Many US persons living in Canada are angry, scared or confused about their US tax obligations and the new Foreign Account Tax Compliance Act (“FATCA”). The internet is buzzing with stories of massive penalties, crippling professional fees and denied entry into the US, some of which may be partly true.
Contrary to the internet, most US persons resident in Canada who have not filed US tax returns will not owe any penalties at all for failure to timely file US tax returns and the related disclosures. Most delinquent filers will also owe no US tax.
Nothing prevents an individual from preparing their own US tax return. Our firm and others do prepare US tax returns. We will also review self-prepared US tax returns for a fee. The more complex an individual’s financial affairs, the more significant the professional costs.
US citizens have a right to enter the US regardless of whether or not they have filed US tax returns. Personal tax information is confidential in the US and is not available to other government agencies, including at border crossings.
Under US tax law US persons are obligated to file US tax returns reporting their worldwide income and to disclose their financial accounts outside the US. They also may be required to disclose investments and transactions outside the US. The disclosure of financial accounts outside the US does not result in a US tax liability.
People can debate the US’s right to tax US persons outside the US, but it has a very long history that goes back to the US Civil War.
US persons include both US citizens and US residents as defined under US tax law, including “green cards” that have not formally been abandoned. The fact that they have never lived in the US or only briefly lived there does not alter their status or their US tax filing obligation.
If you are a US person, what should you do? Regardless of whether you prepare your own US tax return or engage a competent professional, you should comply with US tax law. Failing to do so will unnecessarily expose you to even greater risks.
No penalties will apply to US persons who file under the IRS’s Streamlined filing program. It requires US persons resident outside the US to file their last three years of delinquent US tax returns and disclose their financial accounts outside the US for the last six years.
Lots of US persons resident outside the US have ignored their US tax filing obligations and have suffered no ill consequences to date. The landscape has changed starting in 2008 when the IRS discovered that UBS, a Swiss bank was helping its US clients evade US tax. The bank settled for a $780 million fine and divulged the names of 4,500 of its US clients. FATCA’s enactment in 2010 is a testament to the US Congress’ determination to get US persons compliant with US tax law. It became effective worldwide July 1, 2014.
FATCA will give the IRS another tool to locate US persons who are delinquent in filing their US tax returns. Those that the IRS does locate will be denied benefits otherwise available to them and will not be eligible to have penalties waived under the Streamlined filing program.
Despite beliefs to the contrary, the IRS has been very accommodating with delinquent US persons who file voluntarily. In the very few cases where penalties have been assessed they have proportionate to the actual tax due.
Individuals who revoke their US citizenship or abandon green cards and have failed to file the last five years of US tax returns may be subject to even more significant US tax consequences. Revocation or abandonment may be desirable strategies, but make sure you’re not putting yourself in a worse position.
There has been a lot of noise from a variety of sources about the US tax filing obligations of US persons resident in Canada and elsewhere. Doing nothing, whether on principle or from apathy, unnecessarily puts you at risk and does nothing to minimize or eliminate your US tax exposure now or in future years.
Written by Warren Dueck, FCA, CPA