Canada: IRS Takes Steps To Fulfill Flaherty’s Promise Of Relief For Canadian Residents Who Have Not Filed US Tax Returns

Last Updated: April 30 2012
Article by Roy Berg

On January 9, 2012 the Internal Revenue Service ("IRS") issued a statement that contains two very important announcements for Canadian residents who have US tax and filing obligations: first, it will shortly issue new instructions to bring unfiled returns current for taxpayers who owe no US tax; and second, it indefinitely extends the basic terms of the 2011 Offshore Voluntary Disclosure Initiative ("OVDI" or "IRS amnesty program"), which allowed taxpayers to file delinquent returns and pay a reduced penalty. Thus, it appears Mr. Flaherty's promise of relief for Canadian residents made on December 2 of last year is coming to fruition.

What this means for Canadian residents is that they now have options for bringing unfiled returns current. The first step is to prepare the past eight years of returns and determine whether any US tax is due. If no tax is due, then it may make sense to participate in the newly announced program (though the details of the program are not yet available). If some tax is owed, it may make sense to participate in the new OVDI. Each case is unique and needs to be evaluated on its own merits, so what may make sense for one person may not for another.

Canadian residents with these filing obligations should act now to bring filings current. The onerous failure to file penalties can be reduced to zero under the doctrine of "reasonable cause." Reasonable cause can exist when the individual simply did not know about the filing obligations. As media exposure increases on filing requirements it will become increasingly difficult to rely on ignorance as a defense to the imposition of penalties.

Some Background

The US tax code as it applies to those residing outside the US is punishingly complex. Publication 4732, Federal Tax Information for US Taxpayers Living Abroad illustrates this complexity. The publication refers to at least eight other IRS publications and 667 pages of forms for a total of 7,322 pages.

The US requires its citizens and residents to file returns and pay tax on their worldwide income. However, according to statistics released last week, only about 11 percent of those residing outside of the US filed returns. Of those returns that were filed, only nine percent of them showed a US tax obligation.

It is Not the Taxes, it is the Penalties

Tax obligations, however, are only a minor part of the problem for non-filers. The US requires the filing of many other forms on which no tax is due. The failure to file these forms can trigger penalties that can be financially ruinous. For example, the failure to file the Foreign Bank Account Report carries a $10,000 penalty if the failure was not willful, and enhanced monetary and criminal penalties if the failure was willful. There are numerous other forms that carry $10,000 penalties if not filed when due.

"Reasonable Cause" Defense to Penalties

Most of these onerous penalties may be reduced to zero provided the taxpayer can prove reasonable cause for not filing. Reasonable cause is a legal doctrine, the application of which is determined by all of the facts and circumstances surrounding the taxpayer's failure to file. Particular facts that support its application are found in case law, administrative interpretations, the statutes, and the treasury regulations.

Depending on the particular facts, one of the theories that may support a finding of reasonable cause is that the taxpayer was unaware of his filing obligations. In guidance published in December, the IRS lists facts that the IRS will, apparently, weigh more heavily than others in determining whether being unaware is sufficient to support the reasonable cause argument, including:

  • The taxpayer's education;
  • Whether the taxpayer has previously been subject to the tax for which the return has not been filed;
  • Whether the taxpayer has been penalized before;
  • Whether there were recent changes in the tax forms or law the taxpayer could not reasonably be expected to know; and
  • The level of complexity of a tax or compliance issue.

In the same guidance the IRS issued in December, the IRS gave several examples, the facts of which support a finding of reasonable cause, the most telling of which is Example 4. Under Example 4 the IRS concludes that reasonable cause is shown based on the following facts:

  • The taxpayer complied with tax filing and payment obligations in his country of residence;
  • He was previously unaware of his US filing obligations;
  • After discovering his US filing obligations he filed his previously unfiled returns;
  • He attached a statement to his returns setting forth his reasonable cause argument;
  • He had a legitimate reason for maintaining non-US accounts;
  • There was no indication that he had taken efforts to intentionally conceal the reporting of income or assets; and
  • There was no additional US tax due.

In making the reasonable cause argument, it is critically important to analyze the facts, support the facts with affidavits or other evidence, and to make sure that the facts are supported by existing law. If the facts are either false or misleading, the IRS could charge the individual with criminal tax evasion.

The good news is that we now have good guidance as to what facts will support reduction of penalties. Further, it appears that the IRS appears to be listening to the impassioned arguments made by Mr. Flaherty and others who have been affected.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Roy Berg
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.