There are untold numbers of US citizens who have lived in Canada for many years. Most have never filed US tax returns and (because of the US foreign tax credit) owe no US tax. Nor have they filed FBAR Form 90-22.1 to report their “offshore” (i.e., Canadian) accounts.
One might intuitively view this as a “no harm no foul” situation. Guess again. The US civil penalties for failure to file Form 90-22.1 are prohibitive, and range from 5% to 50% of the account balance. Criminal prosecution is also possible.
Finally, there is tangible relief under IRS Internal Release 2012-65, which was issued June 26, 2012 and becomes effective on September 1, 2012. Key provisions of IR-2012-65 include:
● Taxpayers must submit delinquent Forms 1040NR (along with full payment of income taxes and interest) for the prior three years, and delinquent Forms 90-22.1 for the prior six years.
● The IRS will perform an expedited review and will not assess penalties against taxpayers with “low compliance risk,” meaning, in general, those who have simple returns with less than $1,500 in tax due for each delinquent year. While the penalty waiver seems to be solely linked to “low compliance risk,” IR-2012-65 goes on to say that a taxpayer having reasonable cause for delinquent filings should submit a dated statement signed under penalty of perjury that explains why reasonable cause exists.
● In general, high risk factors include (i) a rise in income or assets of the taxpayer, (ii) indications of sophisticated tax planning or avoidance, (iii) material economic activity in the US, (iv) any history of noncompliance with US tax law, and (v) certain types of US source income.
● The IRS will release additional details prior to the September 1, 2012 effective date.
The key benefit of IR-2012-65 is that FBAR penalties will be waived for most taxpayers who owe no US tax. Prior IRS guidance (such as FS-2011-13) hinted at this result, but was not definitive. Hopefully, the follow-up details to IR-2012-65 will be as promising as those issued on June 26, 2012