U. S. clients in Canada

WIDESPREAD CONCERN

In recent years, U. S. authorities have become increasingly vigilant about ensuring that American taxpayers are keeping up with their tax obligations. That has caused distress among many Americans living in Canada who, until recently, have been unaware of or have chosen to ignore their U. S. tax obligations.

This past June, the IRS announced an amnesty program, known as the “streamlined filing compliance procedure for non-residents,” designed to help American taxpayers abroad – in particular, those with modest income and less complex financial affairs – file with the U. S. government. The U. S. already has an offshore voluntary disclosure program (OVDP) in place, but that program is better suited to wealthier American citizens who have complex financial affairs or might be at risk for criminal penalties due to their non-compliance.

The new, streamlined procedure allows taxpayers to file the previous three years’ tax returns, as well as their foreign bank and financial accounts reports from the previous six years. Returns of taxpayers who are deemed to be a low compliance risk – in general, those returns that show less than US$1,500 in taxes due in each of the previous three tax years – will attract no penalties and no followup action.

However, the IRS will flag returns that it considers high-risk, and charge the applicable taxes, interest and penalties. (See sidebar story at right.)

On Aug. 31, the IRS released its guidelines for the streamlined procedure, giving cross-border tax experts greater detail regarding its scope. In these guidelines, the IRS has placed certain limitations on those it will consider low-risk. For example, taxpayers who have financial accounts in countries outside of their country of residence might be treated as high-risk and, therefore, subject to interest and penalties.

However, tax experts say, the guidelines are somewhat vague and written in such a way that tax advisors can’t be certain exactly how U. S. authorities will interpret them in practice. In addition, U. S. authorities are asking taxpayers who use the program to provide a great deal of personal financial information, something many taxpayers will not be comfortable doing.

@page_break@ COMING CLEAN

“If this program was meant to encourage the ordinary American in Canada to come on board, I don’t think it will,” says Terry Ritchie, a registered financial planner and partner with Transition Financial Advisors Group Inc., who works in both Calgary and Phoenix. “There are still too many unknowns. What if you do get thrown into the high-risk category? That means you’ll face a full audit.”

American taxpayers looking to come clean do have a few alternatives to the streamlined procedure, depending on the facts of their individual situations.

One is to send in the previous six years’ returns, accompanied with a letter arguing that there was a “reasonable cause” for failure to file. Another option is to use the OVDP, which is more stringent than the amnesty program but better suited to certain taxpayer’s particular situations.

Taxpayers also can choose to make a “quiet disclosure,” which involves sending in the previous several years’ returns without an accompanying letter, in the hope that the returns will go into the system without being flagged by the IRS for further investigation. This option is riskier, and some tax practitioners actively recommend against it, especially as the IRS has stated that it disapproves of this method.

One thing is clear, however. It will be much more difficult for American taxpayers in Canada to remain non-complaint in the future, as they are likely to end up on the U. S. government’s radar screen eventually. Beginning in January 2014, under the U. S. Foreign Account Tax Compliance Act (FATCA), foreign financial services institutions, including Canadian banks and other firms, will begin to provide the names and account numbers of their American citizen clients to U. S. tax authorities. Financial services firms that fail to provide this information will be assessed a 30% withholding tax on the income they earn from their U. S. holdings, such as their bank subsidiaries.

“With FATCA coming, if you do nothing, you’re going to have a problem,” says Anne Kestenbaum an associate partner in the tax services practice of PricewaterhouseCoopers LLP in Toronto. As a general rule, she says, taxpayers who approach the government to make a voluntary disclosure can expect more lenient treatment vs those who are identified as non-compliant by the government first.

“People need to weigh their situation,” she says, “as to how much risk they have and make a decision [on how to proceed].“

“High risk” factors

The U. S. Internal Revenue Service (IRS) recently introduced a streamlined filing procedure that allows overseas American taxpayers to catch up with their U. S. tax obligations without penalties. However, submissions considered “high risk” won’t receive this preferred treatment. Any of the factors below, among others, may cause the IRS to consider the submission “high risk”:

Any of the returns submitted claims a refund.

The taxpayer has material economic activity in the U. S.

The taxpayer has not declared all income in the country of residence.

The taxpayer has a financial interest or authority over a financial account (s) located outside the country of residence.

There is U. S.-source income.

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