There has been an amazing amount of hype in the last few weeks about the IRS and the August 31 2011 Deadline for US taxpayers living abroad. At the time you had the opportunity to participate in the IRS voluntary disclosure program. Although that time has come and gone, US citizens are still required to file US taxes and report their bank account information.
If you are a US citizen living in Canada or a green card holder, you are required to file a US tax return each year. American taxes people based on citizenship not on residency as Canada does. So, it doesn’t matter where you live or even what country you name as your residence for tax purposes. This has been the situation for many years and most people are unaware of it.
The deadline for filing US taxes for an individual is April 15, but non residents are granted an automatic extension to June 15.
As well, if you have bank accounts with a total aggregate value of greater than $10,000, at any time during the year you are required to report the account details and highest yearly balance of each account for that year to the US Treasury Department. This is called FBAR filing (Report of Foreign Bank and Financial Accounts – form TD F 90-22.1). This is perhaps more important than the tax return, as the penalty for not filing can be $10,000 or up to $100,000 and possible criminal prosecution for “wilfully failing to file.” The deadline is June 30th every year, which may be extended by application.
Usually these filings result in little or no taxes owing due to the fact that Canadian tax rates are generally higher and you are eligible for foreign tax credits and the foreign income exclusion.
If you intend on travelling to the United States you should get compliant. In 2012, the FACTA (Foreign Tax Compliance Act) comes into effect. Under this initiative, all Canadian Banks and Financial Institutions have agreed to report to the IRS the presence of any accounts held by US citizens at their institutions.
As well, the US border service and the IRS are getting better at talking to each other and may soon start asking US citizens about their tax-filing status as they cross the border.
The “rehabilitation” process is to file several past years’ returns; I suggest 6 years, also include letters of apology and explain that you were not aware until now of your obligation to file. I call this “quiet disclosure” as opposed to the voluntary disclosure process.
If the IRS finds you first, they can require you to file all missing returns, deny the foreign tax credit that prevents you from paying your taxes twice and then apply interest and penalties to your unpaid taxes.
The August 31 deadline was the deadline for the IRS’s Offshore Voluntary Disclosure Initiative. This allowed delinquent taxpayers who had “undisclosed income from offshore accounts” to come clean and avoid possible criminal prosecution and huge fines if the IRS caught them first.
However, penalties still applied. The best case scenario is 5% of all foreign accounts; the worst case is a 25% fine plus all outstanding taxes (if any) and interest on those taxes.
Most US citizens living in Canada don’t owe US taxes and therefore have not avoided them. They have only failed to file and disclose. The CRA recently announced that it will not collect filing penalties for the IRS but will continue to collect taxes for tem as required by US tax treaty.
The best course of action to take at this time is “quiet disclosure” and compliance.
We here at DASHtax and Accounting have helped several US tax clients with their compliance issues as well as with their regular US filings. So if you wish to become compliant or you have rental property or are buying or selling property in the United States, give us a call and we will advise you as to what the best course of action is for your US as well as Canadian Tax needs.