The U.S. taxman comes calling

by Martin K.I. Rumack16 Feb 2012

Are you a U.S. citizen in the eyes of the IRS? Toronto lawyer, author and real estate expert Martin K.I. Rumack clears up the confusion just in time for tax season.



Although I am a Canadian lawyer, this article is designed to be read by Americans – in particular those people who are considered “U.S. Tax Persons or Individuals.” That term is used in legislation enacted in March 2010 by the United States government, titled the Foreign Account Tax Compliance Act (FATCA). The purpose of FATCA is to prevent tax abuse by any and all “U.S. Tax Persons” living outside the United States.


Whether you live in United States, were born there but do not presently live there, have any claim to U.S. citizenship, and/or are a holder of a U.S. Green Card you may be caught by the “U.S. Tax Persons” definition and affected by this legislation which will come into effect on January 1, 2013. Being the American equivalent of our Canada Revenue Agency (C.R.A.), the Internal Revenue Service (I.R.S) considers any individual who is a resident in the U.S., as well as non-residents who are U.S. citizens who have a claim to U.S. citizenship as a result of their parent’s citizenship, to be caught by this definition. U.S. citizens are required to file a federal income tax return as well as Reports of Foreign Bank and Financial Accounts (FBARs) annually, no matter where they reside.


Generally, the late filing of FBARs can result in either a “willful” or “non-willful” civil penalty being imposed on a taxpayer. The penalty for willfully failing to file can be up to the greater of $100,000.00 or 50% of the total balance of the foreign account at the time of the violation. Non-willful violations are subject to a penalty of $10,000 per account, unless the I.R.S. determines the late filings were due to “reasonable cause,” in which case no penalties would be assessed.


What constitutes reasonable cause? The I.R.S. has stated factors taken into account will include:

  • reliance upon the advice of a professional tax advisor who you told about the account;
  • whether the unreported account was established for a legitimate purpose;
  • whether there have been any signs of intentionally concealing the reporting of income or assets; and
  • whether any tax was owing related to the unreported foreign account.


The I.R.S. states that if it determines that a taxpayer’s background and education indicate he or she should have known about the FBAR reporting requirements, or if the taxpayer never disclosed the existence of the account to their tax preparer, the reasonable-cause defence may not be accepted. Note that the I.R.S. may also seize up to half of the contents of accounts, in some circumstances.


If you are a U.S. Tax Person but have not been reporting out-of-country income or capital gains or losses, you should be aware that there was a voluntary disclosure period which expired on September 9, 2011. Subsequently, however, the I.R.S. has revised its rules and will allow late filers to still file and possibly avoid large penalties.   Under this permanent amnesty initiative, titled the Offshore Voluntary Disclosure Program, taxpayers make voluntary disclosure but are liable to pay a penalty of up to 27.5 per cent on the highest balance in their bank accounts during the previous eight years, plus any back taxes and interest that is owed. Those Americans living in Canada may be eligible for a reduced penalty of as little as five per cent, provided that they are up-to-date with their Canadian tax obligations.


However, the I.R.S. reserves the right to cancel this amnesty program at any time, so I would still suggest you make full and complete disclosure now and do not wait! This will hopefully assist you to avoid criminal prosecution, though you will still be liable for financial penalties as set out above.


Also, as of January 1, 2013, all non-U.S. Financial Institutions will be required to enter into a reporting agreement with the I.R.S. to identify all customers who are U.S. Tax Persons who bank with them, and to provide annual financial information reporting on those accounts to the I.R.S.  (And there is incentive for Canadian banks and financial institutions to co-operate:   they run the risk of having a hefty withholding taxes imposed on their U.S. operations, if they do not).


At the same time that these banking records are produced, a U.S. Tax Person will be required to provide either a W-9 form with a valid U.S. Tax identification number, or else provide the evidence required to prove one’s renunciation of U.S. citizenship. Commencing in 2013, if a U.S. Tax Person does not provide either one of the two documents, then their Canadian and any other non-U.S. financial institutions will be required to apply a significant rate of withholding tax on financial transactions and remit the amount withheld to the I.R.S.


In addition to these financial penalties, you may encounter problems at the border if you go back to United States for a visit or for business. Furthermore, if you own a property in the U.S., the I.R.S. may be able to seize and sell those properties in order to pay off your tax liability. Make sure you do comply immediately!



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