IRS Extends an Olive Branch to Dual U.S.-Canadian Citizens
The perceived unfairness of the 2012 Offshore Voluntary Disclosure Program (“OVDP”) stems from the “one-size-fits-all” nature of the amnesty program. For instance, one holding an undisclosed foreign bank account generating $10 a year in investment income is subject to the same penalty structure as one holding an offshore account producing $1 million in annual income. Likewise, a dual citizen of the U.S. and Canada who never sets foot in the U.S. during the calendar year is subject to the same exorbitant penalties on his or her undisclosed Canadian checking or retirement account as a sophisticated U.S. citizen/trader who is resident in the U.S. for the entire year and has an undisclosed Swiss bank account with a $1 million account balance.
The highly punitive and “one-size-fits-all” nature of the OVDP and the recent aggressive enforcement actions by the U.S. regarding FBAR compliance have drawn the ire of many diplomats and other foreign government officials, perhaps none more so than from our neighbors to the north, Canada. Canadian press and government officials have been highly critical of these programs/policies and, in general, the U.S. government’s recent crackdown on undisclosed foreign bank accounts. Canadian officials have been particularly outspoken in their complaints and criticisms regarding the long-arm reach of the U.S. FBAR rules and regulations and their unfair and burdensome impact on dual citizens of the U.S. and Canada who, for the most part, are unaware of these obscure reporting requirements.
In recognition of the geographic proximity and high volume of cross-border activity between the U.S. and Canada (and perhaps in response to this recent push-back from Canadian officials), the IRS recently extended an olive branch to Canadians with ties to the U.S. with the announcement of new streamlined, non-punitive compliance procedures for certain non-resident U.S. taxpayers. These new procedures are only for non-residents of the U.S., including dual citizens of the U.S. and Canada, and are aimed at U.S. citizens who (i) are living abroad, (ii) have limited U.S income tax liability, (iii) have failed to timely file U.S. federal income tax returns or FBARs in the past and (iv) have recently become aware of their U.S, filing obligations and now seek to come into compliance with U.S. tax law.
In order to take advantage of these streamlined, non-punitive procedures, the applicant must (i) be a non-resident U.S. taxpayer (i.e., a U.S. citizen) (with one exception, as discussed below) who has resided outside of the U.S. since January 1, 2009 and has not filed a U.S. tax return during such period (with one exception, as discussed below) and (ii) have a U.S. tax liability of less than $1,500.00 on each of the three income tax returns submitted under these streamlined procedures. The $1,500.00 tax liability threshold should not be a problem for most U.S.-Canadian dual citizens due to the availability of a foreign tax credit for the tax paid on the applicant’s Canadian income tax return. Taxpayers utilizing these procedures will be required to (i) file delinquent income tax returns on Form 1040 for the past three years, (ii) file delinquent FBARs for the past six years and (iii) pay all tax and interest due with the three submitted income tax returns. If all conditions are met, the submitted returns will be reviewed on an expedited basis and the IRS will not assess penalties or pursue follow-up enforcement actions.
These new streamlined procedures are intended as an alternative to the OVDP, albeit a much more attractive alternative for most taxpayers since the taxpayer does not have to pay the 27.5% penalty or any other penalties imposed under the OVDP. However, unlike the OVDP these streamlined procedures do not provide immunity from criminal prosecution and once a taxpayer makes a submission under these streamlined procedures, the OVDP is no longer an option. If the taxpayer has a U.S. tax liability in excess of $1,500.00 for any of the past three years or does not otherwise qualify for these new streamlined procedures (or is concerned about possible criminal prosecution), the taxpayer should strongly consider applying for entry into the OVDP.
These streamlined procedures can also be utilized by U.S. citizens with Canadian retirement accounts. While the U.S.-Canada tax treaty generally allows for U.S. tax deferral on accrued but undistributed earnings from a Canadian Registered Retirement Savings Plan (“RRSP”), an election to defer such tax must be made annually by the plan participant. Fortunately, these new streamlined procedures allow both U.S. nonresident nonfilers and resident filers to seek relief for failure to make such a timely election and request a retroactive deferral of tax on accrued but undistributed earnings from a RRSP. As this request for retroactive deferral in normally made on an amended tax return, this is the only exception to the rule that applicants must not have filed a U.S. income tax return since 2009. It also appears that this right to ask for retroactive deferral is the only remedy available for U.S. residents under these new streamlined procedures.