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Monday, July 30, 2012

Americans in Canada: An Amnesty with Broad Appeal

Americans in Canada: An Amnesty with Broad Appeal

On June 26, 2012, the IRS announced new filing compliance (NFC) procedures for non-resident US taxpayers (IR-2012-65). Starting on September 1, 2012, there will be a new program for US persons who are non-compliant with US law but do not owe substantial US tax. This will greatly benefit the many US persons (US citizens, green-card holders, and resident aliens) living in Canada who are not up to date in the filing of their US tax returns and foreign bank and financial account report (FBAR) information forms (see "Americans in Canada: The End of the Amnesty," Canadian Tax Focus, November 2011). The rules seem to be close to what tax practitioners have been seeking for some time.
To qualify under the NFC procedures, the taxpayer must present a low compliance risk. Generally, this means that the taxpayer's returns are simple, with less than $1,500 of US tax due for each of the three most recent years. Indicia that may move taxpayers out of the low-compliance-risk category are higher levels of income and assets, use of sophisticated tax planning, material activity in the United States, a history of US tax non-compliance (other than what is being reported in the present application), and the amount and character of US-source income. Higher-risk submissions made under the NFC procedures may be subject to greater scrutiny and additional filing requirements. Specific details and further clarifications are expected to be released prior to the procedures' September 1 effective date. In some situations, taxpayers may be required to submit a statement signed on penalty of perjury explaining why there was reasonable cause for previous failures to file in order to eliminate or reduce penalties.
Individuals intending to use the NFC procedures will be required to file tax and related information returns for the past three years, FBARs for the past six years, and information regarding compliance-risk factors. The IRS has released a statement ("New Filing Compliance Procedures for Non-Resident US Taxpayers") indicating that for "taxpayers presenting [a] low compliance risk, the review will be expedited and the IRS will not assert penalties or pursue follow-up actions."
Individuals who choose not to use the NFC procedures have several additional options, including "quiet disclosures," "noisy disclosures," and participation in the 2012 offshore voluntary disclosure program (OVDP). Choosing none of these (that is, doing nothing at all) is increasingly risky as US enforcement efforts increase and technology improves (see the Canadian Tax Focus article cited above). A quiet disclosure--addressing current-year filing obligations and liabilities without addressing past non-compliance--is not much better: "Those taxpayers making 'quiet disclosures' should be aware of the risk of being examined and potentially criminally prosecuted for all applicable years" (question 15, 2012 OVDP FAQs). Noisy disclosures--which generally consist of the submission of six years of returns and a request for abatement of penalties on the basis of reasonable cause--will likely be used only by taxpayers who are not far outside the simple, low-risk threshold of the NFC procedures.
An option for those in riskier situations is the 2012 OVDP. This program, which was announced on January 9, has no predetermined duration, and may be cancelled or modified at any time. It offers more program structure, waiver of criminal prosecution, and predetermined penalties. To participate in the 2012 OVDP program, taxpayers (which can include business entities) must
  • file eight years of US income tax returns, FBAR forms, and other information returns;
  • pay any tax due, a 20 percent understatement penalty, penalties for failure to file and failure to pay, and interest; and
  • pay an offshore penalty of 27.5 percent imposed on the highest FMV of the taxpayer's foreign assets and the highest balances in all foreign financial accounts. However, US citizens residing in Canada (or other foreign countries) for each of the years covered by the 2012 OVDP may qualify for a reduced offshore penalty of 5 percent, which will be imposed only on the taxpayer's foreign financial accounts.
Both the NFC procedures and the 2012 OVDP allow taxpayers with RRSP and RRIF accounts to file forms 8891 on a late basis so as to make an election under article VIII(7)of the Canada-US tax treaty. The election will not only defer US income taxation of the investment income earned by the RRSP and RRIF accounts, but it will also exclude the balances in those accounts from the base on which the offshore penalty is computed. Thus, the advantages of the election are that it makes it more likely that a taxpayer who uses the NFC procedures will have less than $1,500 of US tax due, and it reduces the amount of the offshore penalty for a taxpayer participating in the 2012 OVDP. In order to make the election, a taxpayer must submit a statement requesting an extension of time to make the election, along with forms 8891 for each of the tax years and type of plan covered and a statement dated and signed by the taxpayer, on penalty of perjury, which describes
  • the events that resulted in the failure to make the election;
  • the events that resulted in the discovery of that failure; and
  • whether the taxpayer relied on a professional adviser and, if so, the nature of the professional adviser's engagement and responsibilities.
The relief provided for RRSP and RRIF accounts may also be available for other pension and retirement plan accounts.
Joseph Devaney
Video Tax News, Edmonton
Robert E. Ward
Robert E. Ward & Associates PC
Vancouver and Bethesda, MD

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