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Has Anyone at the IRS Been Listening?


A voice of reason can be a rare thing, especially when it arises out of a bureaucracy like the U.S. Internal Revenue Service. But, the annual reports Nina Olson makes to Congress in her role as the National Taxpayer Advocate make refreshing reading for those of us more accustomed to the technical documents that emanate from the IRS on a more frequent basis.

In her 926 page report for 2011 Ms. Olson outlined “the most serious problems encountered by taxpayers” and devoted a large section to issues affecting international taxpayers, including U.S. individuals and entities, living or doing business outside the U.S., and foreign individuals and entities working or doing business in the U.S. At the opening, the report notes that:

"The complexity of international tax law, combined with the administrative burden placed on these taxpayers, creates an environment where taxpayers who are trying their best to comply simply cannot. For some, this means paying more U.S. tax than is legally required, while others may be subject to steep civil and criminal penalties. For some U.S. taxpayers abroad, the tax requirements are so confusing and the compliance burden so great that they give up their U.S. citizenship."

These observations come as no surprise to the many Canadian residents who, in addition to complying with Canadian tax laws, must also grapple with the complexities of the U.S. tax system and its bureaucracy because they hold U.S. citizenship, work, or do business in the U.S. The report goes on for some 144 pages detailing the frustrations of U.S. international taxpayers, recommending improvements, and chastising the IRS for changing the rules of the 2009 Offshore Voluntary Disclosure Program in a “bait and switch” fashion after taxpayers had entered the program.

6 Months Later and...

Almost six months after the release of the National Taxpayer Advocate’s report, has anyone at the IRS been listening and taken heed of Ms. Olson’s comments?

On January 9th of this year, two days before the public release of Ms. Olson’s report for 2011, the IRS announced the re-opening of the Offshore Voluntary Disclosure Program. The announcement was brief, indicating only that most aspects of the 2012 program would be similar to the 2011 initiative, but with potentially higher penalties. Although it is easy to understand the imposition of penalties in cases of deliberate tax evasion, it is difficult to fathom the magnitude of the penalties that could be imposed under the 2011 initiative (or its predecessor in 2009) in many cases of inadvertent non-compliance where there is little or no U.S. tax payable. Details of the 2012 program were to be available “within the next month” of the announcement, but to date, no details have been forthcoming.

What Does This Mean?

Could this mean the IRS has been listening and is taking the time necessary to implement a program that is appropriate and fair for both cases of intentional tax evasion, and for cases of inadvertent non-compliance where little or no U.S. tax is involved? This may or may not be the case, but I would lean toward caution rather than optimism. Either way the uncertainty while we wait is frustrating for both those with past compliance issues who may be affected by the outcome and their advisors.

What is clear is that the U.S. tax and information reporting requirements for U.S. taxpayers with international activities is complex and the IRS is taking its mandate for enforcement seriously.

To find out more and how MNP can assist with U.S. tax compliance and planning matters, please contact us.