On January 9, 2012 the IRS issued IR 2012-5, which makes two very important announcements:  First, it promises new procedures to bring unfiled returns current for taxpayers who have not filed, but owe no tax.  Second, it indefinitely extends the basic terms of the 2011 Offshore Voluntary Disclosure Initiative (OVDI).

On December 15^th and 16^th I attended the International Taxation conference sponsored by the IRS and held in Washington DC.  There were more than 700 people in attendance and the lunchtime speaker on the first day was Douglas Shulman, the Commissioner of the IRS.  At the end of his prepared remarks he answered only three questions posed by the audience. The first question he answered was mine, which was the following:

Now that the OVDI Program is over and the IRS has released its Fact Sheet on US citizens or dual citizens residing outside of the US, this is a good time to reflect on some common circumstances when US citizens resident in Canada may have additional US tax to pay.

Late on December 7, 2011 the IRS issued Fact Sheet 2011-13 ("Information for U.S. Citizens or Dual Citizens Residing Outside the U.S."), which provides important guidance on two matters for taxpayers residing outside of the U.S.: first it gives insight into the type of facts that would support a "reasonable cause" argument for the abatement of penalties. Second, it clarifies the procedure to bring current unfiled returns, thereby confirming the IRS’s disdain for “quiet disclosures.” The guidance provided by the Fact Sheet makes clear the importance of engaging a professional who is experienced in these matters.

On December 2, 2011 Canada’s Globe and Mail reported, after an interview with US Ambassador to Canada Jacobsen, that US citizens living in Canada will be able to avoid the punitive penalties that result from the failure to file US income tax returns and other forms.  The Globe article states that the IRS will issue written guidance by the end of December 2011 that makes clear the following three points:

As many regular readers of our blog or our Twitter feeds (@RoyBerg1, @Moodystax) already know, applications for the 2011 US OVDI ended on September 9, 2011.  However, there has been no shortage of activity regarding non-compliant US citizens.  Yesterday, our firm received some news from a highly-placed source regarding some further activity.  Apparently, a very influential US body has drafted a letter that should be made public later this week.  The letter advocates lenient tax treatment for US Citizens residing in Canada who are not current with their filing obligations.

Here is what we believe to be the case: