Are you in good standing with the IRS?
The purpose of this article is to help you understand your obligations towards the U.S. tax authorities. If any of the situations presented below apply to you, it is strongly recommended that you consult a professional with U.S. taxation experience.
You are monitored by the IRS if you are in one of the following situations:
- You hold U.S. citizenship (regardless of your current country of residence).
- You are a permanent resident of the U.S. (a green card holder).
- You were present in the U.S. for more than 183 days during the year.
- You meet the U.S. substantial presence test*.
* The “substantial presence test” relates to the total number of days you were present in the United States in the last three years, calculated as follows:
- the number of days you were present in the U.S. in the current year;
- 1/3 of the days you were present in the first year before the current year and;
- 1/6 of the days you were present in the second year before the current year.
If the total is 183 days and more, you meet the U.S. substantial presence test (situation 4 above). For example, if you stay for more than 122 days in the U.S. per year, the total over three years will exceed 183 days. Every day that you are in the United States is counted, even if you are only there a few minutes a day.
If you are in one of the first two situations mentioned above
Regardless of your current country of residence, as long as you are an American citizen or a green card holder, and therefore considered a permanent U.S. resident, you are required to file an income tax return along with any other form prescribed by U.S. law for disclosing investments held outside the U.S.
If you were present in the U.S. more than 183 days (situation 3)
When Canadians stay in the U.S. for more than 183 days, the IRS considers them as dual status aliens for tax purposes. Under the tax convention between Canada and the United States, these individuals can be exempted from their obligations to file a U.S. income tax return, but not from their obligations to disclose investments held outside the U.S.
If you meet the substantial presence test (situation 4)
If you fail to file the form entitled “Closer Connection Exception Statement for Aliens” (Form 8840) before June 15, when the result of the calculation mentioned above is 183 days and more of presence in the U.S. in the last three years, and even if the number of days of presence was less than 183 days in each year considered, you will be deemed to have stayed 183 days and more in the U.S. during the year, and therefore will be subject to the same filing and disclosure obligations towards the U.S. tax authorities as if you were in situation 3.
Penalties for failing to file returns
The significant penalties for failing to file returns generally relate to the obligations to disclose investments held outside the U.S. Thus, if you are in one of the first three situations, or in the fourth situation and haven’t filed form 8840, and you fail to report investments held outside the U.S., you could face a minimum penalty of $10,000 per form or account omitted, per year. In addition, depending on your situation (shareholder or director of a corporation outside the United States, beneficiary of a trust, etc.), you may be required to file other forms and could incur penalties just as high for failure to do so.
To be in standing with the U.S. authorities
If you are in situation 4 (U.S. substantial presence), it is important to file form 8840 before June 15 to be exempted from the obligation to file an income tax return with the U.S. authorities and thus avoid significant penalties. Note that you are also affected if you stayed in the U.S. for more than 122 days during the last three years.
If you are in one of the first three situations, you cannot avoid your obligations to the U.S. tax authorities and will need to use the services of a professional with U.S. taxation experience.
What about previous years?
If you defaulted in previous years, voluntary disclosure programs exist that allow you to correct your situation. These programs, implemented in 2012 temporarily (end date not yet determined), are intended to help over one million people rectify their situation with Uncle Sam.
Chantal Amiot, CPA, CA,
Member of the Order’s Technical Working Group on Taxation and Commodity Taxes