Americans in Canada: Amnesty Improvements

Commencing on July 1, 2014, a new version of the US offshore voluntary disclosure program (OVDP) came into effect, making it easier for US citizens to become compliant in their US personal filings. Of much wider appeal, however, is the release of updated streamlined filing compliance procedures, which fall outside the OVDP. There are now two subcategories in those procedures: (1) the streamlined foreign offshore procedure (SFOP) and (2) the streamlined domestic offshore procedure (SDOP).

The new version of the OVDP, like its predecessor, is expected to be used primarily for situations involving complex tax matters, potential criminal charges, or a need for a very high level of certainty. The SFOP, in both its new version and its previous version, waives most penalties and allows many Americans living in Canada to get up to date on their filings with less onerous compliance requirements than the OVDP imposes. Specifically, participants are not subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR (“Report of Foreign Bank and Financial Accounts”) penalties.

The SFOP revisions relax the rules in four primary ways:

  1. The IRS has eliminated the requirement that a taxpayer could not have unreported tax liability greater than $1,500 in a year.

  2. The risk assessment process has also been eliminated. Previously, individuals who may have done some tax planning, owned a company, or had some other characteristic that the IRS deemed potentially indicative of tax avoidance may not have used the process out of fear that their submission would be deemed high-risk and therefore subject to greater scrutiny and penalties.

  3. The non-residence component has been relaxed. Previously, participants could not have resided in the United States since January 1, 2009. The SFOP revisions essentially make the procedures available to those who have resided in the United States for up to two of the previous three years. Specifically,

    1. if the taxpayer is a US citizen, he or she must not have had a US abode, and must have been physically outside the United States for at least 330 days, in at least one of the last three years, and

    2. if the taxpayer is a permanent resident (that is, a green-card holder), he or she must not have been “substantially present” in one of the last three years. (This test is a calculation of physical-presence days in the United States over a moving three-year period.)

  4. Those who have previously filed income tax returns but understated foreign revenue, and did not submit a prescribed foreign reporting disclosure, may now use the procedures. (Amended returns were not previously allowed.)

Taxpayers will be required to provide a reason for the non-compliance, and the IRS must be satisfied that the non-compliance was “non-willful.” According to the IRS, “[n]on-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.”

For a taxpayer who is not eligible for the SFOP because he or she resided in the United States for each of the last three years, a modified version of the procedures—the SDOP—is available. Individuals may be eligible for the SDOP if they have filed a tax return for each of the most recent three years but (1) they have failed to report income from a foreign financial asset, and (2) the failure resulted from non-wilful conduct. If a taxpayer uses the SDOP, a mandatory 5 percent penalty on the highest aggregate balance or value of the taxpayer’s foreign financial assets is assessed. However, the taxpayer will not be subject to accuracy-related penalties, information return penalties, or FBAR penalties.

A submission under either the SFOP or the SDOP must include (among other items) the three most recent years of US tax returns (only amended returns are accepted for SDOP applicants) and the six most recent years of FBAR filings.

Finally, some individuals may have previously filed their income tax returns and reported foreign income appropriately, but may have missed filing a prescribed form related to foreign investments. These individuals are now to be directed to additional amnesty programs (other than OVDP, SDOP, and SFOP), which are titled “Option 3” and “Option 4.”

For more information, readers should consult the following IRS publications: IR-2014-73 (“IRS Makes Changes to Offshore Programs; Revisions Ease Burden and Help More Taxpayers Come into Compliance”); FS-2014-7 (“Offshore Income and Filing Information for Taxpayers with Offshore Accounts”); and FS-2014-6 (“IRS Offshore Voluntary Disclosure Efforts Produce $6.5 Billion; 45,000 Taxpayers Participate”).

Joseph Devaney
Video Tax News, Edmonton

Yun (Felix) Lin
Yun Lin Professional Corporation, Edmonton

Canadian Tax Focus
Volume 4, Number 3, August 2014
©2014, Canadian Tax Foundation