Kevyn Nightingale

US Citizens Living in Canada Have Yet Another Opportunity to Come Clean With the IRS

Monday, January 09, 2012 by Kevyn Nightingale

 

Kevyn Nightingale is also featured in a Globe and Mail article, providing his insights on amnesty programs from the IRS.

In previous OVDI posts, I have reported on the recent flip-flopping of the IRS on the issue of Americans living abroad who haven’t filed US returns, but want to come clean.

OVDI Reinstated

The 2011 Offshore Voluntary Disclosure Initiative (OVDI) originally expired September 9, 2011, but in response to the calls from many practitioners, myself included, the IRS has reinstated it and made it permanent (while they reserve the right to cancel it at any time, for now it will continue indefinitely). You can read the full press release from the IRS – issued on January 9th, 2012 – here.

Few Changes for Most Americans Living in Canada

The program remains essentially the same, except that the penalty for the top-level individuals moves from 25% to 27.5%. This penalty rate generally affects people living in the US who have unreported assets and income offshore.

Most Americans living in Canada won’t be affected by this change – they will still be subject to the penalty of 5% of their liquid assets if they choose this disclosure route.

No Safe Harbour

It is possible to enter the OVDI and then opt out. The IRS has said in these cases, where there is "reasonable cause" it may abate penalties entirely, and reasonable cause may include ignorance of the requirement to file. At this time, there is no safe harbour; it’s up to the IRS' discretion in each individual case.

Further details will be announced within the next month. The IRS' OVDI FAQ page hasn’t been updated as of today, but it may be when you read this. In any event, I will keep you posted on further developments.

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Comments:

Tuesday, February 14, 2012 - 02:07PM GMT | Petros
Why do you think that Canadians will receive the 5% penalty scheme when most of the OVDI people that we've spoken to have been subject to the higher 20-25% rate? Don't you think that it would be better not to enter the program than to opt out after they hand you a huge fine? That was the opinion of Jack Townsend.
Tuesday, February 14, 2012 - 02:08PM GMT | Kevyn Nightingale (Author)
The 5% rate is known inside the IRS Criminal Investigations ("CI") section as the "Canadian Clause". This rate was extended to certain OVDI participants specifically because of the number of practitioners (like me) who badgered the IRS, arguing that the 25% rate was unduly harsh for people who had already paid quite substantial tax abroad. While the OVDI was announced February 8, 2011, this provision was added only June 2, 2011: http://www.irs.gov/businesses/international/article/0,,id=235699,00.html FAQ 52-3 The CI agents we've spoken to have given every indication that most Canadian applicants will be eligible for the 5% penalty.
Sunday, February 26, 2012 - 07:04PM GMT | wayne
people are telling me not to register or file my us tax report and just let them track me down. ?? also im thinking of selling my home for over 1 milion will that be taxed ?? keep info upto date thanks wayne
Monday, February 27, 2012 - 09:37AM GMT | Kevyn Nightingale
There are a number of ways to enter the system. These ways vary in risk and cost. However, there is one thing you shouldn't do as US citizen, and that's bury your head in the sand. If you come forward now, especially if you haven't owed tax in the past, you could argue that you couldn't reasonably be expected to have known your obligations previously. If the IRS agrees (and there's a decent chance for many people), you may be spared the penalties. In future years, this approach won't work so well. First of all, there's been a lot of publicity in the last 8 months, so "I didn't know" may not be believed. Secondly, the IRS has the Canadian banks looking for you. To open up (or even maintain) a Canadian bank account, you're going to have to disclose your US status, under penalties of perjury. Thirdly, when you cross, the border, Homeland Security may require your US passport, eventually leading to a request from the IRS for returns. See this blog post: http://www.mnptax.ca/insights/blog/2012/1/31/passports-the-irs-continues-to-tighten-the-screws The really not fun part is that one day you will die. Your heirs won't enjoy that, but they will probably enjoy dealing with the IRS on your behalf even less. You may be willing to hide, but your executor and beneficiaries may be a little more risk averse.
Wednesday, February 29, 2012 - 07:19PM GMT | paula
How many years of taxes must we report??
Sunday, March 25, 2012 - 09:22AM GMT | marie
What about someone in my position who was born in the US and moved to Canada as a child? I have no financial links to the US and I am married to a Canadian (non-US) citizen. I am a stay at home mother who has not worked in over 7 years. Any penalty would be a direct hit to my husband who earns all the wages in our home.
Monday, March 26, 2012 - 09:36AM GMT | Kevyn Nightingale
To Paula: The IRS has a standard policy of asking for 6 years' returns. If the IRS believes you have not been intentionally avoiding filing, they will generally be satisfied with that. However, filing in this way does not limit your exposure to penalty. If you want comfort as to the penalty, you need to go the OVDI route, which requires 8 years' filing. Please see my post here: http://www.mnptax.ca/insights/blog/2012/1/9/us-citizens-living-in-canada-have-yet-another-opportunity-to-come-clean-with-the-irs
Monday, March 26, 2012 - 01:17PM GMT | Kevyn Nightingale (Author)
To Marie: If you were born in the US, you are a US citizen. Ordinarily, you need to file a US return. However, if you did not earn any income (anywhere), or have financial accounts that need to be reported, you don't need to file. The income threshold for a married person for 2011 is US$3,700. If you had financial accounts outside the United States that totalled over $10,000 at any time during the year, you need to file the Foreign Bank Account Report [TD F 90-22.1] This form is not part of the tax return. If you own an interest in a closely-held Canadian (or other non-US) corporation, partnership or trust you may need to file to report that interest, even if you don't otherwise have to file a return. There's more, but this is a start.
Tuesday, March 27, 2012 - 02:42PM GMT | Darcy
In 1993, my father who was born, raised and has lived in Canada his whole life, applied for, and was granted US citizenship via his father who was born in the US and later naturalized to Canada with his parents in the early 1900s. The purpose of my father getting his citizenship was to enable him to sponsor me for a US green card. In light of these rulings, is he too now obligated to file US tax returns and in danger of owing back-taxes on his Canadian income? And, if he renounces his US citizenship what repurcussions could there be? I have been reading blogs about this for the last few days and can't find any information regarding these types of "dual" citizens where Canada is their primary citizenship and they have never generated any income or asset from the US.
Monday, April 02, 2012 - 05:26PM GMT | wayne
is there a ballpark cost to file based on no income from usa and all canadian taxes were paid and files are electronically available. personal income less than 80000 cdn. assets worth over 1.5 million.
Thursday, April 11, 2013 - 11:01AM GMT | Kim
If a person who was born in the US and moved to Canada as a minor and has become a permanent resident of Canada do they need to file with the IRS even though they have never worked in the US and have resided in Canada for 30 yrs.
Thursday, April 11, 2013 - 11:08AM GMT | Kevyn Nightingale
Since initial posting of this blog, the IRS has come out with the new Streamlined program. It is much more attractive for most US citizens living abroad. Please refer to my blog here: http://www.mnp.ca/en/media-centre/blog/2012/9/2/details-on-new-irs-streamlined-relief-for-americans-in-canada
Friday, April 12, 2013 - 10:59AM GMT | Kevyn Nightingale
Kim: The answer is yes. Please see the newer blog (link in the above post)
Wednesday, March 12, 2014 - 04:57AM GMT | Alex
A friend moved from the United States when she was 52, began working in Canada and became a Canadian citizen q few years later. She had worked for 30+ years in the U.S. They began sending her Social Security at age 71 and continues and she is now 95. She has only $15,000 in social security from the U.S. and has no U.S. holdings except a very small mutual fund which does get filed) Is she or will she be affected by this legislation.

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