U.S. Citizen Non-Filers Living in Canada
We have noticed an exponential increase in the number of U.S. citizens who are coming to us because they have not been filing U.S. returns. We have found that it is most often not the income taxes payable on the income tax return that creates the greatest tax exposure for these individuals. The reason for this is that the U.S. provides a reduction to their tax liability (a foreign tax credit) for taxes paid on income earned outside of the country. Therefore, if a U.S. citizen lives in Canada and the Canadian taxes payable on Canadian income is greater than the U.S. taxes payable on this income there will be no U.S. income taxes payable for the year. This is the case except for a new tax effective in 2013 that taxes investment income if the individual’s income exceeds certain limits. This tax applies regardless of the Canadian taxes paid.
The biggest exposure for U.S. citizen non-filers is generally the penalties that can be assessed for late filing of certain forms even if these forms do not have a tax liability associated with them. The most common of these forms is the Form 114 Foreign Bank Account Report or “FBAR”. Where a U.S. citizen has an aggregate balance in foreign financial accounts in excess of $10,000 at any point during the year, they are required to disclose all accounts to the U.S. Treasury on an annual basis. Failure to disclose these accounts carries a statutory penalty that starts at $10,000 per year.
A similar penalty exists for any other information return that may be required, including (but not limited to), disclosing an interest in a non-U.S. corporation, a non-U.S. partnership, transactions with a non-U.S. trust, etc.
Fortunately, there are ways to come into compliance without incurring penalties. Currently, the IRS is offering U.S. citizens the ability to come forward and clean up a non-compliant history under one of two programs:
A few important points to consider:
If you are already under audit or review by the IRS, you can no longer apply for any of the programs mentioned above. This means it is important for non-filers to come forward before the IRS approaches them.
The IRS has the right to end the programs at any time.