US taxes for dual citizens - consequences ?

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US taxes for dual citizens - consequences ?


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Old 12th July 2011, 02:29 AM
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Default US taxes for dual citizens - consequences ?

I'm a dual citizen due to birth; lived and worked in the US for a few years ending in 1995.

Recently saw a couple of articles in the Globe & Mail about US citizens having to report foreign accounts, and of course file tax returns. I kind of went oops, oh yeah, forgot about that. As I understand it, I would not owe any money, as I don't make a huge income and have paid Canadian taxes. No complicated investments either.

I'm basically too lazy to deal with the US taxes, but also rather wary of getting back on the IRS radar (in case I were to inherit money in the future - I believe that's likely not taxable but the resulting investment income might be if it was high enough).

If I don't plan to ever live in the US or renew my US passport, it seems to me that there's almost zero chance of there being any consequences to not complying. I do a few short business trips to the US every year, on a Canadian passport, and have never had problems.

I could renounce my citizenship, but again, it's a hassle, probably costs money, and definitely puts you on the IRS radar.

One alternative to simply ignoring the whole business is to file the simplified 1040EZ (saw that mentioned somewhere) with ballpark numbers for salary, and ignore the smaller but more complex things like rental and freelance income, and assume that's sufficient since it's all covered by the tax treaty and I'd owe nothing anyway. Or will they really want something exact?

Thoughts?

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Old 12th July 2011, 07:24 AM
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Officially, to make things right, they'd want you to file 3 or 4 years' back taxes, basically demonstrating that you owe nothing (or very little) to clear away the prior "omission" in filing. Then, you should continue to file going forward.

You can't really file a 1040EZ, because you need to file a form 2555 to "exclude" your foreign earned income from taxation. (Earned income is basically salary, or personal service income if you're self employed.) All other "unearned" income is only protected from double taxation through the foreign tax credit - so if the tax rate on your rents or investment income is less in Canada than in the US, you wind up paying the difference. (Obviously, this is a vast oversimplification - but you get the general idea.)

There are two dangers in simply not filing: The first is that, should you come to the IRS attention at some point (big inheritance, winning the lottery, etc.) and they come after you to assess back taxes, they can (and probably will) disallow your earned income exclusion for any years you haven't filed when calculating your back taxes for you.

The other big danger is that by not filing at all, you can't invoke the statute of limitations. Normally, if you file the IRS has 4 years (I think it is) to raise any objections to your return and the treatment of whatever income you have declared. After the 4 years have run, you're home free. For any income you didn't declare, however, the books theoretically never close and in the event of a lucky windfall or something, the IRS could go back and hit you for back taxes, interest and penalties. (Filing the past 3 - 4 years has the effect of closing out all prior years.)

The financial disclosure stuff is kind of a black hole at the moment. The FBAR disclosures (the Treasury form you file separately from your income taxes if you have at least $10,000 total in overseas accounts) used to be fairly innocuous, but in recent years are getting more and more detailed and more and more onerous. While it's clear they're looking for abuses of the system, there's some concern that the IRS is using the information submitted to set off on hunting expeditions in foreign banks and institutions.

There is an amnesty period for the financial disclosure stuff that I hear has just been extended (once again) to the end of August. It's your call if you have the sorts of financial resources that the IRS insists should be disclosed. Consider, though, that with all the cutbacks in the US budgets, how much are they likely to spend on sending their auditors abroad to track down minor offenders?
Cheers,
Bev

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Old 12th July 2011, 04:51 PM
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Default US taxman cometh

Yes this is quite a mess the US has put all its expats in.

I have been in Canada working as a professional for over 25 years and have been paying my Canadian taxes since. I have no other worldly income or possessions. I knew I was supposed to be filing US income taxes but also knew that, especially with the foreign earned income deduction, I would owe no taxes, so filing seemed like a redundant, time consuming and costly waste. And everything has been fine this way. until now....

Now with the US FATCA coming in in 2013 which will require banks and brokers to report anyone born in or a citizen of the USA to the IRS I am worried. My savings and RRSPs are all in jepordy. And knowing that if they find you before you fess up to them they will be harsh I want to become up to date with the US IRS. But then I read about the FBAR amnesty program with its huge penalties of 5-50% of everything you have in any undisclosed accounts and now I'm not sure what to do. These amounts will destroy my retirement that I have worked so hard for. I am not a tax cheat so it's pretty irritating when uncle sam wants to treat you like one anyway.

From my reading (esp #17 in the IRS's Offshore Voluntary Disclosure Initiative Frequently Asked Questions and Answers [I'm not allowed to post the URL yet because I'm a newbie]) it seems that if you don't owe any US taxes, one could merely file all the delinquent FBARs and income taxes for the past 3-4 years and one should be fine.

Any comments would be appreciated
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Old 14th July 2011, 04:06 AM
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I was concerned about the FBAR thing too. I called my bank and brokerage and asked straight up if they had any record of any citizenships. And in both cases I was told that they had me as a Canadian resident (through my social insurance number) but with no record of citizenship, Canadian, US or otherwise. So I really don't see how any of this will be reported come 2013, if there's no citizenship data.

There were a few more articles in the media some weeks back, it's sounds like there will be intense lobbying on this because Canadian financial institutions cannot comply. And things like RRSPs and RESPs would likely be made exempt, or thresholds raised beyond $10,000.

I intend to ignore it, given the risk of having to pay even 5% penalty during this asinine amnesty.

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Old 14th July 2011, 07:33 AM
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Default FBAR Canada

The reason the banks are complaining is that they will have to spend hundreds of millions to comply with the US requirements to identify where you were born, the nationality of your parents and whether you have a green card. This will replace the only information now required that is are you a Canadian resident. They aren't complaining because they are trying to protect you. Through FATCA if they do not comply with the US requirements all the money they get from the US will be reduced 30% so they will try very hard to comply. They wont risk their profits and try and help you hide.

The rumor spread in the media and elsewhere is that you need to participate in this "amnesty" program. That is really made for people that have lied and cheated and may face criminal charges. I am going to merely file my taxes for the past six years along with the FBAR forms and get caught up so its over and done with. This is also known as quiet disclosure and one expat accountant I talked to said he as done this with hundreds of clients and without problem.

As in Canada if you wait until they find you things don't usually go well. For instance: they can stop you from using the 90,000 per year foreign earned income deduction; tax you and penalize you for all the money your RRSP made and not allow you to file the form which will make the IRS treat the RRSP as Canada does; when you die your executor is required to report the estate to the USA (maybe the banks and brokers will have to report it too?)or be personally liable for unpaid taxes and penalties. This will also require them to back file and pay any penalties and taxes at that time

Below is a response from the US IRS to a query about this which confirms this approach

================================================

Hello Sir/Madam,

I am very confused about this FBAR requirement, which I just learned in a local newspaper.

I have been living and working in Canada for over 25 years and have reported all of my worldly income (all from Canada) and filed my taxes every year in Canada as required here. It was my understanding that Canada and the US had tax agreements and that, if anything, the taxes in Canada are higher than the US and thus I would have no taxes owing in the USA. Hence I have not filed in the US for many years but I plan on doing so from now on.

The question is, if I file my last 8 years of US income taxes and have nothing owing can I then file my FBARs back over the same time period without entering the amnesty program as suggested in the IRS's "2011 Offshore Voluntary Disclosure Initiative Frequently Asked Questions and Answers" section 17 ?

Is this what I should do if I owe no taxes?

I certainly didn't move to and work in Canada to avoid taxes.

Thanks

=============================================
From: [email protected]
To:
Subject: RE: FBAR Canada
Date: Wed, 13 Jul 2011


Dear Sir :

Yes

The Statue of Limitation is 6 years

Filing a late or delinquent FBAR

When filing delinquent FBARs, attach statement to each report explaining why your filings were not made timely. Keep copies of the FBARs and statement for your records. For prior calendar years, use the current version of the Form TD F 90-22.1, but you may rely on the instructions what were in effect during the reporting period of the delinquent FBAR in determining whether you are required to file the FBAR. Mail you delinquent FBAR and explanation to:

Department Treasury
Post Office Box 32621
Detroit, Mi 48232-0621

The maximum value of account is the largest amount (not the average amount) of currency and nonmonetary assets that appear on any quarterly or more frequent account statements issued for the applicable year. If periodic account statements are not issued, the maximum account value is the largest amount of currency or nonmonetary assets in the account at any time during the year. Convert foreign currency by using the official exchange rate at the end of the year.
Though the FBAR instructions direct filers to use the official exchange rate, the Internal Revenue Service has no official exchange rate and generally accepts any posted exchange rate that is used consistently. For exchange rates, check the U.S. Treasury Web site or other commercial sites.


Ellen White
Bank Secrecy Act (BSA)
Tax Law Specialist
Small Business /Self Employed
BSA Compliance Department

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Old 14th July 2011, 03:09 PM
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Thanks, that's useful clarification. The news articles were very misleading.

I cannot imagine banks retroactively collecting citizenship information, which would require voluntary disclosure from customers. It'll be interesting to see what happens.

I suppose I might get organized enough to file these things later in the year, but as before, I really can't think of a situation (beyond moving to the US, which won't happen) in which the IRS would ever find me.

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Old 14th July 2011, 04:19 PM
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Everyone's situation is different and it is very hard to tell with any certainty what to do.

I would be willing to bet that the US's requirement will force the banks and brokerages to do whatever the US requires in terms of place of birth etc. That's why they are complaining about how much it is going to cost them to get all this info from their customers. You could lie when you get the queries from the bank as you will by 2013 but then no doubt there will be penalties if that is discovered and the US will claim that this is as evidence of criminal behavior because you were trying to hide the income and then you are deep do do.

Don't forget the CRA will collect on behalf of the IRS using their massive powers and that Canada has an extradition agreement with the US. You cannot hide once the identify you. Too much risk for me. I'm coming clean. Plus when I die it could be a mess for the executor (who can be held personally liable) and a loss of much or all of the estate.

The experts I have spoken with say it is better to be safe as this could cost one a mint. If you win the lottery, get named in a known US citizen's will, or they find one of your accounts (ie the bank or brokerage reports you as required) it will be a big problem. As I said you could lose many of the ways that the US lets you earn foreign income without paying US taxes (like the 90,000 dollar foreign earned income deduction) and have an RRSP without a problem (you have to file a form which prevents them from taxing your RRSP earnings every year and treated as Canada allows). For me this would cost alot.

Filing can be done very easily. My Canadian accountant just uploads my tax info to my american accountant that deals only with expats who then files them all and the FBARs. Not much work for me. If you are married you can file jointly which saves accounting costs. It will cost me a total of about $1800 for the past 6 years. One could fill out the forms themselves, as I will in the future, but for this back filing I am going to use an expert that does this all the time and its easy. He seemed to think this should all be done by Aug 31st so I need to get him the material by Aug 15th. My Canadian accountant had this all done in a couple of hours.

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Old 14th July 2011, 04:30 PM
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Can you imagine the ****storm that will happen next year if Canadian banks are forced to collect this information on behalf of the US? It's one thing for people like myself who are aware of and have used their citizenship, even decades in the past, but what about all the "unwitting" dual citizens - by birth or parentage - who never took out passports or lived in the US? They will be completely outraged, and rightly so.

I will probably end up dealing with this one day, and if it doesn't at least partially go away (which I suspect) then I figure 2013 is going to be a good time to come clean because there will be several hundred thousand of us in the same boat.

Wait and see, in other words. But I'm hardly an expert.


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Old 14th July 2011, 04:48 PM
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Does the US care?

I doubt it. Look, they broke the centuries old, famous secrecy of the Swiss banks and found a bunch of hidden US account holders. For instance the accounts at UBS included many Americans and there are people in jail now because of this and the money in them is now in the IRS's hands.

The banks worldwide are complaining right now as is the government of Canada but so far the US just says do it. We don't care whatever you are complaining about. If you don't do it we WILL start taking 30% of everything you get from US like stock sales, dividends, interest etc. The brokerages and banks will not unilaterally ignore this. If you move your stuff to one of the brokerages that sounds like they will just stop dealing with the US you will not be able to invest in the worlds largest economy. And the IRS would see this as criminal because you are willfully trying to hide the funds from them. Bad idea unless you want to risk jail time. THe US doesnt fool around with tax cheats. Ask Conrad Black, Martha Stewart or a bunch of Mafia types. My advise is don't mess with the IRS. THey have a very long muscular arm.


Banks the world over are getting ready to comply with the US requirements and Canada is no different. The only hope for that is that the Canadian gov will convince the US that we should be treated differently as we are not a tax heaven but I will be very surprised if that happens. No doubt it will not change the USs legal requirements of filing etc.

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Old 14th July 2011, 05:02 PM
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I guess time will tell. Luckily I don't have enough money to make it worth the hassle.

I guess this strayed a bit from the original question - if you've had no connection to the US for 20 years and your bank doesn't have citizenship data, how would they ever find you?

I scanned various forums and found no reports of anyone having border issues due to tax.

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