IRS FAQs on “Canadian and U.S. Tax Issues”

 
It looks like the IRS set up a FAQ category for Canadian and U.S. Tax Issues back in February 2012!

http://www.irs.gov/faqs/content/0,,id=199920,00.html


Now the IRS has got around to answering two whole questions, one from January 2012 and one from April 2012.

Notice that each of the two questions is followed by a survey form. [Click that radio button if you will — no free-form comments desired. Surprise surprise.]

Do you have any other questions? Do you think the IRS would answer them?

Do you think the IRS could answer them?

So many questions.
 

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19 thoughts on “IRS FAQs on “Canadian and U.S. Tax Issues”

  1. Not that I live in Canada, but I would be interested to hear comments from bloggers here (from Canada) as it concerns whether the IRS lived up to it’s promises (made by the U.S.Ambassador) concerning going light reporting-wise on U.S citizens in Canada (see the article below). This article makes clearing up the problem sound as easy as turning in a sick note to your teacher in grammar school, but I suspect that these people were baited with these promises and then fined to the stars when identified. Does anyone have any stories?

    The link:
    http://www.theglobeandmail.com/globe-investor/personal-finance/taxes/us-taxman-to-go-easy-on-american-residents-in-canada/article2257395/

  2. I am not aware that a US ambassador to Canada, or to any other country has any authority to commit the IRS to apply different standards to US persons who live in one foreign country than to those that live in another. Granted that there are more US persons in Canada than any other country, except possibly Mexico, but the massive penalties being applied to those in Canada are no different than those being applied to US persons in other countries who, had they properly filed US tax returns and FBAR reports on a timely basis are currently all being subjected to the same draconian penalties.

    As we have seen from one specific IRS letter reported on this blog, if the US person resident abroad does not like the world-wide taxation policy of the US he should consider renouncing US citizenship as some 1800 around the world have done, whose names were reported and publsihed recently by the IRS. Some have expressed the opinion that this number was underreported.

    In short there are no special provisions in US tax laws for “going easier” on US citizens resident in Canada. It might be well if those who are expecting that the Ambassador’s commitmnt would be fulfilled foillow up directly with him. We must all be accountable for fulfilling the commitments we make, must we not?

  3. @petros, he may honestly have believed that he would be able to negotiate a special deal for US citizens living in Canada, but I don’t see where there is any provision in the US tax laws that would permit such a thing to happen. Since nothing has happened to fulfill this commitment so far I only suggest that those whom he made this commitment should consider following him up for a report on the status of fulfilling this commitment.

  4. In the Globe and mail article which I cited it said that an IRS guideline would say:
    – If a U.S. citizen files tax returns late and owes no taxes, there are no penalties for failure to file.

    Yet Baird said that in her case they assessed her with late filing charges for four years. The IRS lies to Canadian reporters.

  5. @Petros, Here is the “copy and paste” from the IRS website, updated to April 20, 2012, with respect to international taxpayer failure to file and late file penalties.. Please note that if you file late but you owe zero in US taxes (because of the Foreign Earned Income Exclusion and the utilization of foreign tax credits, the late filing penalty for tax retuns, according to this inormation, is indeed Zero.

    But if you owe any taxes, then their are fines, penalaties, interest, etc. that are due.

    There ARE penalties for failure to file FBAR reports if the total maximum balance in all of these accounts was $10,000 or more at any time during the year covered by the report, even though no US tax was due, unless the taxpayer is able to convince the IRS that there was reasonble cause for failing to submit timely FBAR reports. The IRS seems to have considerable leeway in determining whether the reason for being late claimed by the taxpayer is reasonable or not.

    Here is the information:
    “Penalties imposed for failure to file income tax returns or to pay tax

    If you are required to file a federal income tax return and fail to do so, or you fail to pay the amount of tax shown on your federal income tax return, you may be subject to a penalty under Internal Revenue Code (IRC) section 6651, unless you show that the failure is due to reasonable cause and not due to willful neglect. The penalty is 5 percent of the amount of tax required to be shown on the return. If the failure continues for more than one month, an additional 5 percent penalty may be imposed for each month or fraction thereof during which the failure continues. The total failure to file penalty cannot exceed 25 percent. Note that there is no penalty if no tax is due.
    If you fail to pay the amount of tax shown on your federal income tax return, you may be subject to a penalty for failing to pay under IRC section 6651(a)(2), unless you show that the failure is due to reasonable cause and not due to willful neglect. The penalty begins running on the due date of the return (determined without regard to any extension of time for filing the return) and is 1/2 percent of the amount of tax shown on the return. If the failure continues for more than one month, an additional 1/2 percent penalty may be imposed for each additional month or fraction thereof that the amount remains unpaid. The total failure to pay penalty cannot exceed 25 percent. Note that there is no penalty if no tax is due.

    Under IRC section 6651(c)(1), the failure to file penalty is reduced by the amount of the failure to pay penalty for any month in which both apply.

    For more information regarding the failure to file penalty and the failure to pay penalty, see IRS Notice 746 (Information About Your Notice, Penalty and Interest).

    Example 1: Taxpayer is a United States citizen who lived abroad in Country A for all of 2010, during which time Taxpayer worked as an English instructor. He maintained a checking account with a bank in Country A, and the highest balance in the account did not exceed $10,000 in 2010. Taxpayer complied with Country A’s tax laws and properly reported all his income on Country A tax returns. Although Taxpayer earned income in excess of the applicable exemption amount and standard deduction, he did not timely file a federal income tax return for tax year 2010. After learning of his U.S. filing obligations, Taxpayer filed an accurate, though late, federal income tax return showing no tax liability after taking into account the section 911 foreign earned income exclusion and the foreign tax credit for taxes paid to Country A. Taxpayer is not liable for a failure to file penalty, since the amount of tax required to be shown on the federal income tax return is zero. Similarly, Taxpayer is not liable for a failure to pay penalty, since the amount of tax shown on the return is zero.

    Whether a failure to file or failure to pay is due to reasonable cause is based on a consideration of the facts and circumstances. Reasonable cause relief is generally granted by the IRS when you demonstrate that you exercised ordinary business care and prudence in meeting your tax obligations but nevertheless failed to meet them. In determining whether you exercised ordinary business care and prudence, the IRS will consider all available information, including:

    The reasons given for not meeting your tax obligations;
    Your compliance history;
    The length of time between your failure to meet your tax obligations and your subsequent compliance; and
    Circumstances beyond your control.
    Reasonable cause may be established if you show that you were not aware of specific obligations to file returns or pay taxes, depending on the facts and circumstances. Among the facts and circumstances that will be considered are:

    Your education;
    Whether you have previously been subject to the tax;
    Whether you have been penalized before;
    Whether there were recent changes in the tax forms or law that you could not reasonably be expected to know; and
    The level of complexity of a tax or compliance issue.
    You may have reasonable cause for noncompliance due to ignorance of the law if a reasonable and good faith effort was made to comply with the law or you were unaware of the requirement and could not reasonably be expected to know of the requirement.

    Example 2: Same facts as Example 1, except Taxpayer’s federal income tax return showed a tax liability of $2,100. Taxpayer is subject to the failure to file penalty, unless Taxpayer shows that the failure to file was due to reasonable cause and not due to willful neglect. Taxpayer is also subject to the failure to pay penalty, unless Taxpayer shows that the failure to pay was due to reasonable cause and not due to willful neglect. Since the failure to file penalty is reduced by the failure to pay penalty for any month during which both apply, the maximum failure to file penalty is $472.50 (22.5 percent of $2,100). The failure to pay penalty will accrue for 50 months before the 25 percent maximum is reached. The maximum failure to pay penalty is $525 (25 percent of $2,100). The penalties could be lower depending on when Taxpayer filed the return and paid the tax shown on the return. The penalties also could be lower, or there could be no penalties at all, to the extent Taxpayer is able to show that the failure to file or failure to pay was due to reasonable cause and not due to willful neglect.

    3. Possible additional penalties that may apply in particular cases

    In addition to the failure to file and failure to pay penalties, in some situations, you could be subject to other civil penalties, including the accuracy-related penalty, fraud penalty, and certain information reporting penalties. For information regarding the accuracy-related penalty and the fraud penalty, see IRS Notice 746 (Information About Your Notice, Penalty and Interest). For information regarding information reporting penalties, see the instructions for the specific information reporting form. For example, see the Instructions for Form 3520-A for information on the penalty for failure to file Form 3520-A.

    4. FBAR filing requirement

    As a United States citizen, you may be required to report your interest in certain foreign financial accounts on Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). For information about FBAR reporting requirements, including reporting exceptions, see Form TD F 90-22.1 and the IRS FBAR Frequently Asked Questions.

    5. How to file an FBAR

    For information about how and where to file an FBAR, see Form TD F 90-22.1 and the IRS FBAR Frequently Asked Questions.

    If you learn you were required to file FBARs for earlier years, you should file the delinquent FBARs and attach a statement explaining why they are filed late. You do not need to file FBARs that were due more than six years ago, since the statute of limitations for assessing FBAR penalties is six years from the due date of the FBAR. As discussed below, no penalty will be asserted if IRS determines that the late filings were due to reasonable cause. Keep copies, for your record, of what you send.

    6. Possible penalties for failure to file FBAR

    If you fail to file an FBAR, in the absence of reasonable cause, you may be subject to either a willful or non-willful civil penalty. Generally, the civil penalty for willfully failing to file an FBAR can be up to the greater of $100,000 or 50 percent of the total balance of the foreign account at the time of the violation. See 31 U.S.C. § 5321(a)(5). Note that this penalty is applicable only in cases in which there is willful intent to avoid filing. Non-willful violations that the IRS determines are not due to reasonable cause are subject to a penalty of up to $10,000 per violation. There is no penalty in the case of a violation that IRS determines was due to reasonable cause. For more information about the FBAR penalty, see Form TD F 90-22.1. For information about the reasonable cause exception to the FBAR penalty, see IRM 4.26.16, Report of Foreign Bank and Financial Accounts (FBAR).

    Example 3: Same facts as Example 1, except that the highest balance in Taxpayer’s checking account exceeded $10,000 and, after reading recent press and thus learning of his FBAR filing obligations, Taxpayer filed an accurate, though late, FBAR. The FBAR was accompanied by a written statement explaining why Taxpayer believed the failure to file the FBAR was due to reasonable cause. The IRS will determine whether the violation was due to reasonable cause based on all the facts and circumstances. Taxpayer’s explanation for why he failed to timely file an FBAR appears reasonable in view of the facts and circumstances of the case. Since the IRS determined that the FBAR violation was due to reasonable cause, no FBAR penalty will be asserted.

    Factors that might weigh in favor of a determination that an FBAR violation was due to reasonable cause include reliance upon the advice of a professional tax advisor who was informed of the existence of the foreign financial account, that the unreported account was established for a legitimate purpose and there were no indications of efforts taken to intentionally conceal the reporting of income or assets, and that there was no tax deficiency (or there was a tax deficiency but the amount was de minimis) related to the unreported foreign account. There may be factors in addition to those listed that weigh in favor of a determination that a violation was due to reasonable cause. No single factor is determinative.

    Factors that might weigh against a determination that an FBAR violation was due to reasonable cause include whether the taxpayer’s background and education indicate that he should have known of the FBAR reporting requirements, whether there was a tax deficiency related to the unreported foreign account, and whether the taxpayer failed to disclose the existence of the account to the person preparing his tax return. As with factors that might weigh in favor of a determination that an FBAR violation was due to reasonable cause, there may be other factors that weigh against a determination that a violation was due to reasonable cause. No single factor is determinative.

    Current IRS procedures state that an examiner may determine that the facts and circumstances of a particular case do not justify asserting a penalty and that instead an examiner should issue a warning letter. See IRM 4.26.16, Report of Foreign Bank and Financial Accounts (FBAR). The IRS has established penalty mitigation guidelines, but examiners may determine that a penalty is not appropriate or that a lesser (or greater) penalty amount than the guidelines would otherwise provide is appropriate. Examiners are instructed to consider whether compliance objectives would be achieved by issuance of a warning letter; whether the person who committed the violation had been previously issued a warning letter or has been assessed the FBAR penalty; the nature of the violation and the amounts involved; and the cooperation of the taxpayer during the examination.

    Example 4: Taxpayer is a United States citizen who lives and works in Country B as a computer programmer. Taxpayer has checking and savings accounts with a bank that is located in the city where he lives. The aggregate balance of the checking and savings accounts is $50,000 during the tax year. Taxpayer complied with Country B’s tax laws and properly reported all his income on Country B tax returns. Taxpayer failed to file federal income tax returns and failed to file FBARs to report his financial interest in the checking and savings accounts. After reading recent press and thus learning of his federal income tax return and FBAR reporting obligations, Taxpayer filed delinquent FBARs, reporting both foreign accounts, and attached statements to the FBARs explaining that he was previously unaware of his obligation to report the accounts on an FBAR. Taxpayer also filed federal income tax returns properly reporting all income and no tax was due. The IRS will determine whether the FBAR violation was due to reasonable cause based on all the facts and circumstances. Taxpayer had a legitimate purpose for maintaining the foreign accounts, there were no indications of efforts taken to intentionally conceal the reporting of income or assets, and no tax was due. Taxpayer’s explanation for why he failed to timely file an FBAR appears reasonable in view of the facts and circumstances of the case. Since the IRS determined that the FBAR violation was due to reasonable cause, no FBAR penalty will be asserted.

    7. New reporting requirement for foreign financial assets

    A new law requires U.S. taxpayers who have an interest in certain specified foreign financial assets with an aggregate value exceeding $50,000 to report those assets to the IRS. This reporting will be required beginning in 2012. Taxpayers who are required to report must submit Form 8938 with their tax return. See Notice 2011-55 for additional information about this reporting requirement under IRC section 6038D.

    Page Last Reviewed or Updated: April 20, 2012”

  6. @Petros and Roger…

    As many practitioners said, after reviewing these supposedly “new” guidelines, there was nothing new at all. Just old information, with standard practices wrapped in a new covering to imply that some special action had been taken.

    I think Rogers point is a valid one, the Ambassador does not have the power to change the Tax Code, or the regulations that guide the IRS including the IRM penalty guidelines for failure to report income or FBAR failures.

    He probably was sincerely trying to reassure people with seemingly reasonable statements about “Our intention was not to abscond with some innocent grandmothers”, but as we know reason and logic does not have a place in tax enforcement policy!

    He probably has not given the issue another thought since he was quoted at the Globe as saying… “From where I’m sitting, it’s going to take care of the problem I was most concerned about … which is that people just didn’t know they were supposed to do this.”

    He has done all he is going to do.

  7. Let’s go back to basics, the whole arrogance of the US producing a bulletin for dual US and Canadian citizens is outstanding.

    It’s as if Canadian citizenship is some second-class citizenship as opposed to being a US citizen and Canadians resident in their own country don’t have a choice to ignore US requests.

  8. @JustMe, You stated, referring to the US Ambassador to Canada “He probably has not given the issue another thought since he was quoted at the Globe as saying… “From where I’m sitting, it’s going to take care of the problem I was most concerned about … which is that people just didn’t know they were supposed to do this.”

    Now they know what they have to do. It is either “pay up” or “pay up.” And this applies to granmothers as well. Without so stating I suspect that he now recognizes that the only way out of this lifelong laberynth for persons with US citizenship in Canada is to renounce US citizenship. That is what the IRS Branch Chief in the Office Of Chief Counsel (International) in Washington has recommended, in writiing, as the course of action our blogger in Brazil should consider. It would be interesting to know if the Ambassador now recommends this same course of action.

  9. @Nobledreamer

    If I’m not mistaken you relied on the FS to file your returns prior to your renouncing. Did you have any thoughts to add to this thread? I recall you had commented on this issue before.

  10. @renounceuscitizenship

    Wow, you have an amazing memory. Yes, that is correct. I felt that
    Example 4 fit my situation well and the comments below suggested to me that I they were unlikely to penalize me;
    *taxpayer had a legitimate purpose for maintaining the foreign accounts,
    *there were no indications of efforts taken to intentionally conceal the reporting of income or assets, and no tax was due.
    *Taxpayer’s explanation for why he failed to timely file an FBAR appears reasonable in view of the facts and circumstances of the case. Since the IRS determined that the FBAR violation was due to reasonable cause, no FBAR penalty will be asserted.

    I have heard nothing back regarding the FBARs. However, I did receive a letter back after they processed my 1040’s. I think it was Form 854, and indicated that my attempts to establish reasonable cause were not valid and that I was being assessed a failure to file penalty. There was no amount on the letter that indicated what the penalty was. I phoned my CPA sister who said she had never seen a penalty letter without an amount. A few days later, another blogger, from the Hamilton ON area, posted that he/she had filed via KPMG, & had a similar response/letter. KPMG checked it out with IRS who said the letter could be ignored. At that point I let it go because the less I have to do with the IRS, the better, as far as I am concerned.

    Since I have, from the beginning always been prepared to refuse to pay FBAR penalties and face the consequences, I figured I would take the chance of trusting what they said since it was my choice to do what I could to comply and that I was going to have to file to renounce anyways. I still have no idea if they have even gotten to my FBARs, which I sent registered to Detroit and know they received in mid -December.

  11. @John,

    Of course Canadians resident in their own country don’t have a choice to ignore US requests. The US simply doesn’t get that the rest of the world does not view them as automatically superior and correct about whatever they choose to try and impose.

    I think the quote from Frost/Nixon kind of sums it up:

    Nixon: “When the President does it, that means it’s NOT illegal.”

    IOW, “we can do whatever we want because after all, we are always right.” GRRRRRRRRRRR

  12. When citizenship based taxation started, the laws of citizenship itself were very much different then they are today. With the various supreme court decisions and changes in the citizenship law itself, tax law and citizenship law have become out of step. If citizenship law were where it was in 1962, I would have automatically lost my USC and so not be in the boat I am in today. Tax law is out of date and needs to catch up with citizenship law!

  13. @TrueNorth
    It just shows how messed up they are in the U.S. As I understand it, the Nationality Law (which was amended in 1986) still stands regarding ‘expatriating acts’ resulting in ‘relinquishment of citizenship’. And I believe that is the law the DOS recognizes and therefore will issue CLN’s and show the date of the expatriating act as the date of ‘relinquishment’.
    Then the IRS (who BTW thinks of itself as a Supreme Being) makes up its own “Loss of Nationality Law”.
    Personally, I believe that is why many on this site, who have recently filed for their CLNs plan to make that the end of it – and not file any tax returns. That would be my attitude also. I relinquished in 1972. I sure am not going to file tax returns for the years 2007 through 2012.

  14. @Nobledreamer, you said earlier:
    “I have heard nothing back regarding the FBARs. However, I did receive a letter back after they processed my 1040′s. I think it was Form 854, and indicated that my attempts to establish reasonable cause were not valid and that I was being assessed a failure to file penalty”

    I am a little confused: I thought the reasonable cause letter was to be sent with the late FBARs. Did you also send one with your amended returns? How much longer after you sent the returns did you receive that letter?

    How many years of FBARs and amended returns did you send? I find weird that the SoL is different for FBARs and taxes. For people considering quiet disclosure, is this OK to send 6 years of FBARs and only 3 years of 1040x?

    Thanks.

  15. @ Christophe

    No, you are not confused. I just decided to send a letter with both sets. I figured it couldn’t hurt. It seemed odd to just send the 1040’s with no explanation. And in spite of the FS, I still worried about the IRS deciding it was a “quiet disclosure.”
    The 1040’s were received in Austin on December 14, 2011. I send them via Xpresspost, so I could track them and know that they arrived. Their letter is dated January 24, 2012. So nearly 6 weeks between the time they received my forms and “composed” the letter.

    I sent both sets of forms for 2007, 2008, 2009 and 2010. I renounced on Jan 20, 2012. So 2011 will be my 5th year to confirm on the 8854.

    I cannot advise you on what to send. I believe it depends on many factors. Are you planning to keep your USC? If not, my reading of it means only 5 years prior to the year of renunciation. If you are planning to keep USC, FS-2011-13

    With regard to US income tax filing requirement, IRS has said
    “Generally, you only need to file returns going back six years.”
    I have read in several places that some lawyers advise 3 yrs, or even 4 year. That idea seemed to be based upon showing a pattern as I recall. I guess the number of years for FBAR depend upon SoL?

  16. @ Christophe,

    Sorry, I didn’t check before I hit the “post” button. I meant to include the link for FS-2011-13 so you could see where the quote about 6 years for 1040’s came from:

    FS-2011-13

Comments are closed.