As was discussed in Tax Tip 11-06, U.S. citizens and green card holders must comply with U.S. tax and information reporting requirements no matter where they reside. Many U.S. citizens and green card holders have, only recently, become aware of these obligations and have had to deal with uncertainty regarding the penalties that could be assessed by the IRS.
On December 7, 2011 the IRS released Fact Sheet 2011-13 to provide guidance on how the IRS will assess delinquent filers who now wish to become compliant. This position reflects a change from the potential "heavy handed" approach prescribed in the 2011 Offshore Voluntary Disclosure Initiative (see Tax Tip 11-05) and should allow, in most cases, for innocent non-filers to come forward without paying penalties. The approach stated in the Fact Sheet represents a more reasonable direction and is consistent with advice provided by TSG members. Note however that no blanket amnesty is being offered. Each case will be determined on its own unique facts.
The Fact Sheet confirms that a delinquent filer must file their last six years worth of returns to re-enter the system. If no U.S. tax is owing (for example, due to the application of the foreign earned income exclusion or foreign tax credits). the IRS will not assess any failure to file or failure to pay penalties. Since these penalties, in general, are based on U.S. taxes owing, for most innocent non-filers these penalties are a non-issue.
In the Fact Sheet, the IRS has also clarified that the late filing of Form TD F 90-22.1, "Report of Foreign Bank and Financial Accounts” (FBAR) will not automatically be subject to the penalty of $10,000 (non-willful violation) or 50% of account balance (willful violation) if the taxpayer can demonstrate that they have a reasonable cause for filing the form late. The ability to request an abatement of penalties has always been available to taxpayers. The Fact Sheet reaffirms this position.
The IRS states that the determination of a reasonable cause will be based on the individual's particular facts and circumstances. The IRS will grant relief if the taxpayer can demonstrate that they exercised ordinary business care and prudence in meeting their tax obligations. In making this determination, the IRS will consider all available information, including how long it took a taxpayer to comply once they became aware of their obligations.
With respect to the late filing of the FBAR, the IRS will also consider whether professional tax advice was obtained, whether there was any unreported income and the reason for having the foreign account, in determining reasonable cause. One would think that for a U.S. citizen or green card holder living in Canada, it would usually be considered reasonable to have a “foreign” account in Canada, much more so than a U.S. resident having an account in Switzerland.
It is a relief that innocent non-filers can take some comfort that they will not automatically be assessed late filing penalties if they bring their U.S. filings up to date once they are aware of their obligations.
However, any delay in becoming compliant after learning of their obligations may jeopardize the U.S. person's chance of success for an abatement of penalties based on “reasonable cause.” If you require assistance, please contact a member of the Tax Specialist Group.
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.