Streamlined IRS Tax Compliance for U.S. Expats Living in Canada
The original streamline procedures originally announced in 2012 were only available to taxpayers who were not U.S. residents. However, the success of the program for taxpayers living abroad has convinced the IRS to expand the availability of the streamlined programs to also include U.S. taxpayers living within the borders of the United States. Today, taxpayers living in the United States and in foreign countries may be able to come back into tax compliance through the streamlined procedures offered by the IRS.
Reporting Obligations for U.S. Taxpayers Holding Canadian RRSPs and RRIFs
Ensuring proper handling of foreign retirement plans like Canadian registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) can be difficult for a tax layperson. In recent years, the IRS has made changes to the filing requirements for taxpayers holding this type of account that now results in automatic qualification for beneficial handling similar to that of a 401(k) or IRA plan. Taxpayers are generally eligible for these benefits provided that file taxes for years where they hold an interest in such accounts.
In the past taxpayers seeking to receive this benefit were required to file IRS Form 8891 along with their tax return to receive a deferral. Otherwise, tax was due and owing on the retirement plan. Unfortunately, many taxpayers failed to comply with this requirement and failed to pay taxes or otherwise improperly claimed the deferment. Other taxpayers failed to continue to comply with their then-ongoing annual obligation to report information about the retirement plan including income, distributions, and contributions on for 8891. While Form 8891 no longer exists, tax payers that failed to report their account in past years still can face serious consequences due to these undisclosed offshore accounts.
Streamlined Foreign Offshore Program for U.S. Taxpayers Living in Canada & Other Foreign Nations
The Streamlined Foreign Offshore Tax Program was expanded in 2014 and covers a broad population of U.S. taxpayers living in a foreign nation. The 2014 changes eliminated several previous requirements for the Streamlined program including:
- Elimination of the risk questionnaire
- Elimination of a maximum unpaid tax of up to $1,500 in a single year
Additionally, one requirement was added to the program: The taxpayer must certify that all previous compliance failures were the product of inadvertent error, mistake, or otherwise not due to willful conduct.
Other requirements to qualify for the Streamline Foreign Offshore program to correct problems created by Canadian retirement accounts or other foreign financial accounts includes:
- The taxpayer or taxpayers must satisfy the residency requirements by showing that they are not living or maintaining a place of abode in the United States.
- The taxpayer has failed to report a foreign financial asset and pay tax on that asset. A failure to file FBAR may also accompany the failure.
Individuals seeking relief for failure to elect a timely deferral of income from a Canadian or other retirement plan must also submit certain paperwork and documents including statements regarding the circumstances that gave rise to the failure and a request for additional time. For eligible U.S. taxpayers living outside of the United States, all penalties will be waived.
U.S. Taxpayers Living in the United States
U.S. taxpayers living in the United States must follow different procedures for the Streamlined Domestic Offshore Program. Furthermore, the relief provided by the Domestic Streamlined program differs from the relief provided by the foreign program. To qualify for the Domestic Streamlined program, a taxpayer must:
- Fail to satisfy the non-resident test briefly described in the previous section.
- If required, have previously filed U.S. tax returns
- Failed to report income from a foreign financial asset potentially accompanied by an FBAR or FATCA filing failure.
- All non-compliance was the result of non-willful conduct.
For eligible U.S. taxpayers living within the borders of the United States, the only penalty they will be responsible for is a miscellaneous offshore penalty equal to 5 percent of the foreign financial assets that gave rise to the tax compliance issue. This is a significant discount compare to the standard streamlined procedure offshore penalty of 27.5 or 50 percent. If the IRS discovers your failure to disclose these accounts, penalties become even more severe.
Rely on Our Offshore Tax Experience
Ted Kleinman of US Tax Help is proud to provide tax services to U.S. taxpayers living in the United States, Canada, and throughout the world. To schedule a free and confidential tax consultation, schedule an appointment or contact us online today.