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Update on the U.S. ‘Streamlined’ Voluntary Disclosure Program

01/02/2016


​​​For the basics on this program, see my blog here.​​

When will the program end?

On December 17, 2015, IRS Commissioner John Koskinen said that about 20,000 taxpayers had utilized the Streamlined Filing Compliance Procedures to disclose their foreign assets. These taxpayers include:​

  • Americans living abroad: Overwhelmingly the largest group, just about all of them filing for the first time, or after having ceased filing years earlier;
  • U.S. residents with foreign accounts that were previously undisclosed, and
  • Non-Americans ​with U.S. sources of income that required U.S. tax returns: Likely a very small portion.

The IRS doesn’t have a plan for when it will end the program, Said Mr. Koskinen. “We’re collecting a lot of information through FATCA”.

I read that as code for: “We’re thinking about when it would be appropriate to end the program. We’ll probably do it when we’ve accumulated enough information through FATCA to crack down on the rest of you effectively.”

This is not unreasonable. The IRS started broadly targeted, widely advertised voluntary disclosure programs for people with foreign assets in 2009. If you’re a U.S. person and you still don’t know that you have to file, you must have been living under a rock.

The IRS will have its first full calendar year of FATCA information for 2015. Taxpayers living abroad can extend their filing due date for this year as late as December 15, 2016. The IRS needs some time to digest this information, so my guess is that the Streamlined program will be shut down sometime in 2017.

The IRS Axes the Penalty for U.S. residents on Canadian Retirement Plans

For eligible taxpayers residing outside the United States using the Streamlined Foreign Offshore Procedures, there is no penalty. However, for taxpayers residing in the United States, filing under the Streamlined Domestic Offshore Procedures requires payment of a penalty equal to 5% of the highest aggregate value of the taxpayer's foreign financial assets. The new rule, in most cases, excludes Canadian retirement plans (RRSPs, RRIFs, etc.) from this penalty.

Before I go further, it’s probably helpful to offer a refresher on Canadian retirement plans owned by a U.S. citizen or resident: Under U.S. domestic law, income earned in the plan is treated no differently than income earned in any other account – it’s almost always taxable as it’s earned. However, under the tax treaty, a taxpayer can elect to defer the income until it is withdrawn from the plan and taxed by Canada. This way, Canada and the United States tax the income at the same time and the foreign tax credit will usually avoid double taxation.

In the past, taxpayers had to file various different disclosures to gain the benefit of this treatment for individually-held plans (e.g. RRSPs and RRIFs, not employer-sponsored pension plans), but in 2014, the IRS began to allow the treatment as a default (i.e. no filing required) for most people. This was true even if the taxpayer had not properly made the election previously.

New FAQs provide:

  1. A taxpayer that has a Canadian individual retirement plan (and is using the deferral approach) should not include the retirement plan in the 5% penalty base;
  2. If this plan is the only foreign financial asset that a taxpayer owns or controls, the taxpayer does not need to report that interest under the Streamlined Domestic Offshore Procedures. Delinquent FBARs and forms 8938 still must be filed.
  3. Generally, if a taxpayer previously reported accrued but undistributed earnings in a Canadian retirement plan, but now realizes he could have deferred the tax, he may submit amended income tax returns through the Streamlined Domestic Offshore Procedures and be afforded relief.

This treatment is not available if the taxpayer reported accrued but undistributed income for tax years that are not part of the submission (the submission is usually made for the most recent 3 years).

This treatment is also not available if the taxpayer failed to report distributions from the plan as if he had made the treaty election.

In these two cases, the taxpayer must seek IRS consent for softened treatment.

If the taxpayer does qualify to use this procedure, the Canadian retirement plan will not be included in the 5% penalty base.

For more information on managing your U.S. tax obligations, contact Kevyn Nightingale, CPA, CA, CPA (Illinois), TEP, Tax Advisor, at 416.515.3881 or [email protected]​, or your local MNP Tax Advisor.