IRS eases up on tax penalties for Americans living abroad

This article was published in the Financial Post December 9th 2011.  To see this story and to read related stories on the Financial Post website, please click here

The tax arm of the United States government has released details of its plan to ease up on American citizens living abroad concerned about massive penalties for failure to file returns and bank account information.

On the heels of comments last week from U.S. Ambassador to Canada David Jacobson, the U.S. Internal Revenue Service quietly posted on its website an update to the information for citizens living abroad.

The fact sheet, which the website lists as last updated on Wednesday, largely confirms what Mr. Jacobson said was expected to come from the IRS, stating that no penalties will be imposed on late returns where no tax is due and failure to file required bank account information will also be forgiven for “reasonable cause.”

Mr. Jacobson said the clarifications were expected in response to “a lot of angst” among dual citizens who did not know they had an obligation to file returns in the United States when they were not living there.

Unlike Canada, the United States requires its citizens, whether they are living in the country or not, to file tax returns and report their worldwide income.

Many Americans living in Canada, particularly those who came to Canada many years ago and never worked in the United States, were surprised to find out they were in breach of their obligation to file when they read media coverage of a voluntary disclosure program the IRS launched last summer.

“The IRS is aware that some taxpayers…. may have failed to timely file United States federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs), despite being required to do so,” the IRS fact sheet says.

“Some of those taxpayers are now aware of their filing obligations and seek to come into compliance with the law,” it says.

Canada has a tax treaty with the United States to avoid double taxation and with foreign tax credits, many of those who file returns will not end up owing taxes south of the border.

The IRS fact sheet says no penalties will be imposed on late-filed returns if no tax is due in the United States. It also notes that if taxes are due, the penalty may be waived if the taxpayer can show the failure to file on time is “due to reasonable cause and not due to willful neglect.”

The FBAR rules require U.S. citizens abroad to disclose any “foreign” (i.e. non-U.S.) financial accounts if the total value of an account or accounts is more than $10,000 at any time during a calendar year.

The penalties for failure to file an FBAR can be stiff: up to the greater of $100,000 of 50% of the total balance of the foreign account at the time of the violation.

The IRS fact sheet says penalties for late filing will not be imposed if the IRS determines that the tardiness was due to reasonable cause.

The IRS says taxpayers need not file more than six years of past FBARs, as there is a statute of limitations on reports beyond that. As for tax returns, the fact sheet says “generally you only need to file returns going back six years.”

The fact sheet does not address the situation of those who came forward during the voluntary disclosure program that concluded on September 9.

The U.S. embassy said last week that the clarified IRS rules would allow those who took part in earlier amnesty programs to “opt-out” and reapply under normal examination procedures, but this is not mentioned in the IRS fact sheet.

The changes will be a relief for many of the estimated one million Americans living in Canada. But it may be small comfort for those who already spent thousands of dollars an accounting and legal fees to come forward under the earlier amnesty programs.

Related: Information for U.S. Citizens or Dual Citizens Residing Outside the U.S.

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