Canadian corporations doing business in the U.S. will face stiff penalties if they fail to meet filing obligations required by the U.S. Internal Revenue Service (IRS) by September 15. “Non-resident alien” individuals living in Canada who receive income from the U.S. are also required to file by the September deadline.

“Many Canadian companies believe that if they don’t file a U.S. tax return, they won’t show up on the IRS’s radar screen. In fact, Canadian companies earning U.S. revenue are being targeted by the IRS and have a good chance of being identified over the next few months,” said Stanley Abraham, Partner, KPMG’s U.S. Corporate Tax Practice.

The IRS has identified that beginning in 2004 it will become more aggressive in identifying and assessing foreign corporations who have failed to file. If corporations and individuals fail to comply with this enforcement initiative, the IRS is ready to impose harsh “failure to file” penalties and deny all deductions and credits and assess taxes based on gross income.

Under the new compliance program, the IRS says it will grant partial amnesty and restore a corporation or individual’s ability to claim available deductions and credits if all delinquent returns are filed with the IRS by September 15.

This applies to companies that have never previously filed a U.S. federal income tax return or protective return, never been contacted by the IRS about a failure to file a U.S. federal income tax return or have not been under examination or investigation by the IRS and have not been notified that the IRS intends to commence an examination or investigation.

Certain Canadian companies may not have a permanent establishment in the U.S. and may not be required to file income tax returns. However, relying on the Canada-U.S. treaty to avoid filing requirements may not eliminate potential U.S. liabilities unless a treaty disclosure filing has been submitted to the IRS. Failure to file a treaty disclosure return will result in a penalty of US$10,000 for each year of non-compliance.