New Streamlined Filing Procedures for US Citizens and Green Card Holders
The US remains one of a handful of countries that taxes its citizens and permanent residents (green card holders) regardless of where in the world they live and work.
US citizens and permanent residents living in Canada remain obligated each year to file their US tax returns and to report interests in foreign bank accounts by way of the Report of Foreign Bank and Financial Account ("FBAR").
In fact, US citizens and permanent residents are subject to essentially identical rules for filing income, estate, and gift tax returns and paying estimated tax whether living in the US or abroad.
Many US taxpayers living in Canada have failed to file their US income tax returns, including FBARs, either because they do not know they are required to file or they know but fail to file knowing they will likely be subject to penalties upon filing.
Rather than file, many taxpayers choose not to, hoping instead that they will continue to evade detection by the Internal Revenue Service ("IRS").
However, it's safe to say those days are over and the IRS will eventually discover those non-compliant US taxpayers living in Canada.
However, not all is lost as there is now an excellent opportunity available for US taxpayers ( the "taxpayers") living in Canada to file their delinquent tax returns without penalty.
The IRS recently announced new Streamlined Filing Procedures ("SFP") for the taxpayers who have failed to file past tax returns including their FBARs.
Beginning September 1, 2012 new streamlined filing procedures are available for the taxpayers who, since January 1, 2009, have resided outside of the US and have failed to file US tax returns including pertinent treaty elections; namely, the deferral of earned interest on RRSP, RIF and LIRA accounts.
The new procedures allow the taxpayers deemed "low risk" to file their delinquent tax returns without the possibility of penalty.
Those interested in filing under this program must first determine whether they are likely deemed "low risk" tax filers.
The taxpayers that present a low compliance risk can file under the new SFP by filing the preceding three (3) tax years as well as six (6) years of FBARs.
All submissions will be reviewed by the IRS to determine the appropriate level of compliance risk.
The taxpayers deemed "low risk" generally are individuals with simple returns resulting in little or no US tax liabilities.
Absent any "high risk" factors, as explained later, should the submission show less than $1,500 in tax due in each of the preceding three (3) tax years, the taxpayers will automatically be treated as "low risk" and will not be assessed any penalties as a result of their late submission.
The taxpayers may be deemed "high risk" and not eligible to file under the SFP if any of the following are present: • If any of the tax returns submitted through the SFP claim a refund; • If there is material economic activity in the US; • If the taxpayers have not declared all income in their country of residence; • If the taxpayers are under audit or investigation by the IRS; • If FBAR penalties have been previously assessed or if the taxpayers have previously received an FBAR warning letter; • If the taxpayers have a financial interest or authority over a financial account(s) located outside their country of residence; • If the taxpayers have a financial interest in an entity or entities located outside their country of residence; • If there is US source income; or • If there are indications of sophisticated tax planning or avoidance.
Therefore, it is paramount for the taxpayers to determine whether they present a high or low risk with respect to the SFP before submitting their missing returns with the IRS.
For the "low risk" taxpayers the review process is likely be expedited as the IRS should not assert penalties or initiate follow-up actions against these taxpayers.
The taxpayers assessed at higher compliance risks will be notified they are not eligible for the SFP and may be subject to a more comprehensive review including the possibility of a full audit and examination beyond the three tax years submitted under the SFP.
It should be noted that the IRS has not indicated for how long the SFP will remain open but could indeed end it soon without announcement.
US citizens and green card holders residing in Canada, otherwise eligible to file under the SFP, should take advantage of this window of opportunity and file their missing returns now.
In closing, it should be remembered that filing delinquent tax returns under this or any IRS initiative is a complex process and should be handled by an experienced and qualified professional.
US citizens and permanent residents living in Canada remain obligated each year to file their US tax returns and to report interests in foreign bank accounts by way of the Report of Foreign Bank and Financial Account ("FBAR").
In fact, US citizens and permanent residents are subject to essentially identical rules for filing income, estate, and gift tax returns and paying estimated tax whether living in the US or abroad.
Many US taxpayers living in Canada have failed to file their US income tax returns, including FBARs, either because they do not know they are required to file or they know but fail to file knowing they will likely be subject to penalties upon filing.
Rather than file, many taxpayers choose not to, hoping instead that they will continue to evade detection by the Internal Revenue Service ("IRS").
However, it's safe to say those days are over and the IRS will eventually discover those non-compliant US taxpayers living in Canada.
However, not all is lost as there is now an excellent opportunity available for US taxpayers ( the "taxpayers") living in Canada to file their delinquent tax returns without penalty.
The IRS recently announced new Streamlined Filing Procedures ("SFP") for the taxpayers who have failed to file past tax returns including their FBARs.
Beginning September 1, 2012 new streamlined filing procedures are available for the taxpayers who, since January 1, 2009, have resided outside of the US and have failed to file US tax returns including pertinent treaty elections; namely, the deferral of earned interest on RRSP, RIF and LIRA accounts.
The new procedures allow the taxpayers deemed "low risk" to file their delinquent tax returns without the possibility of penalty.
Those interested in filing under this program must first determine whether they are likely deemed "low risk" tax filers.
The taxpayers that present a low compliance risk can file under the new SFP by filing the preceding three (3) tax years as well as six (6) years of FBARs.
All submissions will be reviewed by the IRS to determine the appropriate level of compliance risk.
The taxpayers deemed "low risk" generally are individuals with simple returns resulting in little or no US tax liabilities.
Absent any "high risk" factors, as explained later, should the submission show less than $1,500 in tax due in each of the preceding three (3) tax years, the taxpayers will automatically be treated as "low risk" and will not be assessed any penalties as a result of their late submission.
The taxpayers may be deemed "high risk" and not eligible to file under the SFP if any of the following are present: • If any of the tax returns submitted through the SFP claim a refund; • If there is material economic activity in the US; • If the taxpayers have not declared all income in their country of residence; • If the taxpayers are under audit or investigation by the IRS; • If FBAR penalties have been previously assessed or if the taxpayers have previously received an FBAR warning letter; • If the taxpayers have a financial interest or authority over a financial account(s) located outside their country of residence; • If the taxpayers have a financial interest in an entity or entities located outside their country of residence; • If there is US source income; or • If there are indications of sophisticated tax planning or avoidance.
Therefore, it is paramount for the taxpayers to determine whether they present a high or low risk with respect to the SFP before submitting their missing returns with the IRS.
For the "low risk" taxpayers the review process is likely be expedited as the IRS should not assert penalties or initiate follow-up actions against these taxpayers.
The taxpayers assessed at higher compliance risks will be notified they are not eligible for the SFP and may be subject to a more comprehensive review including the possibility of a full audit and examination beyond the three tax years submitted under the SFP.
It should be noted that the IRS has not indicated for how long the SFP will remain open but could indeed end it soon without announcement.
US citizens and green card holders residing in Canada, otherwise eligible to file under the SFP, should take advantage of this window of opportunity and file their missing returns now.
In closing, it should be remembered that filing delinquent tax returns under this or any IRS initiative is a complex process and should be handled by an experienced and qualified professional.