Thanks to Barrie McKenna of the Globe and Mail for this article and to his support on this important issue during this most difficult time for U.S. citizens residing in Canada and the rest of the world. Thanks also to Finance Minister Flaherty and the MPs who have supported Canada/U.S. dual citizens during this time.
On December 7, 2011 the IRS posted a Fact Sheet providing information about this issue. I have written some commentary about the Fact Sheet here.
I recently predicted that the IRS treatment of U.S. expats would become a diplomatic issue for the U.S. The December 2011 announcement by Ambassador Jacobson, concerning the IRS and U.S. expats, suggests that this is true.
After having read the following article, one might ask what this means for U.S. expats in other countries. American Citizens Abroad was very quick to point out that this issue applies to U.S. expats all over the world. Scott D. Michel and Mark E. Matthews, two U.S. tax lawyers with extensive experience with OVDI and the IRS have advocated allowing U.S. expats to bring themselves into tax compliance, by simply filing past returns. This is great news for U.S. expats the world over. Christine Dobby writing in the Financial Post reports that relief will also be coming for U.S. citizens residing in other countries. I suspect that in order to qualify for “penalty free treatment” that U.S. citizens will have to prove that they truly are American Citizens living abroad. So, although there are grounds for optimism, as the following article indicates, there are still issues that will need to be understood. One thing for sure: the accounting and legal costs to comply will be enormous! For example, as reported in the Financial Post:
“Maurice Williams, a professor from Kelowna, B.C. who has not lived in the United States since 1973, said he has already incurred $20,000 in accounting fees getting his application together under the offshore disclosure program.
The changes are too little too late in his view, as they will not address the money he has already spent.
“It’s been a financial nightmare,” he said.”
and the following comment from the Globe article:
“It just cost me $25,000.00 in Professional Fees to comply with US taxes, $6200.00 in US Taxes and penalties because I have an Alberta Small Business Corporation. Not to mention all the time and stress to deal with this ridiculous situation. I went to the US Consulate in Calgary to renounce my US Citizenship this week. They would not allow me to do it, handed me a package, and advised me I could meet with them in 2012 on Thursday’s only between 2:00pm and 3:00pm. This means I will have to file for two more years, even though I will be renouncing my US Citizenship.
All this because my father a Canadian went to University in the United States from 1955-1959.”
To make matters worse, U.S. Tax Return Preparers are now required to register with the IRS, pass an exam, and take continuing education. This will make it more expensive to file a U.S. tax return.
So, to use the words of Donal Rumsfeld, there are few “Known knowns“. There are many “Known unknowns“. The biggest problem and what is most fearful are the:
On the subject of “Known unknowns”, Roy Berg, a Calgary based U.S. tax lawyer notes that:
“When the guidance is issued it will presumably address the multitude of additional questions that arise such as: what is the procedure for coming forward with unfiled returns? How many delinquent returns need to be filed? What certainty will the taxpayer have that penalties will not be applied? Will there be relief of the criminal sanctions imposed by the willful failure to file FBARs?
What the article does not address is relief, if any, for penalties imposed for the failure to file a multitude of other forms. Each of the failure to file penalties for the following may be reduced to $0.00 provided the taxpayer proves “reasonable cause.”
I refer you to Mr. Berg’s article, but the “other forms” to which he is referring include:
- New individual income tax returns – the new form 8938 (a FATCA requirement)
- Ownership of Registered Retirement Savings Plans – form 8891
- Certain ownership interests in non-US trusts or estates – form 3520 or 3520-A – these would include the TSFA
- Ownership in non-US corporations and partnerships – form 5471 or 8865
- Transfer of property to a non-US corporation or partnership – form 926 or 8865 may be required
- Receipt of a gift from a non-US person – form 3520
As you can see, the U.S. which prides itself on being a “Nation of Laws” is actually a “Nation of Forms”! Would any reasonable person imagine that all of these forms actually even exist?
But, take a day off from your worry and enjoy the following:
Americans living in Canada who’ve neglected to pay their U.S. taxes are getting a big break from Uncle Sam.
The U.S. Internal Revenue Service is poised to waive potentially massive penalties for Americans who agree to come clean and don’t owe any taxes, The Globe and Mail has learned.
The new rules will be announced within weeks by the IRS, according to David Jacobson, the U.S. Ambassador to Canada, who has been swamped with complaints from anxious Canadians.
“What the IRS is saying here is that if … you don’t owe taxes to the U.S., and you file your return and they show you don’t owe taxes, there aren’t going to be any penalties for having filed late,” Mr. Jacobson said in an interview Thursday.Fears of a looming U.S. tax crackdown has caused a wave of angst among the roughly one million Americans living in Canada. Many of them long ago stopped filing, assuming they owed no tax.
Unlike most countries, the United States requires its citizens to file annual tax returns regardless of where they live and work. Many are now worried they’ll be hit with punishing penalties as a result of recent U.S. efforts to expose citizens hiding assets in offshore tax havens.
Every year, Americans must also report all their foreign bank, brokerage, mutual fund and pension accounts. And by 2014, Canadian financial institutions will have to identify accounts held by U.S. citizens to the IRS.
“We had an obligation to make our situation clear,” Mr. Jacobson explained. “What they have done is clarify what’s going to happen with innocent folks who didn’t know their obligations and are now going to try to comply with the law.”
Even Mr. Jacobson acknowledged the penalties for not filing can be “draconian,” even for “typical” Americans in Canada who owe nothing because Canadian taxes are typically higher.
“Our intention was not to abscond with some innocent grandmothers’ savings,” he said. “From where I’m sitting, it’s going to take care of the problem I was most concerned about … which is that people just didn’t know they were supposed to do this.”
Failure to file so-called Foreign Bank Account Reports can result in penalties of $10,000 (U.S.) a year for every account – fines that can quickly reach hundreds of thousands of dollars. In some extreme cases, the IRS can seize up to half the contents of accounts. Neglecting to file certain tax schedules also triggers fines.
Mike Vance, a 26-year-old doctor from Nanaimo, B.C., who moved to Canada as a child, said the partial amnesty is good news. But he said he no longer trusts that the United States won’t come after his assets in the future as the country struggles to deal with its massive debt.
“I’m using this as a warning sign,” explained Mr. Vance, who recently began the complex process of renouncing his U.S. citizenship. “I’m just starting out as a young doctor and going to have a fair bit of money invested in Canada.”
Finance Minister Jim Flaherty, who repeatedly complained about the problem, said he was “happy” with the IRS policy shift.
“We told the U.S. that the vast majority of Canadians targeted were honest, hard-working and law-abiding individuals and they listened,” Mr. Flaherty said in a statement. “It’s a victory for Canadians and a testament to our positive working relationship with our American neighbours.”
The policy shift will come in the form of new guidance from the IRS, expected to be issued before the end of December. U.S. officials said the statement will make it clear that:
- If a U.S. citizen files tax returns late and owes no taxes, there are no penalties for failure to file.
- U.S. citizens who were unaware of the bank account reporting requirement can file previous reports now, along with a statement explaining why they’re late. No penalty will be imposed if the IRS determines that there is reasonable cause.
- Individuals who took part in earlier amnesty programs this year and in 2009 can reapply and get back penalties already paid.
Accountant Kevyn Nightingale, a U.S. tax specialist with MNP LLP in Toronto, said the changes are “fabulous news” and “a reasonable response” for Canadians unwittingly caught in the crackdown.
But he said it remains unclear how many years of back taxes are covered, or how professionals and consultants who often incorporate their businesses in Canada will be treated. U.S. officials would also not say what would happen to people who owe relatively small amounts to the IRS.
Nor does the change end the concerns of Canadian financial institutions, which complain they’ll face massive costs trying to track all their U.S. account holders. Mr. Flaherty has warned that the new U.S. bank reporting rules, slated to come in 2014, could violate Canadian privacy laws.