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U.S. tax return

U.S. CITIZENS LIVING IN CANADA – NEW SIMPLIFIED U.S. TAX FILING PROCEDURE FOR DELINQUENT INDIVIDUALS
Gerry De Luca, CPA, CA, D.E.S. Fisc. | Partner, International Tax
Linda Spina, CPA, Member of theAmerican Institute of Certified Public Accountant | Senior Manager, Taxation

1. Announcement of a new IRS measure
On June 26, 2012, the IRS announced a new simplified tax filing procedure for delinquent non-resident U.S. taxpayers, which took effect on September 1, 2012. The IRS has implemented this procedure because it knows that many U.S. taxpayers who reside abroad, a good proportion of whom have dual citizenship, have failed to file their U.S. tax returns and certain foreign asset information forms on time. The IRS also recognizes that many of these taxpayers have only recently been informed of their obligations to file U.S. tax returns, and now wish to comply with the law. It is estimated that over one million U.S. citizens reside in Canada, but only a small percentage of them have filed their U.S. tax returns and complied with all related reporting requirements.

 

2. Advantages of the new simplified procedure
This procedure is specifically aimed at US taxpayers who are considered “low risk” by the IRS. A taxpayer who files a simple tax return and has little or no U.S. tax liability (less than $1,500 in any given tax year) will be considered a low-risk taxpayer and will be able to use the simplified procedure. The advantages of this new procedure include an accelerated review by the IRS, and the fact that this agency will not impose any penalties or take any other action. The taxpayer will only be required to file overdue income tax returns for the last three years, overdue TD F 90-22-1 forms for the reporting of financial assets and foreign bank accounts for the last six years, and pay any outstanding balance of tax. In addition, a taxpayer who fails to do so within the prescribed time limits may retroactively elect to defer tax on income earned in certain retirement savings plans, such as RRSPs and RRIFs, as permitted by the Canada-U.S. Tax Treaty. The choice of this deferral must be made in accordance with these plans and at the same time as the application is submitted to the program. The taxpayer must also send a completed questionnaire to the IRS, which will help determine the level of compliance risk.
3. Eligibility
To qualify for the new procedure, the non-resident U.S. taxpayer must have resided outside the U.S. since January 1, 2009, and present a low risk, as mentioned above. Amended returns filed by a taxpayer under this program will be considered high-risk and may be subject to examination by the IRS.

 

All returns must include a valid Social Security number if filed by a U.S. citizen, or an Individual Tax Identification Number if filed by a person not eligible for a Social Security number.

 

4. Determination of assessment risk in relation to compliance
The level of assessment risk will be determined on the basis of information provided in tax returns, foreign financial asset declarations and the questionnaire sent out. Assessment risk will generally be considered low if the taxpayer files simple tax returns and has little or no U.S. tax liability. However, the level of assessment risk may increase if the taxpayer finds himself in any of the following situations:
  • a refund is claimed on the tax returns filed;
  • substantial economic activity in the United States;
  • the taxpayer has not declared all his income in his country of residence;
  • the taxpayer is the subject of an IRS audit or investigation;
  • penalties for declaring foreign bank and financial accounts have already been imposed on the
  • taxpayer or the taxpayer has already received a warning letter in this regard;
  • the taxpayer has a financial interest in, or exercises control over, one or more financial accounts outside the country of residence;
  • the taxpayer has a financial interest in one or more entities located outside his country of residence;
  • he declares U.S.-source income;
  • there are indications of complex tax planning or tax avoidance strategies.

For taxpayers who present a higher assessment risk, the IRS will conduct a more thorough review and may conduct a full examination of returns, extend the review to more than three years, and impose interest and penalties on U.S. tax balances due.

5. Criminal prosecution
It is important to note that the new simplified procedure does not provide U.S. taxpayers with immunity from criminal prosecution, should the U.S. Department of Justice or the IRS determine that such prosecution is warranted. If the taxpayer is concerned about the possibility of criminal prosecution, we recommend that he or she consult a professional tax advisor about the voluntary foreign income disclosure program that was reinstated by the IRS on January 9, 2012. This indefinite program offers a civil settlement agreement under which the taxpayer pays a penalty on foreign income and receives protection against criminal prosecution. This is another option for taxpayers who have not declared foreign income or financial accounts. A taxpayer who chooses to use the simplified procedure cannot take advantage of this program. In addition, a taxpayer who is not eligible for the voluntary foreign income disclosure program is not eligible for the simplified procedure either.

6. One last point
Choosing a competent U.S. tax advisor to ensure that you meet U.S. tax compliance and reporting requirements is an important decision. The professionals at Demers Beaulne can meet with you to assess whether you qualify for the simplified procedure or to discuss your options under the 2012 Voluntary Foreign Income Disclosure program. We have the necessary experience to help US citizens regularize their situation with the US tax authorities, notably through the new simplified procedure.
Demers Beaulne’s tax professionals are at your service around the clock to meet your tax planning and U.S. tax compliance needs. Our experts hold the Certified Public Accountant designation in the United States, and are duly registered with the applicable state professional association. What’s more, our Canadian and cross-border tax specialists are fully conversant with the specific tax issues faced by dual citizens. Our international tax team has the technical skills, experience and contacts required to optimize your global cross-border tax situation, and is on the lookout for the latest changes in tax laws to help you manage the risks these changes entail.

Demers Beaulne’s U.S. and international tax team is at your service:

Gerry De Luca, CPA, CA, D.E.S. Fisc.
Partner
Telephone: 514-878-0294
E-mail :

gdeluca@demersbeaulne.com

Marie-Claude Péthel, CPA, CA
Associate
Telephone: 514-878-0262
E-mail :

mcpethel@demersbeaulne.com

Linda Spina, CPA, Fellow of theAmerican Institute of Certified Public Accountant
Senior Manager
Telephone: 514-878-0281
E-mail :

lspina@demersbeaulne.com

This is a newsletter published by Demers Beaulne that deals with international tax issues affecting Canadians and non-residents.

This bulletin contains general information on cross-border tax issues. Please note that this bulletin is not intended to replace professional advice.

Demers Beaulne’s U.S. and international tax team can proactively advise you on international tax issues (both inbound and outbound from Canada), including the following:
  • cross-border acquisitions and restructuring;
  • financing;
  • capital repatriation or exit strategies;
  • overseas assignment services (expatriate taxation);
  • compliance services – U.S. and Canadian tax returns.

Should you require any further information regarding this newsletter or the above-mentioned services, please contact Mr. Gerry De Luca directly.

 

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