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Feb 1, 2016

US Voluntary Disclosure Program Updated

by Ed Arbuckle

Ed Arbuckle

US citizens must file US personal tax returns no matter where they live in the world and returns are usually required even if no US tax is payable. Currently, if your income exceeds $3,900 as a married taxpayer filing separately or $11,500 as a single taxpayer, you must file. Most countries only tax you if you live there but the US taxes on the basis of both residence in the United States and US citizenship no matter where you live.

 US Citizenship

US citizenship is a difficult concept. You will be a US citizen if you were born in the United States and sometimes even if you were born outside the United States if one or both of your parents are US citizens. Your Canadian passport shows your place of birth so it will be a source of information to US border officials that you cannot hide. However, when you cross the border, by law, US citizens must show their US passport to legally enter the United States.

Streamlined Filing

Voluntary disclosure allows American taxpayers to avoid late and non-filing penalties (but not taxes and interest). US tax authorities will accept overdue 1040 tax and related returns and elections for a three-year period and will consider it a complete disclosure. Taxpayers must also file six years of FBAR (FINCEN Form 114) returns to report non-US investments and other financial accounts. The latest voluntary disclosure program is called Streamlined Filing.

The first official US voluntary disclosure program was effective September 1, 2012 and was followed by more changes which better defined the financial risk to the US Treasury, and the criteria that apply to meet program eligibility.

In a memo issued by the IRS on August 19, 2014, the Streamlined Filing procedures were further amended and simplified. Under the new program, US citizens only need to show that they reside outside the United States and sign a certification attesting to the following:

I failed to report income from one or more foreign financial assets during the above period;

I meet the non-residency requirements for the Streamlined Foreign Offshore procedures;

I meet all the other eligibility requirements for the Streamline Foreign Offshore procedures;

If I failed to timely file correct and complete FBARs for any of the last six years. I have now filed those FBARs;

I agree to retain all records related to my income and assets during the period covered by my delinquent or amended returns;

My failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct; and/or

I recognize that if the Internal Revenue Service receives or discovers evidence of willfulness, fraud, or criminal conduct, it may open an examination or investigation that could lead to civil fraud penalties.

Taxpayers must also give a general explanation for their failure to report all income, pay all tax, and submit all required information returns. The income tax threshold and other risk assessments that existed under previous programs have disappeared. US citizens no matter how large their income or taxes can now join the streamlined program. A statement of reasons for not filing might read as follows:

I was born in Canada in 1975. My father was a US citizen and my mother was a Canadian citizen. Under US rules, I am considered a US citizen. I moved to Canada permanently in August 2000 and I have lived here ever since. I am fully compliant with my Canadian tax filing obligations. I was not aware that the basis for filing a US tax return is citizenship as well as residency. As soon as I became aware of my US tax reporting obligations, I had all required returns prepared to bring my US tax filings up to date. Three years of tax returns and related information returns have been filed as well as six years of FBARs.

The IRS published a further memo on October 9, 2014 providing more details about streamlined filing. Following are some of the more important things to take away from the October memo:

US citizens and green card holders are eligible for streamlined filing if:

– They were present in the United States for less than 36 days in at least one of the last three years;

– They do not have a US abode (place of primary residence – social, economic and family).

As part of the disclosure you must file:

– Three years of delinquent or amended tax returns;

– Three years of any relevant information returns (i.e. 3520, 5471 and 8938); and,

– Six years of FBAR returns (for which the filing deadline has passed).

Failure to file, failure to pay and accuracy-related penalties will not apply unless fraud or willful neglect is involved.

The 36-day presence test will prevent snowbirds from taking advantage of the streamlined filing program.

Delinquent Fbar Returns

As part of the streamlined filing, you must submit six years of FBAR returns. Severe penalties apply for not filing the FBAR (FinCEN Form 114) (both for willful and non-willful reasons) but may be waived if the taxpayer had reasonable grounds for not filing – providing six years of delinquent returns are filed along with an explanation (attached to each return) for not filing. The explanation should cover the following:

All of the income from the accounts was reported on US tax returns;             

The taxpayer was unaware of the requirement to file the FBAR;

The taxpayer promptly filed the return when they became aware of their obligation;                        

The taxpayer relied on tax advice from a 1040 tax preparer and no such advice was provided;    

All of the accounts exist for legitimate purposes; 

No intended efforts were made to subvert the reporting of income or assets;

The income tax has been fully reported and paid for all prior years; and,      

The taxpayer did not intentionally withhold the existence of financial accounts to the 1040 tax preparer.           

Wording of the disclosure might read as follows:

As part of the streamlined filing compliance procedures the taxpayer is electronically filing her delinquent FBAR returns. She was not aware of her requirement to file FBAR returns until recently. She was born in Canada in 1975 and moved to the US in 1985. She moved back to Canada permanently in 2000. She has lived here ever since. She was not aware that the basis for filing a US tax return is citizenship as well as residency. She is current with her Canadian tax filing obligations. As soon as she became aware of her requirement to file FBAR returns she filed them.

Obtaining A Social Security Number (Ssn)

You need a SSN in order to file US tax returns. To get a SSN you will need to complete Form SS-5 and provide supporting documentation to verify to the IRS your age and your identity, and to confirm that you are a US citizen. The name on your social security card must match your current name. If it does not match you will need to get a new card or tax returns will not be accepted.

The supporting documentation must be original documents. Here are some examples of acceptable documents:

Age: hospital record of your birth or passport.

Identity: driver’s license, passport, long form of marriage certificate and divorce decree.

Citizenship: any documents that show that you were born in the United States.

The SSN office will also require the following information:

Name and daytime phone number of a person who could verify the length of time living in Canada—this can be family, but not children born after the move to Canada. The office calls right away, so the person needs to be available.

Proof of residence, such as a copy of a utility bill showing address.

Legal proof of any name change.

Social Security offices are only located in the United States.

Penalties For Delinquent Returns

If you are a US citizen, green card holder or deemed citizen of the United States and you have not filed US taxes and other information returns you should do so as soon as possible. Most penalties for failure to file are $10,000 or higher.

Conclusion

US citizens living in Canada who do not make use of the Streamlined Voluntary Disclosure Program are making a big mistake. Canadian financial institutions are now required to report financial income to CRA which sends the information to the IRS. Your time is running out if you haven’t filed.

 

J. E. Arbuckle Financial Services Inc., Waterloo, Ontario. Phone: 519-884-7087 Email: jea@personalwealthstrategies.net

www.personalwealthstrategies.net