Your clients with ties to the U.S. may now be able to catch up with their U.S. tax filing obligations without incurring the risk of being assessed harsh penalties that can be associated with coming clean to the U.S. government.
The U.S. Internal Revenue Service announced Tuesday an amnesty program that will allow Americans living abroad, including the estimated 1-million U.S. taxpayers living in Canada, to finally come in from the cold.
The new procedure, which is scheduled to come into effect Sept. 1, is aimed at U.S. taxpayers who live abroad and who have not been filing their U.S. federal income tax returns or their foreign bank and financial accounts forms (FBARs). Unlike Canada and most other countries, the U.S. taxes its citizens, as well as green-card holders, regardless of where they reside.
“It’s a big surprise,” says Terry Ritchie, a registered financial planner and partner with Transition Financial Advisors Inc. in Phoenix, of the new amnesty program. “No one saw it coming.”
Ritchie, who advises clients on cross-border issues, says that the amnesty program will give most Americans in Canada who have not been compliant with their U.S. tax filing obligations, but who wish to get right with the U.S. taxman, some level of clarity regarding the process and potential consequences.
Taxpayers who choose to make use of the amnesty program will have to file tax returns for the last three years, and all FBARs for the past six years. The IRS will review all submissions, but those of taxpayers who present “low compliance risk” will be expedited and attract no penalties or follow-up action.
The IRS says that, in general, simple returns that show less than US$1,500 tax due in each of the tax returns submitted will be regarded as low risk. However, returns that present higher compliance risk will not be eligible for the procedure. These taxpayers may be assessed tax, interest, and penalties as would normally be incurred.
“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,” stated the IRS in a description of the new procedure. “Additional risk factors include any additional history of non-compliance with United States tax law and the amount of United States source income.”
The IRS says it will determine the level of compliance risk based on information provided in the returns, and any additional information it will require as part of the submission.
The IRS also announced relief for its citizens who hold certain foreign retirement accounts, such as RRSPs, but who have not made the appropriate election that will allow the income in the plans to be considered deferred under U.S. tax law. The new procedure will provide relief in low compliance risk situations even if the appropriate election was not made on a timely basis. The U.S. has tax treaties with certain countries, including Canada, that allow for income deferral under U.S. tax law, but only if the proper election is made.