Near the end of October, the Internal Revenue Service (IRS) announced it had collected more than $10 billion from 100,000 taxpayers. The money had rolled in thanks to the Offshore Voluntary Compliance Program (OVDP) and the Streamlined Filing Compliance Procedure which allows taxpayers with undeclared income and assets outside of the country to get into compliance before the IRS finds them.
Unlike the Canadian tax system, the U.S. system is based on both citizenship and residency. It means that even if they leave the country to live elsewhere, U.S. citizens may have tax filing obligations with the IRS. In many cases, U.S. citizens didn't realize they needed to file tax returns after they left the country. And in some cases, they had no idea the U.S. considered them citizens.
With an impressive amount of taxes collected, it is safe to assume that the IRS will continue to look for U.S. citizens who need to file tax returns. The Foreign Account Tax Compliance Act (FATCA) and other inter-government agreements mean the IRS can access banking information so it is getting harder to hide from the taxman. The IRS and CRA have been sharing information since last year as per the FATCA agreement.
The purpose of the OVDP allows U.S. taxpayers who willfully failed to disclose assets or financial accounts to come forward without the risk of criminal prosecution. They may still face penalties but they will most likely be less than if they did not file under the OVDP.
The Streamlined Filing Compliance Procedure is targeted at more of the "accidental American" or people who failed to realize or didn't understand that they needed to file. This includes people who moved to another country when they were very young or were born in the U.S. but have spent their entire life elsewhere, and people who have moved to the United States while owning foreign accounts and assets. They were not failing to report accounts but rather just unaware they had obligations. The IRS refers to this as non-wilful compliance.
This program was meant to allow taxpayers who live outside the U.S. to file past returns and pay the outstanding taxes while avoiding the failure to file penalties. It means "accidental Americans" can get into compliance and again, avoid significant penalties. But the IRS is still collecting funds from the program. They estimate they have collected $450 million in taxes, interest and penalties from Streamlined Filing Compliance Procedure. And this does not include the money spent by U.S. citizens preparing the necessary paperwork to get into compliance.
With the success of both programs, it seems unlikely that the IRS will stop searching for U.S. citizens living overseas and not filing tax returns. It is bringing lucrative returns and it will become harder for U.S. citizens to claim they didn't know they should file. The IRS has found a new taxpayer base and it would be hard to think they are going to stop requiring them to file.
FATCA is already creating problems beyond tax compliance. Foreign banks are deciding they do not want to deal with the onerous requirements of FATCA so they are denying U.S. citizens living abroad services including existing mortgages. There are people finding out that they are U.S. citizens after years of living elsewhere.
Like other countries, Canada and the U.S. have a tax treaty in place so the estimated one million U.S. citizens living in Canada are not paying tax twice on the same income. But in most cases, U.S. citizens are required to file paperwork with both the CRA and the IRS to be tax compliant.
If you are a U.S. citizen living abroad and not filing the U.S. returns, you cannot rely on the IRS not finding you. You should investigate your tax obligations and understand if you need to get into compliance. The IRS has decided to pursue collecting from U.S. citizens and based on the success to-date, the search for non-filers will continue for the foreseeable future.
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