William D. Hartsock for California Tax Lawyer Blog writes: About one million United States and dual citizens call Canada home. Many of these expatriates have mistakenly failed to file their U.S. tax return and other forms because they believed they did not owe a federal income tax. In response to such failures, the Internal Revenue Service offers streamlined filing procedures for Canadian and other expats to disclose their foreign income and become compliant with their federal income tax obligations.
Each year, Americans living abroad have the option to decide whether to use any qualified foreign taxes paid throughout the tax year as a foreign tax credit or an itemized deduction. The foreign tax credit was designed to prevent a U.S. taxpayer from paying double taxes on income earned abroad. Since income taxes are generally higher in Canada, most expatriates living and working there will not owe a federal income tax to the U.S. Still, such taxpayers are obligated to file an income tax return each year. In many cases, a U.S. taxpayer living abroad must also file a Report of Foreign Bank and Financial Accounts (FBAR).
According to IRS Deputy Commissioner of International Operations Michael Danilack, the streamlined filing procedures were partially implemented to offer Americans living in Canada the opportunity to come into compliance with their U.S. income tax obligations. The streamlined filing compliance procedures allow individual U.S. taxpayers who certify that their failure to disclose foreign income or assets was not willful to file late federal income tax returns and pay any overdue taxes without facing harsh financial penalties. Although the program was initially only available to U.S. taxpayers living abroad, it was expanded in 2012 to include individuals who reside inside the nation’s borders. As part of that expansion, the owed tax threshold of $1,500 was also eliminated. Taxpayers who choose to utilize the streamlined filing procedures are required to file three years of tax returns and six years of the FBAR.
Previously, U.S. taxpayers with significant overseas earnings and assets could only use the Offshore Voluntary Disclosure Program (OVDP) to come into compliance with their income tax obligations. The OVDP’s financial penalties can be significant, however, since taxpayers who willfully failed to disclose foreign assets may be required to pay a penalty of up to one-half of the highest value of the foreign bank account or other overseas asset. Currently, taxpayers may not use both the streamlined filing compliance procedures and the OVDP.
It would be advantageous for U.S. taxpayers living in Canada and other foreign nations to utilize the streamlined filing procedures now. In July, the Foreign Account Tax Compliance Act (FATCA) went into effect. FATCA requires foreign financial institutions to collect and disclose information about any financial accounts held by U.S. citizens and permanent residents to the IRS. Canada has agreed to begin sharing information regarding financial accounts worth more than $50,000 that are owned by U.S. taxpayers through the nation’s Revenue Agency beginning in late 2015. This is significant because individuals who are under investigation by the IRS may not take advantage of the OVDP or its streamlined filing procedures.
Additional Resources:
IRS entices U.S. expats to come clean on back taxes with relaxed rules, by Barrie McKenna, The Globe and Mail
More Blogs:
What Am I Required to Report About My Foreign Financial Assets?, July 31, 2014, California Tax Lawyer Blog
Additional Civil Penalties for Failing to Apply to Offshore Voluntary Disclosure Program And How to Avoid Them, July 27, 2014, California Tax Lawyer Blog
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