Filing Back Tax Returns for U.S. Citizens Living in Canada

This short article is called ‘Filing Back Tax Returns for US Citizens Living in Canada’ and it can help simplify the process of catching up with back taxes for Americans living in Canada. Before we start, I’ll tell you why it’s so important for you to become tax compliant with the IRS.

The Importance of Filing Back Taxes for US Citizens Living in Canada:

US citizens must file a US tax return every single year and report their worldwide income to the IRS. They must also file a FBAR. This is a report of their bank and financial accounts held overseas. Failure to file could result in a penalty of up to $10,000 per year, per account. In fact, the IRS has so much power that it could require the Canada Revenue Agency to disclose your personal financial information to them.

Now that you know why it’s so important, how do you become in compliance? There are three ways that you can become complaint with the IRS, and they as listed below.

The Streamlined Process:

The first way of filing US tax returns for US citizens living in Canada that allows you to become complaint with the IRS is through the Streamlined Process. The Streamlined Process allows full compliance without any penalties. With the Streamlined Process you must file six years of past due FBARs and three years of past due US tax returns, plus the current year. To qualify for this program you must meet four conditions:

1. You are a US citizen or a Green Card holder.
2. You have not lived in the US since January 1st 2009.
3. You have not filed a US tax return or a FBAR since 2008.
4. You are a low compliance risk.

The IRS considers you a low compliance risk if your tax returns are fairly simple and if you do not have a significant amount of tax owing to the IRS. With the Streamlined Process you must pay all taxes plus interest that are due. While there is no end date for this program the IRS could close the Streamlined Process at any point in time. That’s why I recommend that you take advantage of the Streamlined Process as soon as you can.

Now, please don’t worry about the Streamlined Process. Most US citizens living in Canada will not owe any tax to the IRS because the Canadian tax rates are higher than the US tax rates, and also because you will receive a foreign tax credit on your US tax return for Canadian taxes already paid.

Quiet Disclosure:

The second way, when it comes to catching up with back taxes for Americans living in Canada, is through Quiet Disclosure. Quiet Disclosure means that you are filing past due US returns and past due FBARs and paying the related taxes and interest due. Do not notify the IRS of your submission either formally or by any other means; it must be quiet. While there is no guarantee, the IRS may process your returns normally without any penalty. Under the worst case scenario you could be assessed the maximum allowable penalty amount.

Overseas Voluntary Disclosure Program:

The third way of filing past due returns for US citizens living in Canada in order to become tax compliant with the IRS is through the Overseas Voluntary Disclosure Program. This program is meant for US citizens who have significant undisclosed assets that are overseas. In this program you must file past due US returns and past due FBARs along with paying what’s known as the offshore penalty. There are three types of offshore penalties:

1. Standard Penalty is 27.5% of the highest value of your offshore assets during the period of disclosure.
2. Reduced Penalty is 12.5% of the value of your offshore assets if the value is less than $75,000 each year.
3. Super Reduced Penalty is 5% of the value of your offshore assets. To qualify for this super reduced penalty of 5% you must meet three main conditions:

• You lived in Canada during the year.
• You filed your Canadian tax returns on time and do not have any outstanding Canadian taxes.
• You have earned less than $10,000 in US source income.

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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