U.S. taxpayers and non-filers pay attention – the IRS can still find you in Canada

Canada recently signed an agreement with the United States to govern the application of FATCA in Canada making it easier for the IRS to locate non-filers.

Jeffrey S. Freeman, J.D., LL.M

Not often does the conversation of filing taxes dominate headlines, but those with U.S. connections living in Canada need to pay attention. Foreign Account Tax Compliance Act (FATCA) takes effect July 1, 2014 will require foreign financial institutions (banks, insurers, and investment funds) to send the U.S. Internal Revenue Service (IRS) information about offshore accounts of Americans. The United States and Canada recently signed an agreement where the Canada Revenue Agency will provide the IRS information about foreign offshore bank accounts of Americans. This means that the IRS will have an even larger pool of data to locate and find taxpayers that have not filed their U.S. taxes.

ftx-irs-auditYou might not consider yourself an American, you might not have ever set foot inside the United States, but you still might be required to file U.S. taxes even if you do not owe any. For tax reporting purposes those required to file U.S. taxes include:

  • U.S. citizens and individuals who reside in the U.S.
  • “Accidental Americans” who were born in the U.S. or born in Canada to a parent who is or was a U.S. citizen
  • “Green-Cards” that have not been formally abandoned or revoked
  • Snowbirds that visit the U.S. for more than 120 days over a three year period will be considered a U.S. resident unless they have reported to the IRS that they have a closer connection to Canada.

Jeffrey Freeman, a tax specialist commented that “by voluntarily filing, most U.S. persons residing in Canada will be able to avoid any penalties and likely not have any tax liability. If the IRS contacts them this will not be the case and they will have a higher likelihood of receiving penalties.”

If you recently discovered that you need to file U.S. taxes you have several options. Most U.S. taxpayers who live outside the U.S. and have not filed U.S. returns may qualify for the IRS’ streamlined non-resident compliance procedure. Introduced in 2012 this procedure requires filing delinquent tax returns for the past three years and delinquent FBARs for the past six years. Submissions are reviewed by the IRS, but the intensity of the review varies according to the level of compliance risk presented by the submission. Those with low compliance risk will be expedited and generally will not receive penalties or follow-up from the IRS. Most qualifying taxpayers under this program typically owe no U.S. tax because they are able to claim Canadian tax as a credit and claim other provisions to reduce or even eliminate their U.S. tax exposure.

Another option introduced in 2009 is the IRS’ Offshore Voluntary Disclosure Program (OVDP). The OVDP encourages U.S. taxpayers to come into compliance with U.S. tax laws and avoid criminal prosecution. If accepted into the OVDP, taxpayers must file amended tax returns for an eight year period and pay all back taxes, interest, and an accuracy related penalty of 20 percent of the taxes due, and a civil penalty equal to 27.5 percent of the highest aggregate value of the U.S. taxpayer’s foreign bank accounts during the eight-year period (subject to certain exceptions).

About Freeman Tax Law

Freeman Tax Law is a boutique tax law firm with national exposure equipped to handle all domestic and international tax law matters. At Freeman Tax Law, the attorneys and professional staff have vast experience with foreign tax compliance, international tax planning, and resolving tax controversies involving offshore banking matters. Freeman Tax Law helps taxpayers and foreign entities become in compliance with laws such as Foreign Account Tax Compliance Act (FATCA) and Offshore Voluntary Disclosure Program (OVDP). In addition to handling complex tax controversies, the Freeman Tax Law team has extensive expertise in assisting clients with wealth management and estate planning.

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