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Taxing move could end 'quiet disclosure'

IRS tightens rules for non-resident U.S. citizens

By: David Christianson

Posted: 09/21/2012 1:00 AM | Comments: 0

It is sure a good thing we have done away with the ancient custom of shooting the messenger who bears bad news. I would likely look like Swiss cheese from all of the bullet holes.

On Aug. 31, the Internal Revenue Service of the United States (the IRS) followed through on its June promise to issue the specifications and guidelines for a new procedure to make it easier for Americans living abroad to catch up on their delinquent tax-filing requirements.

I waited until now to report on this, in order to attend an Institute for Advanced Financial Planners presentation last Saturday in Vancouver. This was put on by Terry Ritchie, whom I consider to be the best-informed adviser in Canada on such matters. His practice focuses exclusively on cross-border issues.

Recall that anyone who was born in the United States (even by "accident") or to U.S. parents in Canada, or is otherwise a U.S. citizen or U.S. green card (work permit) holder, is required to file a U.S. tax return each year with the IRS, and a Report of Foreign Bank and Financial Accounts (FBAR report) with the Department of the Treasury.

Yes, the United States taxes on citizenship, rather than residency, as Canada does. That means Americans all over the world are subject to these rules, not just the estimated one million Americans living in Canada.

To try to get non-filers into the system over the past several years, the IRS has had several partial amnesty programs, such as the current Offshore Voluntary Disclosure Program, which decreased the fines and penalties from the usual ridiculously high amounts to just the ludicrous level.

But these programs have been far less attractive to most taxpayers than "quiet disclosure," in which they have filed three to six years of returns and FBARs and re-entered the system quietly.

It appears the days of quiet disclosure may be past.

New IRS guidelines (New Streamlined Procedure for Non-Resident, Non-Filer U.S. Taxpayers) are helpful to an extent, in that they clarify certain requirements.

They specify that "low-risk" delinquent taxpayers will be required to file a Form 1040 tax return for the past three years and the FBAR report (Form TD F 90-22.1) for six years, along with a two-page questionnaire and statement of truth, under rules of perjury.

A "low-risk" taxpayer is one with less than $1,500 owing in each of the years submitted. These folks may qualify for the simplified procedure. However, any one of a dozen factors could throw a taxpayer into the "risk" category, and force filing of additional returns. Things like requesting a refund, having economic activity in the United States, U.S.-source income, having accounts outside their country of residency or any history of penalties in tax filings make you high-risk.

A harsh reality is the IRS is getting more sophisticated and aggressive in going after the billions in taxes that are unpaid by U.S. citizens. They -- or rather their computers -- are also talking more closely with the Border Service, and sharing data on U.S. citizens travelling in and out of the United States.

One thing that seems clear is the days of U.S. citizens burying their heads in the sand about this issue are getting short. All who are behind in their returns should move quickly to get caught up.

Remember, I'm just the messenger. If you think the IRS goes too far, let a U.S. politician know instead of me -- I'm already on your side.

-- -- --

I hope you'll join me and my classic-rock band Highway 59 at the King's Head Pub tonight. Cooler weather outside always guarantees a rockin' good time inside, and you can ask Gary Golden or me for financial advice during the breaks!

David Christianson is a fee-for-service financial planner with Wellington West Total Wealth Management Inc., a portfolio manager (restricted).

dchristianson@wellwest.ca

Republished from the Winnipeg Free Press print edition September 21, 2012 B6

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