Last April, I discussed some of the unique financial tax and estate planning issues your American-in-Canada clients face (see www.
cecorner.ca, "Cross-border planning: updated"). Given a recent spate of U.S. tax law and enforcement changes, the ability for most Americans who live or work abroad to hide from Uncle Sam is quickly coming to an end.
The U.S. government needs money — and lots of it — so the IRS is going after U.S. taxpayers living abroad. That's affecting a number of our clients, as well as Canadian financial institutions with which Americans have accounts.
Through a program that strongly encourages Americans working abroad to comply with annual U.S. tax and filing requirements, the U.S. government is hoping to generate additional revenue through income tax and penalties, with compliance enforcement assistance from financial institutions in those countries.
Contending with complexity
American tax laws are complex. All U.S. citizens are also U.S. residents for income, gift, and estate-tax purposes—irrespective of where they live, where they generate income, where they hold assets, or where they die. And because Canadian dual citizens don't live in or generate income from the U.S., it's easy for them not to know these rules.
In 2009, the IRS collected US$780 million from UBS in Switzerland, along with additional information on client accounts. This success suggested a significant number of Americans are likely holding assets abroad and not reporting them.They include those who have lived in Canada for the majority of their lives, such as your 85-year-old client who was born in Iowa and holds a $300,000 RRIF.
The U.S. Congress, IRS and other governmental agencies are getting results. The IRS had hired approximately 3,300 new agents and tax compliance officers in the 2009-2010 tax years.
With the passing of the U.S. Foreign Account Tax Compliance Act (FATCA) and the IRS's Offshore Voluntary Disclosure Initiative (OVDI) programs, the war has only just begun. According to the IRS, the 2009 and 2011 OVDI programs saw 33,000 U.S. taxpayers remitting an additional $4.4 billion.
There has been significant confusion around whether it would make sense for American citizens who reside in Canada to participate in the OVDI programs.
These programs required overseas U.S. citizens to file original or amended U.S. tax returns for the previous eight years, together with any unpaid taxes, interest and penalties. Further, they were obligated to report any foreign account holdings during the past eight years and then pay a penalty on the highest aggregate annual balance.The penalty under the first program: 20%. Under the second program: 25%. In some cases, individuals could be eligible for a penalty as low as 5% on their highest aggregate balance.
Yet U.S. tax practitioners and attorneys differ as to whether or not people should have participated in these programs.