The United States is moving to entice more U.S. expatriates – including hundreds of thousands of Canadians – to come clean on their back taxes just days before a planned crackdown on foreign financial institutions comes into force.
Acknowledging that it has sometimes treated honest taxpayers too harshly, the Internal Revenue Service said Wednesday that it's significantly relaxing the rules on an existing tax amnesty program – changes it says will give "thousands of people a new avenue to come into compliance."
Canada is home to as many as a million Americans and dual citizens, many of whom have not filed U.S. taxes and bank account reports for years in the mistaken belief that they did not need to because they owed nothing to the IRS.
IRS officials acknowledged that Americans living in Canada, where taxes are generally higher, are a key target of the new rules.
"These are exactly the type of people we would expect to see come in as a result of these streamlined procedures," Michael Danilack, IRS deputy commissioner of international operations, told reporters on a conference call. "We expect that those folks will take a look at this expanded program and say, 'This is for me. Now I can sleep at night, get my returns in and know I've met my obligations going forward.' "
Key changes include the waiving of all financial penalties, eliminating a requirement that only taxpayers who owe less than $1,500 (U.S.) a year in taxes qualify for amnesty and allowing individuals to modify previous tax filings.
Taxpayers will simply have to "self-certify" that their earlier failures to comply were not "willful." The IRS is scrapping a previously used risk assessment questionnaire, which Mr. Danilack described as "scary" to many taxpayers.
"We discovered that there were people … for whom the existing program penalties were too harsh or restrictive," IRS Commissioner John Koskinen said in a statement.
The changes come less than two weeks before the U.S. Foreign Account Tax Compliance Act (FATCA) comes into effect. The law forces foreign financial institutions to start collecting and eventually remitting information about accounts held by U.S. citizens and green-card holders.
Tax experts said the revised amnesty program is long overdue because it significantly reduces the potential financial risk for people who want to start filing.
"With the implementation of FATCA, you can't keep putting this off any more because they are going to catch you," warned Dean Smith a partner at Cadesky and Associates LLP in Toronto. "The IRS is really trying to be lenient and get people in before they get caught."
Kevyn Nightingale, a U.S. tax specialist at MNP LP in Toronto, said the changes will allow "a lot more" Canadians to qualify for amnesty. But he pointed out that there may be millions of non-filers around the world – far more than the "thousands" the IRS expects to come clean. Six to seven million Americans live abroad, but fewer than a million of them currently fill out mandatory annual foreign bank and financial account reports, or FBARS, Mr. Nightingale said.
The looming threat of FATCA coming into effect has caused a lot of consternation among the hundreds of thousands of Americans living in Canada. Under a recent agreement between Canada and the U.S., the Canada Revenue Agency will begin collecting information on all financial accounts worth more than $50,000, starting at the end of 2015.
Individuals entering the streamlined program will continue to have to file three years of back taxes and six years of foreign bank account reports. They may also be subject to different U.S. tax rules, including a new investment tax to pay for Obamacare and no tax holiday on capital gains. Unlike most other countries, the U.S. taxes all citizens, regardless of where they live.
In the past, the only option for wealthier taxpayers who were behind on their U.S. tax obligations was to enter the Offshore Voluntary Disclosure Program, aimed at people who hide cash in offshore tax havens to duck the IRS. The program includes punitive penalties on all assets. The IRS also announced that it would be increasing the penalty on foreign assets to 50 per cent from 27.5 per cent to go harder on "willful" tax cheats.