SBLR Chartered Accountants

You Can Run, But You Can't Hide From The IRS!

If you are a U.S. citizen, living in Canada, who has neglected to comply with U.S. tax filings, take note!

On January 9, 2012, the Internal Revenue Service (IRS) reopened the offshore voluntary disclosure program which had previously expired in September of 2011.  The program is directed mainly at U.S. taxpayers who have failed to disclose offshore assets, and related income, to the IRS.

The program has been revised for 2012.  For taxpayers who have intentionally hidden assets offshore, they have the opportunity to become compliant without the threat of criminal penalties, although the top penalty rate has now increased to 27.5% (up from 25% in the 2011 program and 20% previously).

Taxpayers with less significant offshore assets or accounts (generally with value less than $75,000 US) and those who have been fully compliant in their country of residence may still qualify for reduced late-filing penalty rates of 5%. 

Filings must be made for the last 8 years and the penalties will be based on the highest aggregate value of the foreign assets over that period.

The new program still does not clearly address the issue of innocent non-filers, who have two options:

1. They can file under the new program and pay a penalty of at least 5% of the value of their non-U.S. financial accounts; or

2. They can opt to file outside of the new program using a reasonable cause argument, if they can demonstrate a reasonable cause as to why returns have not been filed on a timely basis.

However, the IRS has not provided clear guidance on what constitutes acceptable “reasonable cause" and it notes that penalties may be increased at any time and the voluntary disclosure program may terminate at any point.

If not for this voluntary program, the legislative penalties for failing to disclose offshore assets are very harsh:  an automatic penalty of $10,000 per late filing, up to 50% of the balance in the account, and possible criminal charges if it can be proven that the assets were willfully withheld from the government.

The message is clear – taxpayers who continue to delay or ignore the U.S. filing disclosure of offshore assets and income tax requirements will only face more punitive repercussions as time goes on.  To be certain, it will be much more difficult to prove reasonable cause for not filing (i.e. lack of awareness of the reporting obligations), due to the amount of publicity afforded the issue over the past several years.  Our advice?  Act now in order to avoid major headaches (and penalties) in the future.

 

 

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