The long battle waged by the IRS against US citizens residing and working in Canada has reached a truce. Penalties for failing to file a US tax return are waived for most of these US citizens. They can obtain assistance from someone with tax preparer training to file past due returns with the IRS. In so doing, they avoid late payment penalties if they don't owe any US income tax.
The most common tax preparation result in these situations is that no US taxes are owed. This is the reason so many US citizens who work and live in Canada have not filed with the IRS. They incorrectly believed that the payment of taxes to the Canadian government was sufficient to meet their complete tax obligations.
Unfortunately, US citizens living and earning income in any location face the filing requirements outlined in tax preparer study. Responsibility for submitting tax returns to the IRS is based upon taxpayer income amount, filing status, and age. A requirement to file a tax return is not based upon whether any tax is due.
All US citizens - as well as taxpayers with status as resident aliens - are taxed on worldwide income. The majority of Americans living and working in Canada don't owe the IRS because they are entitled to exclude most of their earnings that were taxed by the Canadian government. The tax return preparer study material addressing excludable foreign income therefore comprises essential details for helping US citizens with jobs in Canada.
One of the disclosures required on any US tax return is whether the taxpayer has an account at a foreign financial institution. This includes accounts with pension funds or similar retirement plans. Because a few Americans have used foreign accounts to hide income from the IRS, this has been an area of aggressive IRS action. However, most US citizens living and working in Canada are not sheltering income. They simply were unaware about needing to file annual US tax returns.
The penalty for failure to file a US tax return and report a foreign account is quite substantial. A fine of $10,000 is possible for each year. The new IRS relief option allows filing of returns for past years without penalty as long as no tax is due. The fine for failing to disclose a foreign account is also waived when the taxpayer shows reasonable cause.
According to Canadian officials, typical Americans living and working in Canada should incur no punishment for simple ignorance of filing obligations. These people must merely come forward now and show that the don't owe any US income tax. Anyone who has participated in an earlier amnesty program can use the new process to apply for refund of past penalties paid.
Assistance from paid tax preparers in the US is a likely means to create tax returns for past years. These professionals usually have access to the correct prior year forms. No electronic filing is possible for tax returns of years that precede the currently due 2011 tax year.