Are you a U.S. Citizen or a U.S. ‘Green Card’ Holder?
As you may already be aware there have been a number of articles in the mainstream media recently concerning tax filing obligations of U.S. citizens or residents living abroad.
All U.S. citizens and green cardholders are required to file an annual U.S. individual income tax return (form 1040).
If that is you, please read on:
The reality, for most, is that, once the various deductions and credits available are taken into account, you will not end up owing any tax to the IRS (mostly due to the fact that Canadian tax rates tend to be a bit higher). However, there are some instances where income is treated differently on either side of the border. Capital gains on the sale of a principal residence, and Canadian-source mutual fund income are examples – that income could result in you actually having to pay tax to the IRS.
That is just one of the many reasons why it is important to ensure that you are in compliance with your U.S. filing obligations and to get up to date immediately if you are not.
Another reason, and the most talked-about in recent news, is the “Report on Foreign Bank and Financial Accounts” (FBAR) form. All U.S. citizens and residents are required to file this form if they had bank or financial accounts located outside the U.S. (e.g., bank accounts in Canada) with an aggregate value of $10,000 or more at any time during the year. This reporting is done on Form TD F 90-22.1 and is due on June 30 of the following year (i.e. the 2010 FBAR was due on June 30, 2011). The reporting would include all your bank accounts, investment accounts, RRSPs, TFSAs, and more. You are required to include not only accounts in your name, but also any account that you have signature or authority over such as RESPs or corporate accounts.
Penalties for failure to file this form can range from $10,000 per offence per year, up to 50% of the maximum value of each account during the year each year if the IRS were to determine you were clearly try to hide the account.
The good news is that you do have options.
Firstly, the IRS currently has a program called the “Offshore Voluntary Disclosure Initiative” (OVDI) which allows individuals to come forward up until August 31, 2011. Numerous forms are involved. If you are eligible to enter this program you would be subject to significantly reduced penalties.
Secondly, and perhaps more attractive, is a “quiet disclosure” where you simply file your past due tax returns and FBARs from 2003 to 2010. If you do not owe any tax on the income from these unreported accounts, it’s the IRS policy not to assess penalties for failure to file the FBAR forms if you do this on or before August 31, 2011. Below is a link to the IRS Frequently Asked Questions page on the OVDI. Please pay particular attention to #17 which applies to the “Quiet Disclosure”.
IRS Frequently Asked Questions webpage:
Some of you may be thinking: “since you have gone so long without filing in the U.S., would it not be best not to draw the IRS’s attention, by filing now ? How could the IRS track me down, anyway ?”
Well, starting in 2013, the U.S. Foreign Account Tax Compliance Act will require all Canadian financial institutions with U.S. depositors to disclose identities, and other information, directly to the IRS. The IRS can enforce this due to the fact that most Canadian institutions do business on both sides of the border, so failure to comply with a U.S. law would have major consequences.
We strongly advise against taking the “head in the sand” approach, as that would open the door to serious penalties, if the IRS was to detect you.
It is important to take action as soon as possible. Please contact Scott Larson (firstname.lastname@example.org, direct 604-408-3091) of our office – he can get your U.S. tax filings up to date. If you have any questions or would like more information please feel free to call our office.
The Lohn Caulder tax team.