The IRS announced on June 4, 2019, that it will end its tax transcript faxing service in June and will amend the Form 4506 series to end third-party mailing of tax returns and transcripts in July. The announcement indicated that transcripts have become increasingly vulnerable as criminals impersonate taxpayers or authorized third parties to file fraudulent returns for refunds.
As a result, beginning June 28, 2019, the IRS will cease faxing tax transcripts to taxpayers and third parties, including tax professionals. In addition, beginning July 1, 2019, the IRS will no longer provide transcripts requested on forms 4506, 4506T or 4506T-EZ to third parties.
The policy change has little impact on the IRS or U.S. tax filings. However, there is substantial impact on Canadian tax filings of U.S. citizens or other Canadian residents claiming a U.S. foreign tax credit (FTC).
In 2015, the CRA changed the requirements for acceptable supporting documentation related to claims for the FTC made by individuals with U.S.-sourced income. The CRA began requiring official transcripts from the IRS documenting the final tax liability in order to support the FTC. Tax professionals protested the change due to the fact that the IRS does not provide an automatic notice of assessment. In response, the CRA relaxed its policy and provided some clarification at the 2016 STEP conference (question 9):
In response to feedback received, the CRA has decided to offer the following option to support a claim for the federal foreign tax credit:
- If you are unable to provide a copy of a notice of assessment, transcript, statement, or other document from the applicable foreign tax authority indicating your client's foreign income and final tax liability, we will accept proof of payment made to or refund received from them. This may be in the form of bank statements, cancelled cheques, or official receipts. The following information has to be clearly indicated:
- that the payment was made to or received from the applicable foreign tax authority;
- the amount of the payment or refund;
- the tax year to which the payment or refund applies;
- the date that the amount was paid or received.
Delays in processing transcript requests from the IRS prompted further comments from the CRA at the 2016 CTF conference (question 12):
It is recommended that taxpayers and their representatives not wait until CRA asks for supporting documents before requesting them. According to the IRS website “Most requests will be processed within 10 business days.” If a request for the account transcript is made promptly, there would be a reduction or elimination of issues related to the timeframe for submitting a copy if the CRA asks for documentation.
Initially, our Baker Tilly offices had difficulty requesting transcripts from the IRS, and the CRA did not properly or consistently administer the revised policy related to alternative documents. Grace Orrell, a tax manager and enrolled agent in our Dartmouth office, confirmed that the process of requesting a transcript from the IRS has improved significantly: “When requesting a transcript from the IRS, we routinely receive it directly from the IRS by fax within 24 hours.”
On the impact of the policy change on her ability to gain access to the transcript in the future, Grace notes, “We are in the business of taking care of our clients. With this change in policy, we now have to place a level of burden on our clients to ensure we receive the transcript on a timely basis. We may still be able to request the transcript, but the client will now have to deliver it to us.”
Darlene Shaw, a U.S. tax services leader in the Dartmouth office, agrees with Grace and has concerns that this added delay could cause denied FTC claims for the firm’s clients:
The CRA initially permits 30 days to provide supporting documents for the taxpayer’s FTC. Gathering the necessary documentation required by the CRA can be time-consuming, and any potential delays in receiving an official transcript from the IRS could result in denied FTCs, requiring our clients to file formal notices of objection. Filing a formal notice of objection is a very long process and can place a lot of stress on our clients.
John F. Oakey, National Director of Tax Services with Baker Tilly Canada, is a member of the CPA Canada Small and Medium Practitioner Tax Committee. John confirms that the committee is consulting with the CRA on an ongoing basis to seek ways to mitigate these issues.
Taxpayers claiming FTCs on U.S.-sourced income should speak with their tax professionals to ensure all supporting documentation, including the official IRS transcript, is received on a timely basis.
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