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.

Friday, October 12, 2012

Update on IRS Amnesty Provisions for U.S. Citizens Living in Canada

On June 27th, I wrote about the proposed Internal Revenue Service ("IRS") amnesty procedures for United States ("U.S.") citizens living in Canada, who have not previously complied with their U.S. income tax filing requirements and are considered "low compliance risk". Today I will provide an update of the amnesty procedures.

To briefly review, in contrast to Canada, the U.S. imposes a requirement to file income tax returns and information returns based on citizenship rather than residency. This requirement has caught many U.S. citizens living abroad (especially Canada) off guard who believed that their U.S. tax filing obligations would cease once they departed. In the past, the penalties associated with catching up on late filings were very severe despite the fact many filers would owe little to no tax; therefore, many individuals were deterred from filing.  
On August 31st, the IRS announced a new streamlined filing program to allow qualifying U.S. citizens living abroad to catch up on outstanding U.S. tax returns and related information returns without penalties being imposed. Under this new program, which came into effect on September 1, 2012, individuals who qualify must:
  1. File tax returns for the 2009, 2010, and 2011 and pay any balances owing plus arrears interest. Each return must show no more than $1,500 of taxes owing.
  2. File Foreign Bank Account Reporting (“FBAR”) forms for the six previous years (a separate disclosure form to be filed if the balance of all the non-U.S. bank and investments accounts is more than $10,000 at any time during the year).
  3. Complete an IRS questionnaire that will be used to assess your “compliance risk”.
In order to qualify for the streamlined filing program, affected U.S. citizens (including dual-citizens) must have been living abroad since January 1, 2009, have not filed U.S. tax returns for 2009, 2010, and 2011 and are considered low-risk based on the completed questionnaire in #3 above. The IRS will look at the following non-exhaustive list of factors to determine if an individual is considered low- or high-risk:
· If any of the filed tax returns claims a refund.
· If there is any significant economic activity in the U.S and/or has U.S.-based income.
· If the taxpayer reported all their income in Canada.
· If the U.S. citizen is under audit or investigation by the IRS.
· If FBAR filing penalties have been previously assessed or if a warning letter was issued.
· If the U.S. citizen has bank accounts or investments outside his/her home country.
· If there are indications of sophisticated tax planning or avoidance.
The compliance risk is an estimate by the IRS of an individual’s risk that there may be additional taxes owing and/or disclosures required that may not have been captured based on the required filings above in #1 and #2.
Individuals identified as high-risk will not be eligible for the streamlined filing procedures. They will likely be subject to a more detailed follow-up from the IRS and may be asked to file returns for earlier years. In this situation, the IRS does have the ability to impose penalties and even pursue criminal prosecution if the high-risk individual’s package is not accepted.
A benefit of this streamlined program is that U.S. citizens in Canada with Canadian RRSP and RRIF accounts will be able to file the appropriate forms to elect to defer the income in the event that these forms were not filed on time in the past. Canadian registered accounts that allow the deferral of income are not treated the same way by the IRS.
For U.S. citizens, it is about time the IRS put in place a well-publicized and documented tax amnesty program, under which U.S. citizens are not treated like Al Capone. The program should be effective for the vast majority of Americans living in Canada, although, the arbitrary nature of the risk assessment will leave some U.S. citizens wanting. The cost of preparing the required U.S. tax returns and FBAR forms will be expensive, but the potential of avoiding thousands of dollars of penalties still makes this streamlined filing program very attractive for U.S. citizens that want to come clean with the IRS.
Bloggers Note: I am posting this blog to update U.S. citizens living in Canada. I am not a U.S. income tax expert and may not be able to answer many questions you may have on the amnesty.  

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.

21 comments:

  1. "File Foreign Bank Account Reporting (“FBAR”) forms for the six previous years..."

    Which years are the six 'previous' years? Ex. is that 2005-2010 + 2011 (if filed 2011 Fbar timely, and applied for an extension until October, or December 2012 to file the 2011 1040 return), or 2006-2011 for those who did not file the 2011 FBAR this year, timely?

    Did the SOL for 2005 FBAR expire in June 2012?

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    Replies
    1. Anon, my understanding is everything counts back from 2011, so would be 2006-2011. However, if you filed 2011, you may be disqualifed under the requirement that you had not filed since 2009.

      I have seen commentators wonder what happens if you filed in 2011 only, will you be disqualified or will the IRS still allow you to file. I dont know, a literal reading is you are disqualifed.

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    2. Thank you very much for your kind response. Just a clarification though. What if one had filed ONLY the 2011 FBAR, (plus a request for extension to file the 2011 return) in order to avoid falling further delinquent - pending the long delay in the IRS releasing the details of the 'streamlined' process.

      So, no actual 'return' had been filed for 2009-2011, only the 2011 FBAR (not a 'return'), and a request for an extension to file the return for 2011 (i.e. not an actual 'return').

      In that case, which years of FBARs are then required? 2011 was already filed, and the SOL for 2005 has already expired. The 'delinquent' ones still open are only 2006-2010 if in addition, the 2011 was filed timely in June 2012.

      Confused.

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    3. Anon, I wish I could answer, but I dont know. You may be ok, since you have not filed a tax return, but an information form. As I stated in blog, I am not a US tax specialist, you should engage one to help you understand your filing requirements even if you do not have them file your returns. At this early juncture, they may not know the answer either, but you should move forward and get some professional assistance.

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    4. Very appreciative of your willingness to let us ask questions. Information is in short supply, and prohibitively expensive - though many of us owe absolutely no actual US tax. Thank you for your reply.

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  2. Avoiding the US draft since the 60sOctober 12, 2012 at 6:12 PM

    Good article, very informative and easy to understand.

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    Replies
    1. Thx Anon,

      Wow you have not filed a tax return since Mickey Mantle retired and Batman first hit the air if you came to Canada in the 60's.

      Delete
  3. Perhaps Canada should pass an FBAR-equivalent, demanding compliance from all US banks, and see what kind of reception that gets in the USA?

    Silliness all!

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    Replies
    1. USA expects tax returns and reports of non-US accounts from 'US persons' who do not live in US. These bank accounts are not foreign to those who live outside the US, but USA does not distinquish these accounts from the hidden CAYMEN accounts of its homelanders.

      Canada does not expect tax returns from its citizens who live in the USA, because Canada practices residence-based taxation. That is what makes this whole FATCA nonsense from the USA totally one-sided. No other country in the world (except the despotic state of Eritrea) taxes non-residents on foreign earned income. USA needs to get on board with the rest of the developed world!

      What USA refers to as IGAs (international government agreements) serves no country other than the USA. There is nothing bi-lateral about these IGAs, no matter how the government, or business (accountants, tax-lawyers, etc) or biased media spin it.

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  4. I have lived in Canada since 1971, and never filed USA tax forms. I am getting an inheritance from my mother in the USA for about $100,000. Is there a problem related to not filing income tax involved with getting this money?

    ReplyDelete
    Replies
    1. Anon, as I note above, I am not a US tax expert. I dont know if the IRS will tie in an inheritance to a non-filer. However, if you are a US citizen and have not filed since 1971, you should talk with a US tax expert to undestand the risks and liability you are incurring in not filing in respect of the inheritance and tax returns and taxes possibly due.

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    2. Hi Anonymous, I am in a similar situation as you are. I was born in USA to Canadian parents, thus dual from birth, but left USA as an infant with my mother. My father still lives in USA and I will be getting an inheritance from my father. Until recently I had no clue I was supposed to be filing US returns and FBARs.

      I have done some research on the issue to try and figure out the best way to handle my non-filing situation, FATCA, and future inheritance. If you are interested in sharing thoughts on this, post here with an email address and I will respond to you.

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    3. Both Anon; Stop being penny wise and pound foolish. Hire a US tax accountant, maybe you could share the costs.

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    4. You have bigger problems than just your inheritance. Have you heard about FATCA (foreign account transaction compliance)? Soon all world banks will be required to identify and report clients who the US considers tax payers to the IRS. You need to do some serious research on all the implications of this. Check out the following website which is full of information, as well as links to other helpful sites: issacbrocksociety.ca. Word of caution: tax advisors and lawyers are predictable in their advice. By all means, hear what they have to say, but do your own research, in order to make a fully informed decision on how to proceed. Try not to let fear rush you into a decision you may regret later. Take your time, and think it through AFTER you have done all the drugery of research which includes checking out the issac brock society. Good luck.

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    5. Anon, check out this link, FATCA may be in trouble
      http://www.americanbanker.com/bankthink/rejoice-fatca-overreaching-us-tax-law-in-trouble-1055877-1.html

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    6. @The Blunt Bean Counter,

      There are a lot of good, honest people working on this. Thanks for posting the link. Just because its the law doesn't make it right.

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    7. @Anon,

      From what I understand, a large sum of money transferred from US to Canada will kick off automatic reports to both IRS and CRA which will include info such as your name, address, and SIN. What will happen with that info I don't know. Certainly you will no longer be completely under the radar at that point, but whether you will be in trouble from IRS or not I cannot guess. Before you do such a transfer, you definitely should talk to a lawyer specializing in international law. The other thing to keep in mind is that a large transfer from US will also alert your bank to your potential 'US person' status which means that they may ask you for proof you are NOT a US citizen, or make you sign a privacy waiver so they can tell IRS all about you, or tell you to close all your accounts. At that point, you may be better off telling the exector to donate your inheritance to the charity of your choice. Sorry, no good news here. It sucks to be born in US.

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  5. @The Blunt Bean Counter,

    I wish it were so straightforward. Unfortunately, its not.
    Thanks for your 2 cents though.

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  6. @The Blunt Bean Counter,

    USA is alone in the world in its antiquated policy of citizen-based taxation. Suggesting that law-abiding Canadian citizens or residents, earning a living in Canada and paying taxes to the Canadian government should have a duty, desire or interest to 'come clean with the IRS' is to condone the unjustness and immorality of citizen-based taxation. Might doesn't make right.

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  7. I can think of quite a few people who are affected by the laws. I don't think that Americans who are living abroad should be subjected to harsh penalties that were in place before. I am glad that the system has been adjusted to make it easier for persons to file.

    We have to bear in mind that many people who are fortunate enough to live and work abroad already have to pay taxes in the country that they work in. It is unfair to ask them to do two sets of paperwork every year, at what is normally a stressful time for everyone.

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