IRS to go easy on American residents in Canada

After protest from Ottawa, ambassador says IRS will institute new rules that will waive penalties for people filing late. Americans living in Canada who've neglected to pay their U.S. taxes are getting a big break from Uncle Sam.

The U.S. Internal Revenue Service is poised to waive potentially massive penalties for Americans who agree to come clean and don't owe any taxes, The Globe and Mail has learned.

The new rules will be announced within weeks by the IRS, according to David Jacobson, the U.S. Ambassador to Canada, who has been swamped with complaints from anxious Canadians.

The policy shift will come in the form of new guidance from the IRS, expected to be issued before the end of December. U.S. officials said the statement will make it clear that:

1. If a U.S. citizen files tax returns late and owes no taxes, there are no penalties for failure to file.
2. U.S. citizens who were unaware of the bank account reporting requirement can file previous reports now, along with a statement explaining why they're late. No penalty will be imposed if the IRS determines that there is reasonable cause.
3. Individuals who took part in earlier amnesty programs this year and in 2009 can reapply and get back penalties already paid.

U.S. officials would also not say what would happen to people who owe relatively small amounts to the IRS.

The change doe not address the concerns of Canadian financial institutions, which complain they'll face massive costs trying to track all their U.S. account holders.  The new U.S. bank reporting rules, slated to come in 2014, could violate Canadian privacy laws.