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New Requirements for Disclosure of Foreign Assets
The US government has recently embarked on an aggressive campaign to reduce international tax evasion by US citizens or permanent residents with undisclosed income and assets located in foreign countries. As part of this campaign, the US government is putting pressure on foreign governments and financial institutions to disclose the identities of US citizens and permanent residents and the assets they hold in the respective foreign jurisdictions. In tandem with these enforcement efforts, the Internal Revenue Services has offered some relief to taxpayers. On 9 January 2012, the IRS reinstituted the Offshore Voluntary Disclosure Initiative. This program offers an opportunity to American citizens or permanent residents with undisclosed foreign assets and income to voluntarily disclose such amounts in exchange for reduced penalties. In addition, in December 2011, the IRS stated that penalties related to the failure to disclose foreign assets may not be imposed in certain situations. Taxand Canada provides an overview of the newly reopened OVDI and the US tax law requirements most relevant to US citizens or permanent residents living abroad.
Income Tax Returns and Disclosure of Foreign Assets
Unlike Canada, a US citizen or permanent resident is taxed on his/her worldwide income on the basis of citizenship and immigrant status rather than residence. Therefore, even if a US citizen has never lived or worked in the US, he/she is still obligated to file a tax return, pay taxes and make certain financial disclosures to the IRS.
US taxpayers who reside in Canada are placed in the unenviable position of having to navigate two different sets of complicated tax laws in Canada and the US. Unfortunately, recent actions by the US government have increased the burden on these taxpayers. Beginning in 2012, FATCA imposes new disclosure requirements for US taxpayers, as well as the penalties for non-compliance. Furthermore, even though US taxpayers have always been required to file an FBAR where applicable, there is now more rigorous and aggressive enforcement of this disclosure requirement by the IRS. In consultation with their tax advisors, US taxpayers living in Canada, or any other foreign countries, should carefully consider their situation, and take steps to file any delinquent FBARs given the renewed fervor of the US government in tracking down foreign assets held by US taxpayers.