We get asked the same question all the time. “I am a US Citizen living in (insert country name here) who has not been filing my annual tax returns as I should have been. I (reluctantly) agree I should get up to date, but what is this going to cost me in taxes? Is the IRS going to take my house and all my money?”
Thankfully the short answer is no, they are not going to take your house and probably want none of your money either.
So if I will owe no taxes why bother?
Good question. The answer to that primarily is found in FATCA. While that is a whole topic of discussion in and of itself, briefly FATCA (The Foreign Account Tax Compliance Act) was a US law enacted in 2010 which requires all foreign financial institutions (banks) to search their records for customers who are US Persons (defined as US Citizens or Permanent Residents (green card holders)) and report the identities and the assets they hold to the US Department of Treasury. It also added a new Form 8938 requirement in addition to the already existing Foreign Bank Account Report (FBAR, now FinCEN Form 114) requirement for US taxpayers to annually self-report more in depth asset information depending on the value of those assets. FATCA enacted very severe penalties on the banks who would choose not to comply.
In further efforts to implement FATCA – the US Government has been enacting intergovernmental agreements with foreign governments to proactively exchange tax information on each other’s tax residents on an annual basis. Canada and the US signed one in 2014, which took effect in 2015. Under that agreement the information that FATCA seeks is sent to the CRA first in Canada, who in turn shares it with the IRS. CRA officials have confirmed that they sent more than 700,000 records to the IRS in 2017. Further sharing continues.
So essentially if the IRS was not yet aware that you were not in compliance with your US filing requirement, they will be eventually. Have you ever gone to any bank and tried to open a bank account or make changes to your existing accounts lately? You will be asked if you are a US Person. If you say yes (which you of course should if you are) your information will go on the list. If you do not answer the question or waffle? Your information will go on the list. Were you a former citizen who can not prove that you are not any longer? Your information will go on the list.
US Citizens living in Canada do have exposure to fairly significant penalties for unfiled US tax and information returns or improper/incomplete filed US tax and information returns. The most common financial risks of non-compliance are:
- FBAR penalties starting at $10,000 per year
- Form 3520 (foreign trusts, gifts, and inheritances) penalties starting at $10,000 per year
- If you are required to file form 8938 for any year and fail to do so – the Statute of Limitations (normally 10 years on a filed return) NEVER starts
- Intentionally refusing to pay a US tax debt (whether you dispute that debt or not) is a criminal offense in the United States. The US government could potentially pursue criminal charges, which are often reciprocally enforced in Canada
That is some of the bad news. The good news is that there is a way out!
In 2011 the IRS instituted what they called the OVDI (Offshore Voluntary Disclosure Initiative) which morphed in 2012 into the OVDP (Offshore Voluntary Disclosure Program). The 2012 program was in place with minor modifications until it was shut down effective September 28, 2018. These programs allowed taxpayers with undisclosed foreign income and undisclosed foreign accounts to get current. However the programs were not particularly user friendly for the average taxpayer, as they did not relieve all penalties and were more geared to those with criminal liability in non-compliance.
The vast majority of clients that we meet qualify for the Streamlined Foreign Offshore Procedures (SFOP). This program has been around since 2012 and allows delinquent foreign residents to come into compliance with their US tax filing requirements with no penalties. As long as you are eligible for the program, you are allowed to file the most recent 3 years of overdue income tax returns and all required information returns and the most recent 6 years of overdue FBARs with no penalties and you will be considered to be up to date and in compliance.
The Streamlined program is the optimal method to come into compliance for the majority of taxpayers as it promises to relieve all penalties as well as being relatively self service in requiring no prior interactions with the IRS to submit. I like to tell my clients that it is a no news is good news situation. I only start to worry if the IRS starts to ask questions.
It is important to know that the Streamlined program is considered a courtesy of the IRS. The program can be closed or changed at any time by the IRS and for any reason. Over the years there have been numerous modifications to the requirements and who is eligible, and we expect this to continue in future years. At any point in time the IRS can call success and stop accepting new submissions. If that happens, then we go back to the prior situation where many were forced to choose to come into compliance by what were called “quiet disclosures”. Essentially file and pray that you will not be penalized. This certainly is not an optimal situation.
The question that usually comes up near the end of many of my consultations is – can’t I simply renounce my Citizenship and then I won’t have this problem?
In a word: NO. When one renounces US Citizenship you are asked to certify that you are in compliance with ALL income tax filings for the prior 5 years. If you are not able to certify this or if you make a false certification you risk becoming what we call a “Covered Expatriate”. This may sound like a good thing, but it is not. You do not want to be this.
If you would like to discuss if a Streamlined filing would be appropriate for you please feel free to contact me any time. The sooner the better!