Over the weekend, a variety of Canadian news sources (see, e.g., the Financial Post and the Edmonton Journal) reported on anticipated guidance from the IRS, which would result in the waiver of penalties on certain U.S. citizens living in Canada for past failures to file Form TD F 90-22.1, commonly known as the “FBAR.” According to the news reports, the IRS will waive failure-to-file penalties for such individuals who file delinquent tax returns and FBARS so long as the individual owes no taxes. In addition, taxpayers who were unaware of the FBAR filing requirement will be able to file delinquent reports and not be penalized so long as they can demonstrate reasonable cause in a disclosure statement accompanying the delinquent forms. At this point, it remains unclear how many years of tax returns and FBARs would be required to participate in this new opportunity. Interestingly, according the articles, taxpayers who participated in (and paid penalties under) the 2009 and 2011 offshore voluntary disclosure initiatives (OVDIs) would be permitted to opt out and reapply for the new zero-penalty offer.
The news of this guidance has some practitioners wondering whether U.S. taxpayers living in other countries will be able to negotiate a similar zero-penalty deal if they either (i) already have filed their past tax returns and paid the relevant taxes or (ii) do not otherwise owe any taxes on their foreign accounts. On the one hand, there is arguably no principled basis for distinguishing between U.S. citizens residing in Canada versus those residing elsewhere in the world. On the other hand, the IRS has considerable discretion in applying the FBAR penalty regime (subject to the statutory penalty ceilings) and may exercise that discretion to treat U.S. taxpayers residing in Canada differently from those residing in other countries.
See also coverage from the Federal Tax Crimes blog.