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U.S. tax-evasion amnesty deadline extended

American citizens living in Canada have a little longer – until Friday – to apply for a limited amnesty from a U.S. tax-evasion crackdown.

The U.S. Internal Revenue Service announced late last month that it is extending its Aug. 31, 2011 Offshore Voluntary Disclosure Initiative (OVDI) deadline for U.S. citizens, residents and green-card holders to report their foreign bank accounts.

"Due to the potential impact of Hurricane Irene, the IRS has extended the due date for offshore voluntary disclosure initiative requests until Sept. 9, 2011," the IRS said in a statement on its website dated Aug. 26.

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The extension provides a brief reprieve for the many people scrambling to comply with tough new U.S. tax laws designed to uncover Americans who are hiding money offshore. The crackdown stems from the IRS push to recover lost taxes from U.S. money stashed in foreign banks around the world.

Even if they do not actually owe any U.S. taxes, people who fail to come forward could be hit with steep fines, simply because they failed to file a yearly statement of income.

"The extension means that Americans who are living in Canada but have not been compliant and who want to be accepted in to the OVDI program have an additional eight days to apply for the 90-day extension," says Wayne Bewick, a chartered accountant in Canada and U.S. certified public accountant who is a partner with Trowbridge Professional Corp. in Toronto.

"If there is anyone who is still contemplating being compliant with their U.S. tax filings using the voluntary disclosure program, they should do so right away."

Under the 2011 OVDI, penalties are reduced to a range of zero to 25 per cent of the balance of all non-U.S. financial accounts and assets – including chequing and saving accounts, investment accounts, and tax-free savings accounts. The IRS calculates the penalty by looking at what year between 2003 and 2010 that an individual had the highest aggregate balance for all of their non-U.S. accounts.

Mr. Bewick says his office has been flooded with requests this summer from people looking to take advantage of the amnesty.

Many U.S. citizens living in Canada are angry because they have been dutifully paying their Canadian taxes but scared of the consequences of not coming forward, he says. "The thought that the IRS could heavily penalize them for not being compliant with their U.S. filings, when they have always paid their Canadian taxes, especially when they have been out of the U.S. for 20, 30 or 40 years seems ludicrous to them, and like outright robbery."

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Mr. Bewick has one client with a net worth of $2-million who left the U.S. when he was 11 years old and has never filed a U.S. tax return. This client has decided to apply for the amnesty program and pay a huge fine, even though he has not lived there in over 40 years.

"He does not even have a U.S. social security number so ... it is clear that he has not benefited from his U.S. citizenship but he is still going to have to pay $125,000," Mr. Bewick says.

Unlike most countries, the U.S. requires its citizens to file annual tax returns based on their worldwide income, regardless of where they live and even if they do not owe any taxes.

That law has never been enforced and many Americans living in Canada, even those who have never worked in the U.S. and also hold Canadian citizenship, were unaware that they needed to do so.

As of 2014, the IRS will require foreign financial institutions to identify all accounts held by Americans. Many Canadian banks and brokers are already starting to document customers with suspected ties to the U.S.

Separately, the Canada Revenue Agency will not collect any penalties imposed by the IRS, the federal finance department recently said.

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