According to US tax law (aka Internal Revenue Code) I.R.C.§61(a), US citizens and US Green Card holders are required to file a US personal income tax return and report their worldwide income regardless of where they live.
Many delinquent US Citizen expats and “Accidental Americans” may consider not filing a US income tax return because they live abroad (including Canada); have a house in foreign country (including Canada); non-US/foreign bank accounts, foreign employment; or have ties to the US limited to occasional travel to the US for vacation or other purposes. They may even wonder how the Internal Revenue Service (IRS) would locate them and even determine that they are non-compliant for US tax purposes.
There are some common techniques by which the IRS may search for delinquent US Citizens or Green Card holders and determine if they filed their US tax returns regardless of where they live:
Foreign Account Tax Compliance Act (FATCA)
FATCA was signed between the US and many countries including Canada during 2013 & 2014 and became effective in Canada in July 2014. FATCA requires the financial institutions outside of United States (including, but not limited to, banks and investment/brokerage companies) — to report the balances of financial accounts owned by US persons in other countries to the IRS. FATCA has made it much easier for the IRS to locate US persons (including US citizens) living anywhere outside of the US and penalize them for non-compliance.
CBC News has reported that the Canada Revenue Agency (CRA) sent 900,000 records of Canadian residents to the IRS for the tax year 2018, a number which is increasing steadily year by year. (CBC, Nearly a million Canadian bank records sent to IRS, 2019). The records shared with the IRS may include Canadian residents’ names, addresses, account numbers, highest/year-end balances, amount and type of income earned. Neither the CRA nor financial institutions generally inform Canadian residents if/when their information will be shared.
Recently, two US citizens living in Canada with no real ongoing connection with United States made an appeal to the Federal Court of Canada, arguing that the provisions of FATCA breach the Charter of Rights and Freedoms section of the Canadian Constitution that prevent unreasonable seizure and ensure the equality of people under law. However, Federal Court of Canada Justice Anne MacTavish ruled that the provisions do not violate Canada’s Charter of Rights and Freedoms and also pointed out that the Supreme Court of Canada has found that taxpayer’s privacy interest in records that may be relevant to the filing of income tax returns is “relatively low.” (CBC, Court dismisses challenge of deal that helps U.S. nab tax cheats in Canada, 2019).
Non-US/Foreign (including Canadian) Financial Institutions such as Banks and/or Investment/Brokerage Companies
Under FATCA, non-US financial institutions including banks are obliged to obtain US taxpayer-identification numbers (i.e. Social Security Numbers – SSN#) from their US customers. If they do not comply with this obligation, the IRS may impose a 30% withholding tax on their US-sourced income. To remain FATCA compliant, many banks in France and Britain are threatening to freeze or close the bank accounts of US citizens living there.
Although the IRS does not have direct access to the financial information of US citizen expats, it can, however, officially request the respective financial institution to obtain the required information.
Further, under FATCA all foreign financial institutions are required to issue US 1099 tax slips for any investment income earned in foreign financial accounts. In general, depending upon the type of investment income earned in any financial accounts such as bank or investment accounts in Canada, US citizens living in Canada may receive Canadian tax slips such as T5s/T3s/5013s etc. and US tax slips such as 1099-INT/1099-DIv/K-1s which reveal their US Social Security Number (SSN#) or tax identification number (TIN). The IRS also receives a copy of those US tax slips from these financial institutions.
If any US citizen expats receive any refund from the IRS on their previously-filed US tax returns and deposited those funds into their bank account, the IRS may be able to obtain that account information from their database.
US Passport or Green Card
A US Passport or Green Card are official US travel documents issued by the US Department of Homeland Security to US Citizens. US Citizens residing outside of the US are required to travel to the US on a US Passport even if they also have a foreign passport by the virtue of dual citizenship. There is a risk that US expats may be identified at a border crossing and questioned about their US tax non-compliance.
Though the IRS cannot directly take away the US Passport of any US Citizen expat, if the IRS determines that the expat did not file a US tax return and assesses a seriously delinquent tax debt, it may release certification to the US Department of Homeland Security to revoke a current US Passport/ Green Card or deny an application for a US passport or renewal of a US Green Card. (IRS, n.d.)
Relocation to US:
If a US citizen plans to relocate to US from a foreign country for personal or employment reasons, his/her US employer would issue a W2 slip and send a copy to the IRS. From this the IRS may be able to determine that US tax returns were not filed for previous years when the expat was not physically present in US, and assess penalties and interest for late filings and/or late payment of tax owing, if any.
Fiduciary or Beneficiary In Estate of Deceased US Citizen:
If a delinquent US citizen expat is appointed as the fiduciary (for e.g. an executor/executrix named in a will and/or trustee named in a trust) in the estate of a deceased US citizen (may be a family member, cousin or close friend), s/he is obliged to fulfill all fiduciary duties and responsibilities. One of key fiduciary duties is filing of US personal income and/or estate income tax returns and payment of tax owing for the Deceased US person. There is a risk that the IRS may identify that fiduciary of the estate is Delinquent US tax payer.
Similarly, if a delinquent US citizen is named as a beneficiary in a US estate; received some US situs assets as an inheritance. Upon eventual sale of those assets, delinquent US citizen being a seller, may be required to prepare the form “1099-S – Proceeds from Real Estate Transactions” and report his/her name, SSN# and address as transferor and file a copy with the IRS. There is a risk that the IRS may identify that seller/transferor is a Delinquent US taxpayer.
However, if you are a delinquent US citizen or Accidental American who has never filed a US tax return, you may reinstate your tax-compliant status by opting to file your US tax returns for previous years without late penalties and interest under the Streamlined Filing Compliance Procedures and/or Relief Procedures for Certain Former Citizens if you meet the eligibility criteria.
Please feel free to contact Raj at your convenience to determine if you are eligible under either of the above procedures.
