U.S. Tax Compliance

Compliance Procedures for Non-Filing U.S. Taxpayers living in Canada.

Description of the New Streamlined Procedure

Effective September 1, 2012 the IRS implemented new streamlined filing compliance procedures for U.S. taxpayers living outside of the U.S in recognition that some U.S taxpayers living abroad have failed to timely file U.S federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs), but have recently become aware of their filing obligations and now seek to come into compliance with the law.  These new procedures are for non-resident U.S. taxpayers including, but not limited to, dual citizens who have not filed U.S. income tax and information returns.

This streamlined procedure is designed for taxpayers that present a low compliance risk.  All submissions will be reviewed, but, as discussed below, the intensity of review will vary according to the level of compliance risk presented by the submission.  For those taxpayers presenting low compliance risk, the review will be expedited and the IRS will NOT assert penalties or pursue follow-up actions.

Taxpayers utilizing this procedure will be required to file delinquent tax returns, with appropriate related information returns (e.g. Form 3520 or 5471), for the PAST THREE years and to file delinquent FBARs (FinCEN Form 114 which superseded the former Form TD F 90-22.1) for the PAST SIX years.  Payment for the tax and interest, if applicable, must be remitted along with delinquent tax returns.

Eligibility 

This procedure is available for non-resident U.S. taxpayers who have resided outside of the U.S. since January 1, 2009, and who have not filed a U.S. tax return during the same period.  These tax payer must present a low level of compliance risk as described below.

Amended returns submitted throughthis program will be treated as high risk returns and subject to examination, except for those filed for the sole purpose of submitting late-filed Forms 8891 to seek relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by relevant treaty. It should be noted that this relief is also available under the Offshore Voluntary Disclosure Program.

Compliance Risk Determination

The IRS will determine the level of compliance risk presented by the submission based on information provided on the returns filed and based on additional information provided in response to a Questionnaire required as part of the submission.  Low risk will be predicated on simple returns with little or no U.S. tax due.  Absent any high risk factors, if the submitted returns and application show less than $1,500 in tax due in each of the years, they will be treated as low risk and processed in a streamlined manner.

The risk level may rise if any of the following are present:

  • If any of the returns submitted through this program claim a refund;
  • If there is material economic activity in the United States;
  • If the taxpayer has not declared all of his/her income in his/her country of residence;
  • If FBAR penalties have been previously assessed against the taxpayer or if the taxpayer has previously received an FBAR warning letter;
  • If the taxpayer has a financial interest or authority over a financial account(s) located outside his/her country of residence;
  • If there is U.S. source income.

Streamlined Filing Compliance Procedure and Section 965

The “transition tax” per section 965 of the Internal Revenue Code generally treats the accumulated post-1986 deferred foreign income (DFI) of a Specified Foreign Corporation (SFC) as Subpart F income. This means that DFI represents the accumulated undistributed retained earnings of  a SFC determined as of December 31, 2017.

A taxpayer who uses Streamlined Filing Compliance Procedure to come into compliance remedies a specific number of tax years, generally the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed. Taxpayers that own SFCs and have a section 965(a) inclusion using the Streamlined Filing Compliance Procedures must come into compliance for the section 965 transition tax in their submission and include the tax year in which the transition tax inclusion might occur (generally 2017 and/or 2018) even if that tax year would not be within the standard three-year lookback period. In other words, the lookback period for any submission to the Streamlined Filing Compliance Procedures involving SFCs with a section 965(a) inclusion in 2017 must include tax year 2017 and include all subsequent tax years.

Report of Foreign Bank and Financial Accounts (FBAR)

Every year, under the law known as the Bank Secrecy Act, a U.S. person must report certain foreign financial accounts, such as bank accounts, brokerage accounts and mutual funds, to the Treasury Department and keep certain records of those accounts. You report the accounts by filing a Report of Foreign Bank and Financial Accounts (FBAR) on FinCEN Form 114.

A United States person, including a citizen, resident, corporation, partnership, limited liability company, trust and estate, must file an FBAR to report:

  1. a financial interest in or signature or other authority over at least one financial account located outside the United States if
  2. the aggregate value of those foreign financial accounts exceeded $10,000 at any time during the calendar year reported.

Unless an exception applies, a U.S. person must also file Form 8938 if you have an interest in specified foreign financial assets and the value of those assets is more than the applicable reporting threshold.

For an individual  taxpayer, you satisfy the reporting threshold only if the total value of your specified foreign financial assets is more than $200,000 on the last day of
the tax year or more than $300,000 at any time during the tax year.

A U.S. person  is  required to file Form 8938 and  report the specified foreign financial assets in which you have an interest even if none of the assets affects your tax liability for the year.

Types of Specified Foreign Financial Assets

Specified foreign financial assets include the following assets.

  1. Financial accounts maintained by a foreign financial institution.

Foreign means any financial account located outside the U.S. territory.

  1. The following foreign financial assets if they are held for investment
    and not held in an account maintained by a financial institution.
    a. Stock or securities issued by someone that is not a U.S. person
    (including stock or securities issued by a person organized under the laws
    of a U.S. possession).
  2. Any interest in a foreign entity.
  3. Any financial instrument or contract that has an issuer or counterparty that is not a U.S. person (including a financial contract issued by, or with a counterparty that is, a person organized under the laws of a U.S. possession).

When to file

The FBAR is an annual report, due April 15 following the calendar year reported. You’re allowed an automatic extension to October 15 if you fail to meet the FBAR annual due date of April 15. You don’t need to request an extension to file the FBAR.

Form 8938 should be filed together with your annual return and file by the due date
(including extensions) for that return.

Failure-To-File Penalty

If a U.S. person is required to file either  FBAR or Form 8938 but you do not file a complete and correct form  by the due date (including extensions), you may be subject to a penalty of US$10,000 per each form annually.

For additional information contact Val Volkov, a U.S. designated CPA who can assist you with your U.S. tax filings.   Val can be reached at val@taxpertsgroup.ca or 416-493-0444.