majority caucus is divided. Speaker Boehner has invoked the Hastert Rule during the recent fiscal debates leading up to the current government shutdown.  Some suggest that the House of Representatives could pass clean (no added legislative language or provisions) legislation to reopen the government or raise the debt ceiling because most of the Democrats and 20 or so of the Republicans would vote for it, giving it enough votes to pass.  However, bringing that legislation up would violate the Hastert Rule since at this point it would not have the support of the majority of the Republicans (the majority party).

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Immigration Reform Resurfaces Amid Congressional Breakdown Over Funding and Debt Ceiling

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As the country waits for Congress to resolve the government funding and debt ceiling stalemate, immigration reform simmers in the background. This week, a group of Democrats introduced a Comprehensive Immigration Reform bill, H.R. 15, entitled the “Border Security, Economic Opportunity, and Immigration Modernization Act.” This is not the much awaited work product of the secret bi-partisan Gang of 8 (which has now been disbanded), but rather an almost verbatim reproduction of the Senate passed CIR legislation, S. 744. The new House bill does include provisions from the McCaul-Thompson “Border Security Results Act” (H.R. 1417) reported out of the House Homeland Security Committee and passed this summer with bipartisan support. It also removes the Corker-Hoeven border security amendment, which seeks to add approximately 20,000 border patrol agents, more than 700 additional miles of border fencing, a mandatory E-Verify program nationwide, and an entry/exit tracking system for temporary visitors to the United States.

House Republicans on the Judiciary Committee are working through the normal order and are drafting separate bills to address the future of undocumented immigrants in the U.S., as well as new temporary worker provisions for lesser skilled workers. We expect the Judiciary Committee to take up measures on immigration in the next few weeks. We also expect the “Strengthen and Fortify Enforcement (SAFE) Act” (H.R. 2278) and other border security measures to be brought to the House floor this year.

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Update on Government Shutdown's Impact on Trade

Katten Muchin

The ongoing federal government shutdown is impacting a wide variety of import and export trade activities. While the situation remains fluid as each agency executes its contingency plans, below is a summary of the current impact on trade.

Customs and Border Protection (CBP): The majority of CBP employees are exempt from the furlough as being deemed essential to the country’s security. Most of those exemptions are related to the agency’s ongoing revenue collections. Currently, ports are maintaining their normal hours of service. CBP also seems to be accepting and processing protests, although with some delays. However, CBP appears to have stopped processing ruling requests or responding to any court documents due to the shutdown. Among the CBP personnel not exempted from furlough are technicians and program managers. As a result, certain additional CBP activities, such as bonds and licensing and processing FDA refusals, may also be impacted.

Food and Drug Administration (FDA): FDA continues to perform entry review and to address high-risk recalls, civil and criminal investigations, and other critical public health issues. However, FDA has furloughed personnel as well, resulting in entry review delays. The agency is giving priority to perishable entries, defined as merchandise expiring within 30 days, and to any lifesaving medical product. The agency has generally ceased routine establishment inspections, monitoring of imports, notification programs such as those involving food contact substances and import formula, and its laboratory research activities.

International Trade Commission (ITC): ITC has shut down its investigative activities, including antidumping and countervailing injury investigations and reviews, and intellectual property rights infringement investigations and ancillary proceedings. The schedules and deadlines for all investigative and pre-institution activities are being tolled and all hearings and conferences have been postponed. In addition, ITC’s website is down, so information such as the online Harmonized Tariff Schedule is not available.

International Trade Administration (ITA): ITA’s website—including the online steel licensing system—is down. The agency recommends sending an email to steel.license@trade.gov for manual processing of license requests for shipments that do not have a steel license. Enforcement and Compliance (formerly, Import Administration) intends to uniformly toll all administrative deadlines related to the administration of US antidumping and countervailing duty laws for the duration of the shutdown. These include deadlines for preliminary and final determinations in antidumping and countervailing duty investigations and administrative reviews and deadlines for all actions by parties to these proceedings.

Bureau of Industry and Security (BIS): BIS is no longer accepting advisory opinion requests, classification requests (CCATS), encryption reviews, encryption registrations or export license applications. Similarly, BIS will not issue any final determinations. The SNAP-R application on BIS’s website is not available and will not reopen until the shutdown ends. All pending export license applications, commodity classification requests, encryption reviews, encryption registrations and advisory opinion requests will be held without action by BIS until the shutdown ends. Applicants may request emergency processing of export license applications for national security reasons.

Department of Agriculture (USDA): USDA’s website is down. The Animal and Plant Health Inspection Service (APHIS) is operating in the ports, but personnel will not be available for the renewal and authorization of notifications or permits.

Alcohol and Tobacco Tax and Trade Bureau (ATTTB): ATTTB has halted its regulatory functions, noncriminal investigative activities and audit functions. But it will ensure that all tax remittances are processed because these functions have been deemed necessary for safety and protection of property.

As Congress continues to debate the necessary appropriations to fund the government’s operations, the trade community should expect further impact on trade operations.

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Federal Government Shutdown

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For the first time in 17 years, the federal government has officially shutdown.  Late last night, the Administration released a memo to all federal agencies advising them to execute their contingency plans (an agency-by-agency list is available here).

Yesterday the Senate passed a bill that would fund the government through November 15, 2013, but would make no changes to the Affordable Care Act (ACA).  (More information on the Senate vote is available here.)  Last night, by a vote of 228-201, the House passed legislation that would keep the government open through December 15, 2013, but would delay the ACA’s individual mandate requirement and would eliminate health insurance subsidies for Members of Congress, Congressional staff, the President, the Vice President, and political appointees.  By a vote of 54-46 the Senate voted to table, or kill, the legislation.

Following the latest Senate action, the House voted to formally request a conference committee with the Senate.  (Conference committees are joint House-Senate committees that are created to resolve disagreements between the House and Senate versions of a given bill.)  House Speaker Boehner (R-OH) appointed the following members to the conference committee:  House Majority Leader Cantor (R-VA-7), Ways and Means Chairman Camp (R-MI-4), House Budget Committee Chairman Ryan (R-WI-1), House Appropriations Chairman Rogers (R-KY-5), Representative Frelinghuysen (R-NJ-11), Representative Crenshaw (R-FL-4), Representative Carter (R-TX-31), and Representative Graves (R-GA-14).  House Democrats have not appointed conferees.  The Senate voted to table the request for conferees.

While the House and Senate cannot seem to agree on terms to fund the entire government, both chambers have passed H.R. 3210, legislation that would provide payment through the government shutdown for members of the Armed Forces (including reserve personnel) and civilian Department of Defense (DoD) employees and contractors whom the DoD Secretary determines are providing support to members of the Armed Forces.  The legislation passed the House by a unanimous vote, the Senate passed the bill by a voice vote, and was signed into law by President Obama last night.

At this point, both the House and the Senate appear at a stalemate.  Until Members of Congress can reach some agreement, the government shutdown will remain in place.  We will continue to update this blog as events unfold.

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US Taxpayers with Canadian Registered Retirement Savings Accounts (RRSPs)? File now to avoid penalties!

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This blog post focuses on the rules around US citizens or tax residents who have Canadian Registered Retirement Savings Accounts (RRSPs). RRSPs are a government sanctioned savings program in which contributions are deducted from taxable income, and any investment growth is deferred from taxation until the owner of the account makes withdrawals. This is a fantastic program for Canadian residents, as it provides significant tax savings in the short term, while allowing pre-tax retirement accounts to grow for use in a later year when income (and thus marginal tax rates) are expected to be lower.

However, there is a complication for US citizens resident in Canada, who are subject to both Canadian and US tax rules. Many assume that because the growth in an RRSP account is sheltered from tax in Canada, it need not be reported and taxed in a US tax return either. Unfortunately, this is not necessarily the case. In fact, the default treatment of RRSP accounts under US tax law is no different than a non-registered investment account – interest, dividends or gains on invested funds are reportable in the Form 1040 tax return, with no deduction for contributions in a given year.

However, there is relief available under Article XVIII(7) of the Canada-US Tax Treaty. Since 2002, US income tax residents have been able to make an election to defer US tax on the growth within an RRSP. The election is made by filing Form 8891 with a timely filed income tax return. Of course, the IRS will not permit a deduction for RRSP contributions; even so, Canada’s generally higher income tax rates usually mean that no US income tax is payable on the difference in taxable income, after foreign tax credits are applied. And, it is important to recall that RRSP accounts must be disclosed on FBAR returns annually.

This Treaty election is certainly helpful, but what should be done for those just hearing about their US tax obligations? The difficulty is that Form 8891 must be filed with a Form 1040 income tax return, so coming into compliance after the fact will not necessarily be effective. However, a trio of recent Private Letter Rulings (PLRs) from the IRS does provide some comfort regarding the IRS’ view on this issue.

As background, PLRs are written memoranda released by the IRS in response to specific enquiries by taxpayers regarding their tax situations (all personal information is redacted prior to public release on the IRS website). While these rulings are completely fact-specific, and cannot be used as legal precedents in any future cases, the IRS reasoning and interpretation of the rules can be instructive.

On September 12, 2013, three PLRs were released in which the IRS granted an extension to taxpayers in order to file appropriate Form 8891 Treaty Elections without penalty or interest accruing. In each case, the taxpayer was seeking discretionary relief from the IRS to permit late filings of Form 8891 in respect of their RRSP accounts in Canada. In each case, the extension was granted.

While each case was ostensibly decided on its own facts, a few common elements from all three cases are worth noting. First, in each case the taxpayer was otherwise tax compliant. This may be a relevant factor in terms of how the IRS would view late-filed Form 8891 – if the tax returns were timely filed at first instance, amended returns attaching the Treaty election form may be less likely to attract attention.

More significantly, however, in each case the IRS made a point of noting that the taxpayers promptly took action upon learning about the need to file Form 8891. The taxpayers did not wait until the IRS sent letters or notices of deficiency regarding the RRSP income.

The regulation that permits the IRS to grant extensions (i.e. Treasury Regulation § 301.9100-3(a)) requires that the taxpayer must satisfy the Commissioner that she acted reasonably and in good faith, and that the grant of relief will not prejudice the interests of the US government.

This factor should serve as fair warning to anyone in this position who is still trying to decide how to deal with their US tax compliance issues. While it may be the simplest and cheapest option, leaving your head in the sand is unlikely to earn any sympathy from the IRS if and when your delinquency does come to their attention. Instead, acknowledging an honest mistake and taking action to come into compliance will help to build a set of facts that will permit the IRS to grant some leniency toward your situation.

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