My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Wednesday, June 27, 2012

IRS Sets Forth Amnesty Procedures for U.S. Citizens Living in Canada

Over the last year or so, I have written blog posts on the requirements of U.S. citizens to file both Canadian and U.S. income tax returns and the outrageous penalties that could be assessed for not filing Internal Revenue Service ("IRS") information forms. In addition, I posted on the possibility of a true amnesty for Americans living in Canada after Finance Minister Jim Flaherty jumped into the dual tax filing fray.

Well, that amnesty may now be close at hand. On Tuesday, IRS Commissioner Doug Shulman announced a plan to help U.S. citizens residing overseas, including dual citizens, catch up with tax filing obligations and provide assistance for people with foreign retirement plan issues. As he said in the press release "Today we are announcing a series of common-sense steps to help U.S. citizens abroad get current with their tax obligations and resolve pension issues,".

While some of the details are still forthcoming, the IRS set forth a new procedure in which taxpayers who are considered a "low compliance risk" will be required to file three years of income tax returns and six years of Foreign Information Returns. All submissions will be reviewed and for those low risk taxpayers, the review will be expedited and the IRS will not assess penalties or pursue follow-up actions, although any tax owing must be paid.

Higher compliance risk returns are not eligible for the procedure and will be subject to a more thorough review and possible full examination. In these cases, tax, interest and penalties may be imposed.

The press release says this about compliance risk determination:

“The IRS will determine the level of compliance risk presented by the submission based on certain information provided on the returns filed, and based on certain additional information that will be required as part of the submission. Low risk will be predicated on simple returns with little or no U.S. tax due. Absent high risk factors, if the submitted returns and application show less than $1,500 in tax due in each of the years, they will be treated as low risk. In general, the risk level will rise as the income and assets of the taxpayer rise, if there are indications of sophisticated tax planning or avoidance, or if there is material economic activity in the United States. Additional risk factors include any additional history of noncompliance with United States tax law and the amount and type of United States source income. Additional information regarding the specific factors the IRS will use to assess the level of compliance risk, and how information regarding those factors should be presented in the submission, will be released prior to the effective date of the new procedure.”

The above procedure will also provide for retroactive relief for failure to timely elect income deferral on certain retirement and savings plans (Canadians who have RRSP’s are required to elect to defer the yearly RRSP earnings) where deferral is permitted by relevant treaty will be available through this process. The proper deferral elections with respect to such arrangements must be made with the submission.

Although the concept of “compliance risk” seems to leave the IRS with significant discretion, the new procedure should allow the majority of U.S. citizens living in Canada to comply with U.S. income tax regulations without a significant financial cost. For those with a high compliance risk, the press release does not appear to provide much relief or if it does, you are rolling the dice with the IRS and are at their mercy.

Finally, there is no discussion about whether Canadians who complied with the earlier amnesty programs and paid interest and penalties, can apply to have those funds refunded.

Bloggers Note: As I have no knowledge of how this amnesty will work other than what the IRS press release and procedure states, I will not answer any questions in relation to this blog.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.