On June 26, 2012, the Internal Revenue Service announced new “catch up” filing compliance procedures for non-resident U.S. taxpayers. The release of these procedures appears to be in response to various requests for the Internal Revenue Service to provide amnesty to “innocent” non-filers. While there is no complete amnesty, the new procedures should provide some relief to “low risk” filers.
Under the new rules, effective as of September 1, 2012, qualifying taxpayers will be required to file 3 years worth of income tax returns (as opposed to 6 years under the reasonable cause approach and 8 years under the Offshore Voluntary Disclosure Initiative program). They still, however, must file 6 years worth of Report of Foreign Bank and Financial Accounts, Form TD F 90-22.1. The delay in the starting date of the new program seems to be in order to allow the Internal Revenue Service to develop policies relating to the new program.
To be accepted under these new procedures, the submitted return must be considered “low risk”. A return will be low risk if it is a simple return with little or no U.S. tax due (less than U.S. $1,500 per year). The risk level of the return will increase as the income and the 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. Identified risk factors include a history of noncompliance with United States tax law and the amount and type of United States source income. These identified risk factors would seem to support the argument that if all the income is Canadian source, then there would be no U.S. tax owing and no risk to the U.S. treasury.
If the Internal Revenue Service determines the filing to be of low risk, assessing will be expedited and the Internal Revenue Service will not assess penalties or pursue follow-up actions. It is not clear as to whether it is only the Report of Foreign Bank and Financial Accounts penalties that will be relieved or whether the normal late filing tax return penalties will also be waived.
Taxpayers who wish to use the new procedure will be required to submit:
- delinquent tax returns, with appropriate information returns for the past three years;
- delinquent Report of Foreign Bank and Financial Accounts for the past six years, and
- any additional information regarding compliance risk factors based on future Internal Revenue Service guidance
Payment of any federal tax and interest must accompany the submission.
Taxpayer asserting reasonable cause as a defence against penalties will be required to submit a dated statement, signed under penalties of perjury, explaining why there was reasonable cause for failure to file in previous years.
The new procedures will also allow a late filed election with respect to the treaty deferral of income earned in a Canadian Registered Retirement Savings Plan or Registered Retired Income Fund. Technically an election to defer income must be timely filed. Absent this concession, taxpayers would need to apply for a private letter ruling to back date the election.
We are not clear as to whether the new program will allow a taxpayer to file more than 3 years of returns.
Taxpayers who are considering surrendering their U.S. citizenship must certify, under penalties of perjury, that they have been compliant for at least the last 5 years. As such, these taxpayers may want to follow the current Internal Revenue Service policy of filing returns for the last 6 years with a reasonable cause submission.
These procedures will not protect taxpayers who face the risk of criminal prosecution (non-innocent filer). Such taxpayers should consult their legal advisors and may wish to file under the Offshore Voluntary Disclosure Program.
If you have any questions regarding the new regulations and require assistance in preparing and submitting prior years U.S. Income Tax Return, please contact Joe Truscott at [email protected] or by telephone at 905-528-0234, ext: 224.
Joe has extensive experience in preparing U.S. Income Tax Returns and has an extensive network of very specialized U.S. Income Tax Preparers to assist him in any of your complex U.S. Income Tax issues.
August 2012
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