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CASESTUDY
by DEAN DiSPALATRO,
senior editor of Advisor Group
ONTARIO- BASED DOCTOR IN TROUBLE WITH IRS
CLIENT PROFILE
Svetlana Klepakhov*, 51, is a family physician with her own practice,
living in London, Ont. She moved from the U.S. to Canada with her parents when she was 19. She’s married to Matvei; they have no children. Matvei’s an actor, performing mostly in theatre productions. His income rarely tops $70,000 and can be as low as $45,000.
Svetlana’s followed recent media coverage of the IRS crackdown on the non-compliance of Americans living abroad. She files income tax returns every year, but because she’s had her own professional corporation for 20 years, she’s worried she hasn’t been complying with more complex filing requirements. She has an accountant, but turns to a dedicated cross-border shop for a second opinion.
*This is a hypothetical scenario.
The experts
MINDI BANACH
cross-border tax lawyer at Morris Kepes Winters LLP in Toronto.
VERONIKA CHANG cross-border tax lawyer at Morris Kepes Winters LLP in Toronto.
The situation
Issue #1:
IRS Form 5471
The biggest problem is her failure to meet filing requirements for foreign corporations. This isn’t unusual, says Mindi Banach, a cross-border tax lawyer at Morris Kepes Winters LLP. Many U.S. citizens in Canada assume there’s no special filing for their corporations.
From an IRS perspective, Svetlana’s medical practice is a foreign-controlled corporation, and that means annually filing Form 5471, Informa- tion Return of U.S. Persons With Respect to Certain Foreign Corporations (see “Why some- one has to file Form 5471,” page 18). The penalty for not filing gets Svetlana’s attention: $10,000 for each year she should have filed.
When the IRS discovers someone’s non- compliant, it sends a notice. At that point, the taxpayer has 90 days to get the form in; if it’s late, there’s an extra $10,000 penalty for each full or partial 30-day period beyond the 90-day window. The maximum penalty is $50,000 for each failure to file. So, it’s conceivable someone could rack up multiple $50,000 fines for successive failures to file. Failing to file Form 5471 can also result in a reduction of foreign tax credits.
Veronika Chang, also a cross-border tax lawyer at Morris Kepes Winters LLP, notes Svetlana will
16 AE 05 2015
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