Voluntary Disclosure may not be what you think it is

Voluntary Disclosure can be like voluntary financial suicide.

If you are one of those wondering what you should do about unreported income, make sure you get really good advice before you go blundering off to the Canada Revenue Agency looking for forgiveness for youre sins.

This is a tax problem, requiring a professionally prepared solution.

You need to be prepared to have a full audit, disclose all your banking and financial affairs, and there is no guarantee that you will not face criminal charges.

We have clients who wish they had never done the voluntary disclosure. They now have even bigger tax problems.

A Voluntary Disclosure (VD) is like Venereal Disease (VD)  A prophylactic for the mind that will not save you from the ensuing disaster.

You can easily find yourself in the same trouble as you would be if you had not done the VD.

If you are considering a VD, make sure you get some very good advice beforehand, on how to do it, and what you need to prepare for…VD is not a ‘get out of jail easy card.’

These kind of difficult tax problems, require sophisticated tax solutions.

Below is an excellent article written by Tim Cestnick.

Dan White

Tim Cestnick

Last updated on Friday, Sep. 25, 2009 04:41AM EDT

It appears that the ripple effect has begun. When Swiss bank UBS agreed to disclose the names of 4,450 U.S. taxpayers to the Internal Revenue Service south of the border, you knew it was only a matter of time before the Canada Revenue Agency got in on the action. Turns out that the CRA has had discussions with UBS, and who knows how many other foreign financial institutions, to obtain the names of Canadians with money socked away offshore.

All of which leads to the question of the day: If you’re resident in Canada and haven’t been reporting all of your worldwide income to CRA, what should you do about it? There are a couple of ways to deal with this: The first is by way of an adjustment request, the second is by a voluntary disclosure. Adjustment request An adjustment request is the easier option. It’s a one-page form (form T1-ADJ) on which you tell the CRA which line on your tax return ought to be adjusted, and by how much. You’ll need to file a separate T1-ADJ for each tax year in question, but don’t file a T1-ADJ if you’ve failed to file a tax return for a particular year – you’ll need to file a complete tax return in that case.

The problem with an adjustment request is that you won’t avoid the penalties that can arise if the CRA figures out you’ve knowingly unreported your income. Since the penalties can be up to 50 per cent of the tax evaded, plus interest from the date the taxes were due, you need to count that cost first. By the way, if the dollar amounts are big enough, it’s possible that the CRA could file criminal charges that could mean additional penalties of between 50 and 200 per cent of the tax evaded, and up to five years in prison.

Your best bet is to use an adjustment request only where the tax balance owing is very small and the likelihood of criminal charges is remote. If you’re not feeling lucky, a voluntary disclosure might be better for you. V oluntary disclosure You might be glad to know that the CRA is willing to ignore all penalties and criminal charges where you’ve made a voluntary disclosure (VD). In this case, you’ll still be on the hook for the taxes owing, plus interest. The issue is that a VD involves making a detailed submission to the CRA to allow the taxman to verify all the facts surrounding your unreported income, or false deductions or credits.

You can be sure that a VD will cause the CRA to ask plenty of questions about your financial affairs. You may have to provide details regarding deposits and withdrawals from bank and brokerage accounts, among other things. For this reason, you have one chance to disclose all unreported income when you make a VD. If you fail to disclose everything, you could still face penalties, and possibly prosecution.

If you’re considering a VD, you have to contact the CRA before the CRA contacts you. Once the taxman has started an audit of your affairs, it’s too late; no disclosure will be considered voluntary at that point. In addition, your VD must be in writing, and you’d be wise to have a tax professional prepare the submission to ensure it’s complete. The CRA’s information circular IC00-1R2 (available online at cra.gc.ca) provides more information about voluntary disclosure. U.S. connectionsWhile we’re on the topic of coming clean, you should be aware U.S. citizens living in Canada, or anywhere else for that matter, are required to file tax returns – and potentially other forms – with the IRS each year. Green card holders and anyone resident in the U.S. also have the same filing requirements.

Sept. 23, 2009, was to mark the end of an amnesty period for U.S. taxpayers to come forward and file past tax returns and certain forms without the usual potential for criminal charges. The good news is that the IRS has now extended the amnesty period to Oct. 15, 2009. The IRS has not promised to waive criminal charges, but the likely result is that you’ll pay the taxes, interest and penalties only.

According to Mark Feigenbaum, a U.S. lawyer and chartered accountant practising in Toronto, there are a number of forms that may need filing south of the border, including the U.S. Individual Income Tax Return (Form 1040), Report of Foreign Bank and Financial Accounts (Form TD F 9-22.1 or FBAR) and the Controlled Foreign Corporations form, if you’re a U.S. person who is also a shareholder in a Canadian or non-U.S. corporation (also known as Form 5471), and potentially other forms. Failing to file these forms can result in significant penalties. According to Mr. Feigenbaum, the IRS is generally expecting forms for the past six years in order to get properly caught up.

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