IRS offers tax amnesty to Americans in Canada

If you have American clients who are delinquent on their U.S. tax filings, keep reading.

The Internal Revenue Service has plans to help U.S. citizens living overseas, including dual citizens, catch up with their tax filings.

“Today we are announcing a series of common-sense steps to help U.S. citizens abroad get current with their tax obligations and resolve pension issues,” said IRS Commissioner Doug Shulman.

Shulman says the IRS will provide a new option to help some U.S. citizens and others residing abroad who haven’t been filing tax returns. It will give them a chance to catch up with their obligations, provided they owe little or no back taxes. The new procedure will go into effect on Sept. 1, 2012.

“I wasn’t expecting this to happen,” says Andrea Taylor, director of the Investment Industry Association of Canada and a cross-border tax specialist.

“Any relief the IRS can provide from the U.S. tax filing burden for Canadian clients is welcome. But filing U.S. tax returns and FBARs is complicated and expensive, and usually requires the assistance of U.S. tax professionals. So there are still real costs, regardless if there’s relief from penalties.”

Read: U.S. stands firm on tax law changes

She adds the U.S. is one of the only countries that bases taxation on citizenship, rather than residence. And while it’s unlikely the U.S. will change its policy, she suggests the IRS simplify the returns so citizens don’t have to consult experts to help them complete filings.

“Anyone who has to do these filings has to have a social security number or a U.S. tax ID number. For the average person, it’s a difficult undertaking, even if you doesn’t owe any back taxes or penalties. And you’re making these filings every year.”

Taxpayers designated by the IRS as low compliance risks will be able to meet past-due tax requirements without facing penalties or additional enforcement action. These people generally will have simple tax returns and owe $1,500 or less in tax for any of the covered years.

Taxpayers deemed a higher compliance risk may be audited, and that audit could cover more than three tax years.

Yet Taylor’s concerned the IRS doesn’t go into enough detail. “It’s not clear from the statement who is considered low-risk,” Taylor says. “They’ve identified some factors that they’ll apply [only] after the filings have been made.”

To qualify for amnesty, U.S. citizens will have to file three years of back taxes, and FBARs for the past six years. This is down from the previous requirement of six years of back taxes.

Read: Cross-border planning: updated

IRS also will be adopting new procedures to resolve issues related to RRSPs. The U.S.-Canadian tax treaty allows for income deferral, but only if an election is made on a timely basis. The streamlined procedures will be made available to resolve low-compliance risk situations even if this election was not made on in the time allotted.

Read: Tax cheats beware

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.