A look at U.S. tax exposure

Legal Obligations

Americans in Canada started to learn about their tax obligations in August 2011, prior to the ending of the second voluntary disclosure program. Greater awareness led to pressure on finance minister Jim Flaherty.

As a result of Flaherty’s efforts, the U.S. Ambassador to Canada, David Jacobson, tried to assure Canadians the IRS was only looking for Americans who were purposely evading taxes.

In December 2011, the IRS released a fact sheet called “Information for U.S. Citizens or Dual Citizens Residing Outside the U.S.” (FS-2011-13) to clarify the filing requirements of U.S. citizens in Canada.

It made clear that dual citizens are required to file U.S. federal income tax returns and FBARs. The announcement also stated if a dual citizen files returns, and owes no tax because of the foreign-earned income exclusion or foreign tax credits, he or she will not be subject to failure-to-file or -pay penalties. The fact sheet further states taxpayers should state why their tax returns and FBARs are being filed late.

Unfortunately, this was only clarification of what we already knew and what we have been advising for years. A majority of Americans in Canada, after the application of the U.S. foreign-earned income exclusion and foreign tax credits, generally pay no additional U.S. income tax. However, it’s the additional level of tax compliance and reporting on foreign assets and accounts that can cause problems.

Voluntary Disclosure

On January 9, 2012 the IRS announced it had reopened the Offshore Voluntary Disclosure Program (OVDP). The program is similar to the previous ones, but with a few key differences.

First, it will be open indefinitely. Second, the overall penalty structure will be similar to the 2011 OVDI program, with the penalty being increased from 25% to 27.5%. The 5% penalty that can be applied in limited situations is still available under the new program.

So what’s a non-compliant American to do? Unfortunately, every situation needs to be looked at separately. And you will likely get differing opinions from a variety of practitioners. At minimum, given the impact of FATCA kicking in in 2014 and the new U.S. tax filing requirements for the 2011 tax year it’s vital to become compliant with the IRS.

Life for Americans in Canada will continue to get more complicated as these laws develop. Mercifully, the CRA and the Canadian government have publicly acknowledged they won’t be party to the enforcement or collection of tax or penalties brought about through the failure to file FBARs.

That said, the U.S. Senate has unanimously approved a provision to a highway transportation bill that would revoke the passports of people with seriously delinquent tax debts.

This addition would allow the State Department to deny, revoke or limit a passport for any individual whom the IRS has certified as having tax debt in excess of $50,000.

Guess the War of 2012 is just beginning.

This article was originally published on capitalmagazine.ca.