A time of reckoning is closer at hand for US persons residing in Canada who are not in compliance with their US tax filing obligations. As of September 28, 2018, the Internal Revenue Service (IRS) will shut down the 2014 Offshore Voluntary Disclosure Program (OVDP). This program currently provides a way for US persons to get into compliance and avoid hefty non-compliance penalties.
US persons are a broad group in US tax law. The term US persons includes green card holders, Canadian residents who were born in the United States, and often times it also includes their children. In certain circumstances, it can also include estates and trusts. US persons must report and pay tax in the United States on their worldwide income, even if they are not currently residing in the United States.
The OVDP and its predecessor programs were an incentive for non-compliant US persons to come forward, make the appropriate filings with the IRS, pay any outstanding tax, and pay reduced penalties for non-compliance. Non-compliance penalties add up quickly, so one of the main benefits of the programs was avoiding these fees.
After the OVDP shuts down, non-compliant US persons can still come forward under the IRS’s Streamlined Filing Compliance Procedures if they qualify. However, it's probably only a matter of time before this program is shut down too. After years of well-publicized efforts by the IRS to catch non-compliant US persons, such persons may no longer be able to certify that the non-compliance was due to negligence, inadvertence, or mistake.
In addition to tax reporting compliance, US persons need to report foreign bank and financial accounts on a form called the Report of Foreign Bank and Financial Accounts (FBAR). There are also procedures for filing delinquent FBARs. Penalties will not be imposed for delinquent FBARs if US tax returns have been filed, tax owing has been paid, and foreign income is reported on the FBARs. As with the OVDP, the IRS could withdraw the FBAR delinquent submission procedures at any time.
The IRS has indicated that it will continue to combat offshore tax avoidance (Canada is considered offshore from a US perspective). The current global environment of cracking down on tax non-compliance and avoidance, along with the increasingly stronger enforcement tools, and advanced information exchanges between governments, have increased the likelihood of detection. The time where non-compliant US persons can make it right with tax authorities is vanishing quickly.
If you want more information or have any tax-related questions, please reach out to a member of our tax team.