After several weeks speculating about the implications of the IRS’ new “incentives” for Americans in Canada filing belated tax returns (refer to my recent OVDI posts here), a December 8 Fact Sheet issued by the IRS finally outlined the department’s full initiative. The IRS has now confirmed that the Fact Sheet was the guidance the Ambassador had alluded to when he promised further relief.

Penalty abatement for Canadian residents participating in the Offshore Voluntary Disclosure Initiative (OVDI) is available only if the taxpayer “opts out” of the program and successfully argues that he had “reasonable cause” for failing to file the returns. This means that the IRS will not automatically abate penalties for reasonable cause without the taxpayer opting out.

OVDI and RRSPs

The IRS is aware of the problems caused by including Registered Retirement Savings Plans (RRSPs) in the OVDI penalty computation. We have been informed that the IRS is likely to exclude RRSPs from the OVDI penalty calculation where the RRSP income is excluded under the treaty. This treatment is not certain.

What if you haven’t filed yet?

The OVDI is over. The IRS has provided very little guidance for taxpayers who are currently non-compliant, but want to get into the system.

We have had clients who have filed outside of the OVDI, after the September 9, 2011 deadline. They have been put into the OVDI, or an OVDI-like, program (the IRS wasn't clear on which).

Some taxpayers are filing prospectively (2011 and subsequent years only). Some are filing or amending prior years, with no special disclosure identifying their prior year errors or omissions. This is called “quiet disclosure”.

The IRS is looking for taxpayers using quiet disclosure and it is possible these people may be hit with substantial penalties. Unfortunately, there is no alternative program right now.

We will keep you posted on further developments.

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