In Tax Tip 11-05, we reported that the IRS had introduced the 2011 Offshore Voluntary Disclosure Initiative (“OVDI”) in an attempt to bring US taxpayers (no matter where they lived) who had not reported income from, or the existence of, foreign assets into the tax system without criminal penalties. In Tax Tip 11-09, we reported that the Internal Revenue Service (“IRS”) introduced a reduced penalty regime for certain US taxpayers who were not compliant in their tax affairs.
The reduced penalty regime was welcome news for many US taxpayers who did not know they had any US compliance obligations. US persons who wish to become compliant and avoid criminal penalties using the reduced penalty regime under the OVDI program have until August 31, 2011 to complete their application. In very limited circumstances, the deadline can be extended to November 29, 2011 provided that the taxpayer has made a good faith effort to comply with the August 31, 2011 deadline. Even with an extension, time is running out for non-compliant US taxpayers who wish to have certainty in bringing their tax affairs into order and avoid criminal penalties. If a taxpayer wishes to request an abatement of penalties based on reasonable cause, it may be wise to file by August 31, even though the filing will not be made under the OVDI.
The above begs the question as to what will happen to US taxpayers who wish to become compliant but attempt to do so after the OVDI has expired. Good question but a difficult answer. In the absence of another US amnesty or reduced penalty program, the IRS may take an aggressive stance with taxpayers who simply file numerous tax returns in order to become compliant. However, where the US person has reasonable cause as to why they did not previously file returns, they may be able to make a case for reduced penalties and no criminal prosecution. Prior to the recent US formal reduced penalty programs, the IRS did not automatically assess penalties where a US person who innocently failed to file information returns and forms became compliant. Normal late-filing penalties were assessed, however, if any US tax was owed. It is uncertain if the IRS will continue to assess in this manner.
As we discussed in Tax Tip 11-06, the 2010 Hiring Incentives to Restore Employment (HIRE) Act that will force non-US financial institutions (such as Canadian financial institutions) to “turn in” their US clients will make it difficult for non-compliant US taxpayers to hide assets in foreign bank accounts. This law was scheduled to take effect January 1, 2013 but will now be phased in to January 1, 2014. While the one year phased in deferral of the implementation is certainly welcome, we can expect the US to continue to enact legislation and implement rules designed to discover non-compliant taxpayers.
Navigating through the dangerous process of becoming a compliant US filer should not be attempted without proper professional advice.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.