“the new procedures should provide some relief.”
On June 26, 2012, the IRS announced new “catch up” filing compliance procedures for non-resident U.S. taxpayers. The release of these procedures appears to be in response to various requests for the IRS to provide amnesty to “innocent” non-filers. While there is no complete amnesty, the new procedures should provide some relief to “low risk” filers.
Under the new rules, effective as of September 1, 2012, qualifying taxpayers will be required to file 3 years worth of income tax returns (as opposed to 6 years under the reasonable cause approach and 8 years under the OVDI –see TAX TIP 12-02. They still, however, must file 6 years worth of FBARs, Form TD F 90-22.1. The delay in the starting date of the program seems to be in order to allow the IRS to develop policies relating to the new program.
To be accepted under these new procedures, the submitted return must be considered “low risk”. A return will be low risk if it is a simple return with little or no U.S. tax due (less than U.S. $1,500 per year). The risk level of the return will increase as the income and the 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. Identified risk factors include a history of noncompliance with United States tax law and the amount and type of United States source income. These identified risk factors would seem to support the argument that if all the income is Canadian source, then there would be no U.S. tax owing and no risk to the U.S. treasury.
If the IRS determines the filing to be of low risk, assessing will be expedited and the IRS will not asses penalties or pursue follow-up actions. It is not clear as to whether it is only the FBAR penalties that will be relieved or whether the normal late filing tax return penalties will also be waived.
Taxpayers who wish to use the new procedure will be required to submit:
- delinquent tax returns, with appropriate information returns for the past three years
- delinquent FBARs for the past six years, and
- any additional information regarding compliance risk factors based on future IRS guidance.
Payment of any federal tax and interest must accompany the submission.
Taxpayer asserting reasonable cause as a defense against penalties will be required to submit a dated statement, signed under penalties of perjury, explaining why there was reasonable cause for failure to file in previous years.
The new procedures will also allow a late filed election with respect to the treaty deferral of income earned in a Canadian RRSP or RRIF. Technically an election to defer income must be timely filed. Absent this concession, taxpayers would need to apply for a private letter ruling to back date the election.
We are not clear as to whether the new program will allow a taxpayer to file more than 3 years of returns.
Taxpayers who are considering surrendering their US citizenship must certify, under penalties of perjury, that they have been compliant for at least the last 5 years. As such these taxpayers may want to follow the current IRS policy of filing returns for the last six years with a reasonable cause submission.
These procedures will not protect taxpayers who face the risk of criminal prosecution (non-innocent filer). Such taxpayers should consult their legal advisors and may wish to file under the Offshore Voluntary Disclosure Program (OVDP) as discussed in TAX TIP 11-05.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.
The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.