Introduction
If you are a U.S. citizen living in Canada, you may have heard that you must file an FBAR (Foreign Bank Account Report) when you hold foreign financial accounts. Many U.S. expats discover this requirement only after living abroad for years. Fortunately, the IRS offers the Delinquent FBAR Submission Procedures (DFSP) to help eligible taxpayers come into compliance.
This article explains how the DFSP works for U.S. expats in Canada.
What is the DFSP?
The Delinquent FBAR Submission Procedures (DFSP) let taxpayers who failed to file required FBARs come into compliance without penalties, as long as they meet certain conditions.
Who can use the DFSP?
You may qualify for the DFSP if all of the following apply:
- You did not file one or more required FBARs.
- The IRS is not currently examining or investigating you in a civil or criminal matter.
- The IRS has not contacted you about the missing FBARs.
- You properly reported and paid tax on all income from the foreign accounts on your U.S. tax returns.
How do you file Delinquent FBARs under the DFSP?
If you qualify, follow these steps:
- File the missing FBARs electronically through the BSA E-Filing System.
- On page 1 of the FBAR, choose the late-filing reason: “Did not know that I had to file.”
- Add a brief explanation in the text box if the form prompts you to do so.
- File electronically only. Do not mail paper copies to the IRS or FinCEN.
How many years of FBARs should you file?
In most cases, you should file FBARs for the last six years. The IRS generally reviews that six-year period for FBAR compliance.
Will you owe penalties or interest?
If you meet the DFSP requirements and you reported all income from your foreign accounts, the IRS will not impose a penalty for filing late FBARs under these procedures.
What if you did not report income from Canadian accounts?
If you failed to report income from your Canadian accounts, you do not qualify for the DFSP. In that case, you may need to use the Streamlined Filing Compliance Procedures or the IRS Voluntary Disclosure Program. Those options may require additional filings and may involve penalties.
What Is the Statute of Limitations for FBAR penalties?
The IRS generally has six years from the FBAR due date to assess FBAR penalties under 31 U.S.C. § 5321(b)(1).
For example, the 2020 FBAR was due on April 15, 2021, with an automatic extension to October 15, 2021. The statute of limitations for that year would generally expire in 2027.
Do U.S. Expats in Canada need to file other international forms?
Possibly. In addition to the FBAR, U.S. expats in Canada may also need to file:
- Form 8938 (FATCA): Statement of Specified Foreign Financial Assets under IRC § 6038D
- Form 3520 and Form 3520-A: Often relevant for certain foreign trusts and sometimes for Canadian RESPs or RDSPs under IRC § 6048
- Form 5471: For certain ownership interests in foreign corporations under IRC § 6038
If you missed these forms, you may need the Delinquent International Information Return Submission Procedures (DIIRSP) or the Streamlined Filing Compliance Procedures instead.
What does “reasonable cause” mean for late FBAR filing?
Reasonable cause generally means you used ordinary business care and prudence but still could not comply. For some U.S. expats, lack of awareness of the FBAR rules may support a reasonable cause argument when the facts justify it. See 31 U.S.C. § 5321(a)(5)(B)(ii) and IRM 4.26.16.4.6.1.
How do you claim reasonable cause?
When you file delinquent FBARs, choose the appropriate late-filing reason and provide a brief explanation if requested. If the IRS later contacts you, you should be ready to provide a more detailed explanation and supporting documents.
What happens after you file under the DFSP?
The IRS and FinCEN do not send formal acknowledgment for DFSP submissions. You should keep copies of the filed FBARs and your electronic filing confirmations for your records.
Can the IRS still review your filing?
Yes. The DFSP is intended for non-willful cases, but the IRS can still review your submission. If the IRS concludes that your conduct was willful, or that you failed to report income, it may assess penalties or begin a deeper investigation.
How does the DFSP compare to other IRS Offshore Programs?
The DFSP applies when you reported all income and only failed to file FBARs. If you qualify, the IRS generally does not impose a penalty.
The Streamlined Filing Compliance Procedures apply when you failed to report income, failed to file FBARs, or both, but your conduct was non-willful. These procedures generally require amended tax returns for the last three years and FBARs for the last six years. U.S. residents may face a 5% penalty, while eligible non-residents generally do not.
What about the IRS Voluntary Disclosure Program?
The IRS Voluntary Disclosure Program is for taxpayers whose noncompliance may have been willful. It requires broader disclosure, carries higher penalties, and may involve criminal exposure.
What Should U.S. Expats in Canada do next?
If you are a U.S. expat in Canada with delinquent FBARs, start by reviewing your Canadian financial accounts to see whether you met the FBAR filing threshold. Then check your U.S. tax returns to confirm that you reported all foreign income.
If you only missed FBAR filings and you properly reported all income, the DFSP may be the right solution. If you also missed income reporting or other international information returns, speak with a tax professional about the Streamlined Procedures or other compliance options.
Raj Pandher is a qualified CPA (cross border tax accountant), a Trust and Estate Practitioner (TEP) and a Certified Executor Advisor (CEA) who assists the U.S. citizens and green card holders immigrating from the U.S. to Canada with their U.S. Canada cross border income tax return(s) filing including foreign information return(s) reporting.
