The U.S. Internal Revenue Service has announced that is offering a revised, and what is intended to be a more lenient, tax amnesty program to encourage Americans living abroad to become compliant with their U.S. tax filing obligations.
On Wednesday, the IRS said that it is changing its existing streamlined amnesty program by eliminating: the requirement that the taxpayer have less than US$1,500 of tax owing per year; the need to fill out a risk questionnaire; and the requirement that the taxpayer certify that his or her previous failure to comply was non-willful.
In addition, for U.S. taxpayers outside the United States who are eligible for this program, all penalties will be waived.
“We’re expanding the streamlined procedures to cover a much broader group of U.S. taxpayers we believe are out there who have failed to disclose their foreign accounts, but who aren’t willfully evading their tax obligations,” says John Koskinen, the commissioner of the IRS in a statement announcing the changes.
The U.S. bases its tax system on citizenship: American citizens and other U.S. tax residents must file a U.S. tax return annually on their worldwide income regardless of where in the world they live. The revisions to the streamlined program are good news for the majority of Americans in Canada who are not compliant with their U.S. tax filing obligations, cross-border experts say.
“In my opinion, the IRS has now recognized that the previous programs really did not fit the traditional American in Canada client who most advisors work with,” says Terry Ritchie, director of cross-border wealth services at Cardinal Point Wealth Management in Toronto. “Although it’s never fun dealing directly with any specific tax agency, including the IRS, this is welcome relief for a number of Americans in Canada and tax practitioners. Time will tell if this additional nudge to these programs will encourage more Americans abroad to come on board.”
At the same time that the IRS makes the streamlined program more lenient, it will be increasing the bite associated with its Offshore Voluntary Disclosure Program. The OVDP is designed for those Americans whom the tax agency considers willfully non-compliant, and who therefore aren’t eligible for the streamlined program. The changes include requiring more information from the taxpayer, and higher penalties in some cases.
The changes to the amnesty programs will be effective July 1, which is the same day that the U.S. Foreign Account Tax Compliance Act comes into force. FATCA, which is being implemented in Canada through an intergovernmental agreement signed between Canada and the U.S., will see Canadian banks and other financial firm report to the Canada Revenue Agency on their U.S. citizen clients. The CRA will then exchange that information with the IRS, who will, under the agreement, provide reciprocal information if requested.
“With the full implementation of FATCA at the beginning of next month, Americans in Canada would be finding it more difficult to hide from the IRS,” Ritchie says.