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.

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.