We continue our discussion on Canadians who had the legal requirement to annually file US tax returns and FBARs (reports of foreign bank accounts…ie, your bank accounts in Canada which had more than $10,000 (US) in them at any point in the year), but who haven’t filed a US tax return or a FBAR in many years (if ever). Again, this amnesty program offers really is peace of mind. If you haven’t been filing your US tax returns (or FBAR’s) for years, maybe you know (now) you have that obligation, but you don’t know how to “come clean”. This new amnesty program is your chance. Under the new amnesty program, for those who qualify, the IRS will not impose penalties nor conduct an audit. In order to “come clean” you must: (1) File all tax returns with appropriate related information returns required for the past three years (i.e., 2009, 2010, and 2011); (2) File Foreign Bank Account Reports (FBARs) for the past six years (i.e., 2006- 2011); (3) Pay any tax and interest if applicable on the unfiled returns (there probably won’t be any US tax or interest); and (4) Complete and sign under penalties of perjury a 20-question questionnaire. In Part 1 of this series, we discussed how only Canadians who “reside in Canada” could take advantage of this new amnesty. In Part 2, let’s review some more of the unusual conditions of the new amnesty program.
The Taxpayer Cannot Owe More Than $1,499 in US tax in any of the tax years beginning in 2009 and ending on 2011.
We suspect this requirement generally won’t be problematic. Although the US does impose tax on income earned by its citizens and residents no matter where they earn it anywhere in the world (e.g., Canada), due to the tax credit system and the relief offered by the US-Canada Tax Treaty, as long as the taxpayer has been paying the appropriate tax in Canada he or she probably (although not certainly) won’t owe any US tax. So owing not more than $1,499 in US tax in any of the tax years beginning in 2009 and ending on 2011 is probably not a difficult hurdle to overcome.
The taxpayer has filed a US tax return for any tax year subsequent to 2008.
Sort of an unusual requirement (not having filed the taxes), but one can suppose the rationale behind it is the IRS wanting to help only those people who more or less have been unaware of their obligation to file their US taxes (not the ones who knew of their obligation but simply tried to pay less than they should have in prior years).
The taxpayer presents a “low compliance risk”
Ah, this is where it gets really interesting. I want to apply for the new amnesty so as to clear up my unfiled US back taxes, but I must be considered by the IRS as a low compliance risk. How do I know if I’m a low compliance risk?
Based on the questionnaire the taxpayer is required to complete, the IRS will determine whether the taxpayer is considered “low compliance risk”. According to the IRS, the taxpayer’s risk level may rise above “low” if he or she has any of the following:
-Any of the returns submitted through this program claim a refund;
-There is material economic activity in the US;
-The taxpayer has not declared all of his/her income in his/her country of residence;
-The taxpayer is under audit or investigation by the IRS;
-FBAR penalties have been previously assessed against the taxpayer or if the taxpayer
has previously received an FBAR warning letter;
-The taxpayer has a financial interest or authority over a financial account(s) located outside his/her country of residence;
-The taxpayer has a financial interest in an entity or entities located outside his/her country of residence;
-There is US source income; or
-There are indications of sophisticated tax planning or avoidance.
So what do we learn here? If you have US source income (like from the sale of a US house), and you did not at least file a nonresident tax return, you may not be an ideal candidate for the new amnesty program (although at least with real estate you as a Canadian should have had an excess tax amount automatically withheld at the time of sale due the FIRPTA rules). It is of course entirely possible the taxpayer has bank accounts in other countries, it’s hard to see what is so damaging about that. Based on this list, the factors which give me pause in going forward with the program are owing back US taxes (above $1,500 per year), or being at all involved in any FBAR hot water. If you have any of the remaining factors, you should at least explore the possibility to joining the new IRS amnesty program for dual citizens who haven’t filed US tax returns recently.