Tax Insights: New IRS relief for US citizens living outside the US

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Issue 2014-28

On June 18, 2014, the US Internal Revenue Service (IRS) announced changes to its offshore voluntary compliance programs that are expected to significantly increase the number of US persons that can participate in these programs.

The announcement responds to criticism from US taxpayers and the IRS’s own Taxpayer Advocacy Service. It is good news for US citizens living in Canada who are struggling with how to meet their US filing obligations. The latest changes make it easier for those US citizens who have filed their Canadian tax returns and paid all of their Canadian taxes while living in Canada.

Two IRS programs have allowed US persons who have not complied with their US filing obligations to come forward and avoid criminal prosecution and substantial penalties:

  • The ‘streamlined’ process –Simplified procedures (more commonly used by Canadians) were introduced in 2012 for US persons who live outside of the US and owe little or no tax.
  • The 2012 Offshore Voluntary Disclosure Program (OVDP) – A 27.5% penalty is assessed on the highest aggregate balance or value of the person’s offshore assets during the previous eight years (penalties of 5% or 12.5% also apply in certain cases).

To use the streamlined process, a taxpayer must still file three years of past US federal tax returns and six years of past Foreign Bank Account Reports (FBARs).

However, the recent changes:

  • remove the limit of $1,500 or less of unpaid US tax per year to qualify for the program
  • remove the need for applicants to complete a risk questionnaire
  • require participants to certify that previous failures to comply were due to non-wilful conduct
  • treat individuals as meeting the non-residency requirement if certain criteria were met in at least one of the last three years for which the US tax return date (including extensions) has passed

As with the previous program, individuals will be granted retroactive relief for failing to timely elect income deferral on certain RRSPs where the election is permitted under a treaty.