The IRS warned recently that the Streamlined Filing Compliance Procedures may end. The message is clear: don’t wait any longer.
What is the program?
In September of 2012, the IRS set up a new program to allow people to file overdue U.S. tax returns without fear of penalty. Before 2012, the IRS had been silent on how many overdue returns it wanted filed. Many U.S. citizens in Canada, some having immigrated as children, did not realize they needed to file. In those cases it seemed impractical to file what could be 50 years’ worth of tax returns.
That guidance came with the beginning of the program in 2012. However, it was clear from the start that the program would not last forever.
Who qualifies?
Though the program has been in place for some time, and the eligibility criteria are well known, a review would be helpful. There are two streams to the program: one for U.S. taxpayers residing outside the U.S., and one for domestic non-filers. Those living outside the U.S. qualify if they:
- are a U.S. citizen or lawful permanent resident (i.e. green card holder);
- have failed to file any one of the three most recent tax filings; and
- have not lived in the U.S. for at least 330 days for one of those years, and have no home in the U.S.
Those living in the U.S. qualify if they:
- fail to be a non-resident under the above rules;
- have filed a U.S. tax return for each of the most recent three years; and
- have failed to report gross income from a foreign financial asset and pay the associated tax, and may have failed to file the Foreign Bank Account Report (FBAR), or any one of the other possible international information forms (some examples being 3520, 3520-A, 5471, 5472, 8938, 926, and 8621).
You may be surprised to learn who is a U.S. citizen. The U.S. Citizenship and Immigration Services website has a chart to help determine whether you are a citizen or not, but consulting with an immigration lawyer is advisable. If there is anyone in your lineage that is a U.S. person, you should review the chart here.
How to become compliant
Besides the tax returns themselves, many other information forms and filings may be required. Standard Canadian investment planning using TFSAs, mutual funds and RESPs can add to the complexity of filing your U.S. tax return. Further, if you have more than $10,000 aggregate in all your foreign accounts (all Canadian accounts are foreign to the U.S.), you also must also file the FBAR form.
Don’t let the $10,000 limit fool you. Consider an example of how the limit is calculated. Assume you have saved $4,000 in your chequing account. You don’t have a current need for the cash, so you move it into a savings account to earn a little interest. A few months go by and you decide to purchase an RRSP to reduce your current year’s Canadian taxes. Your highest total cash on hand during the year was $4,000. The question is, are you under the $10,000 threshold? The simple answer is no. The Financial Crimes Enforcement Network (where the FBAR is filed) considers the aggregate of the highest balances of each of your financial accounts in determining if you meet the $10,000 threshold. In this example, you must add together the maximum value of each account ($4,000 in three accounts) and as a result, you’d have $12,000 and would be required to file the FBAR forms.
So what is needed to become compliant? Under the program you must file:
- your last three years of tax returns and all related information forms;
- the last six years of your FBAR form; and
- a questionnaire on which you tell your story of why you were non-compliant and explain that your non-compliance was not willful.
What if I just leave the U.S.?
Some former citizens choose to renounce their U.S. citizenship for various reasons. If you believe you have no need of your U.S. citizenship and would like to avoid the tax filings, you can renounce your citizenship. However, that does not absolve you from your U.S. tax filing obligations. Depending on your circumstances, you must at least ensure that you have filed all forms related to the past five years of taxes, and you may need to file for a further ten years.
When will the program end?
Currently there is no set end date for the program. There was a similar program, called the Overseas Voluntary Disclosure Program (OVDP), which recently accepted the last applications on September 28, 2018. That program began in 2009. As with the streamlined procedures, it was intended to help get taxpayers back into compliance with their U.S. filing obligations, particularly those taxpayers who were likely to face criminal charges and penalties for their willful non-compliance.
Though the OVDP lasted nine years, there is no guarantee the streamlined program will last as long. The announcement in March of 2018 warning of the end of the OVDP provided only six months notice. The IRS cited low applications as a reason for shutting down the OVDP program. It received 600 applications in 2017, much fewer than the 18,000 received during its peak in 2011.
As part of the announcement to close the OVDP program, the IRS warned that it “may end this [streamlined] program too at some point.” It is anyone’s guess when the program will end, but it is likely to be sooner rather than later. More than 65,000 applications have been submitted over the course of the program. There are no official annual statistics, but judging by the IRS’ news alerts the average number of annual applications has fallen from 20,000 in 2015 to around 8,500. That still exceeds the number of applications at the end of the OVDP program when the IRS decided to “pull the plug,” but it does show a downward trend that is likely to continue. It is in the interest of the IRS to have compliant taxpayers. The best time to become compliant is now.
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