Catching up on Tax Compliance

This is our main tax information forum which deals with topics concerning Canadians living and working in the U.S., U.S. citizens contemplating working in Canada, and all aspects of Canadian and U.S. income tax and related adminstrative issues.

Moderator: Mark T Serbinski CA CPA

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cathaea
Posts: 2
Joined: Thu Aug 16, 2018 12:21 am

Catching up on Tax Compliance

Post by cathaea »

Hi friends. I am a Canadian-born citizen who has US citizenship through my US-born mother. I have never lived in the United States and I have no US assets. I not been filing US taxes or reporting FBARs as I did not realize that I was supposed to. I do not, and have never, owe/d any US taxes.

Question 1: Do I need to enter the streamlined program or is it sufficient simply to file the delinquent FBARs and taxes for the last six years? I have been researching this and it seems to me that the Streamlined program is most appropriate for individuals who may have a tax liability because it reduces penalties associated with that. I am a small fish--my income and assets are modest (far less than 200k USD). What is my best chance to get on the right side of the IRS?

Question 2: Is it crazy to think that I can do either of these options without hiring a tax accountant or lawyer? I believe that I understand which forms I need to fill out and how to do them. I am reluctant to pay a single cent to anyone to resolve this issue because I would like to save my money to renounce my US citizenship as quickly as possible.
formerpatriot
Posts: 62
Joined: Mon Feb 23, 2015 4:13 pm
Location: Montreal

Re: Catching up on Tax Compliance

Post by formerpatriot »

Hi cathaea. You have several options (including doing absolutely nothing). If you are certain that you will never want to move to the USA, then my advise to you would be the following:

File 6 years of FBAR and 1040. Then renounce.

Assuming that your situation is simple and that your wealth is modest, you can do it all by yourself. With the 1040, add Form 2555 will flush out your earned income. The exemption(s) and/or standard deduction will flush out interest income and other such things. You may need to add Form 8938 (if you have a lot of money in an RRSP for example). If you have a TFSA containing only GICs, just declare the interest earned on those GICs. Avoid treating the TFSA as a trust (and therefore avoid having to file complicated tax forms such as 3520, 3520a, etc).

I am not an expert but I do have some experience in the matter. My son filed 6 years of FBAR and 1040 last Spring and he renounced 4 weeks ago. My wife had not filed for 19 years. Then in 2015 she filed for the previous 19 years. She's been compliant since then. She will renounce in a couple of months.
FormerPatriot in Montreal
formerpatriot
Posts: 62
Joined: Mon Feb 23, 2015 4:13 pm
Location: Montreal

Re: Catching up on Tax Compliance

Post by formerpatriot »

One more thing:
You will find a lot of useful information at
http://isaacbrocksociety.ca/renunciation/#comments
FormerPatriot in Montreal
cathaea
Posts: 2
Joined: Thu Aug 16, 2018 12:21 am

Re: Catching up on Tax Compliance

Post by cathaea »

Thanks--those links are helpful. I am now going down the rabbit hole of those comments.

My TFSA unfortunately holds mutual funds, but only recently--I transferred it out of a high interest account into a trading account. But since I'm backfiling, I am pretty sure that I can make a QEF election for the PFIC filing for 2016 and 2017 shouldn't be much of an issue. I think this basically forces me to declare the account on 3520 and 3520-a, but I'm compelled by the argument that it's not actually a trust. I am probably going to write an explanation letter to the IRS describing what I did and why I did it and ask for guidance. I have heard that they will not respond to that kind of request, but having written the letter should give me reasonable cause if I get nailed for not having filled them out.

Not sure how renunciation affects these types of accounts. I am pretty savvy and will do my best to sort through IRS documents. On the other hand, I worry that if I am able to figure this out without an accountant that this will make them doubt my credibility for non-willfulness -- e.g. if you can figure out these arcane rules, surely you couldn't have been stupid enough not to know you needed to file. Although on the other hand, maybe this does mean that they would believe I really am that stupid--no one would open up accounts like this if they ever thought they were subject to US laws.

Out of curiosity since you seem to be in the process of this: if I apply for a relinquishment and receive it (worked for gov't of Canada in 2007--this is actually why I didn't think I was a US person anymore), what happens to my tax status? Do I file for the last 5 years or the 5 years before that? I wouldn't have a clue how to calculate my 2002 return, e.g. But probably a moot point since I'm doubtful they will accept a relinquishment because I think I travelled on my US passport once or twice after accepting this job (but did not renew it and definitely have not used it 8+ years).
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Catching up on Tax Compliance

Post by nelsona »

The ability to give up US citizenship has nothing to do with whether you "used" it or not. You could move out of US tomorrow, and renounce the very next day. So you would have no problem renouncing.

There are no circumstances where you would need to go back more than 6 years with IRS. But you would need to go back 6 years, no more no less.
Not sure why Mrs Patriot filed 19 years.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
formerpatriot
Posts: 62
Joined: Mon Feb 23, 2015 4:13 pm
Location: Montreal

Re: Catching up on Tax Compliance

Post by formerpatriot »

Mrs Patriot is married to Mr Patriot. Mr Patriot is a bit of a sicko. He found it amusing to file 19 years of tax returns and he still wonders what was the look on the face of the IRS person who opened the envelope containing a nice cover letter and 19 years of tax returns.
FormerPatriot in Montreal
JGCA
Posts: 754
Joined: Thu Nov 18, 2010 3:05 pm
Location: Montreal, QC Canada

Re: Catching up on Tax Compliance

Post by JGCA »

you should consider having an accountant or cross border expert do this or at least give you guidance. Your problem is not the modest tax you may or may not owe but the failed FBAR and other disclosures you have not done this has nothing to do with tax owed its the penalties for non compliance and at $ 10K per bank account penalty for failure to disclose you will be hit very hard indeed. Ask Sebinski for a consultation do not just file back taxes and hope they will let you off the hook they won't and you will be subject to penalties you need help.
JG
victoriaguy
Posts: 54
Joined: Sun Oct 26, 2014 12:03 am
Location: Victoria, BC, Canada

Re: Catching up on Tax Compliance

Post by victoriaguy »

Hi Cathaea,

Are you sure you have US citizenship? If you don't have a passport or other inditia, look up the rules on the immigration site. A single US parent does not automatically make you a citizen.

Yes, I would definitely do a Streamlined submission as the FBAR penalties alone can bankrupt you. There is no problem with these penalties in a Streamlined submission if you have lived outside the US more than 330 days in at least one of the most recent 3 overdue tax years. And make sure when you are preparing your submission you look up the instructions and the certification form AT THAT TIME as they can change.

If you do this yourself, you will be in for a LOT of study. Make sure you don't also have to file an 8938. Make sure you understand how to calculate the thresholds. Each account's or asset's max value is determined for each year, and all these max values are added together to see if you meet the filing threshold. Make sure you understand the foreign earned income exclusion (if you are living abroad), and the foreign tax credit if you have passive income of any kind (very complicated if you don't use software... and complicated regardless).

Good luck!
victoriaguy
Posts: 54
Joined: Sun Oct 26, 2014 12:03 am
Location: Victoria, BC, Canada

Re: Catching up on Tax Compliance

Post by victoriaguy »

Oh right... mutual funds. They are a mine field. And the computation of tax is inpenetrable, and impossible without software. You might want to call the Streamlined Hotline and ask them if they will let you make a retro-active QEF election... IF your mutual fund will supply you with the Annual Information Statements... see form 8621 instructions re that. It's a complete mess, Cathaea. I wouldn't do those yourself.
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