Am I a US Citizen? If so Now What?

This article is not meant to be technical in any way. No advice is being provided, nor should anyone rely on this article for tax advice. Tax advice can only be given where there are specific facts that are reviewed carefully by your professional advisor.

In this day and age it is hard to imagine that some people do not know or realize that they are actually a Citizen of another country, especially one as prominent as the United States. However, these US Citizens were often born in a country other than the United States. These US Citizens also have lived their entire lives in another country. In fact, some have never even stepped into the United States. For the purposes of this discussion I will only focus on US Citizens living in Canada.

On a personal note years ago I had a client frantically come into my office when he realized that he had US tax filing responsibilities and had not complied with them. This elderly gentleman had lived the last fifty years in Canada. He also felt worse when he realized he had brought his daughter into the worldwide web of US tax filings. During a foreign assignment in Switzerland this client had married and his wife gave birth to a child while in Switzerland. Switzerland at that time did not grant Citizenship based on birth. As the client was a US citizen the only country he could register the birth with at that time and give Citizenship to was the United States for his new born child. He and his wife moved to Canada after the assignment was over. Imagine his child’s surprise years later when she was told she was a US Citizen.

If you were born in the US you are typically a US Citizen, no ifs ands or buts. A child adopted from the US is a US Citizen by birth. There are many US Citizen parents who took out US Citizenship for their children. There is a belief that Citizenship was awarded to children in the earlier days of US Citizens but I truly believe it had to be applied for. Because the United States had changed their policies so many times it is difficult to ascertain whether or not some people have US Citizenship because their parents were US citizens.

A US ITIN ( Individual Taxpayer Identification Number) is needed where a US Social Security number is not applicable. An ITIN is for a non US Citizen required to file a non-resident US tax return. Often clients who have US tax filings come in to apply for an ITIN only to find out that they are a Citizen. Not sure if these clients really did not know, or were in denial that they were in fact a US Citizen. In fact many clients who arrive at my door know they are US citizens but have ignored it over the years until a family member living in the US dies and leaves them US source income.

I often come across other individuals who had moved to Canada from the US. Many of these clients have told me that they found a local accountant who had advised them that they were only required to file Canadian tax returns. In fact I once asked an accountant why he had not advised a family member that they were required to file a US return. The answer I received was shocking. The CPA told me that no one really cares because the client would not have to pay tax anyways so why should he get the client to pay for the preparation of a US tax return. The CPA believed he was saving his client money. Nothing could be further from the truth.

Filing of Tax Returns

A U.S. Citizen is legally required to file an income tax return for each and every year on his/her worldwide income whether or not their income is derived within the United States(“US”) or elsewhere. In other words the US taxes its Citizens on worldwide income regardless of where they reside.

How can this be? I live and work in Canada and I file and pay enough taxes to Canada? Well, since you already pay a lot of tax to Canada when you file your US return you will be eligible to take a foreign tax credit for the tax you have already paid and you should not have to pay anything else to the US in a perfect world.

Unfortunately, now a US Citizen living in Canada has the expense of filing both a Canadian and a US tax return on the same income.

Yes, both the Canadian personal tax return and the US tax return report worldwide income. The US income tax return is referred to as a 1040, while a Canadian return we call a T1.

The US tax return that is filed for a US Citizen living in Canada is also very different than the US return that would be filed by a US Citizen living in the US. Not only is it different, it is much more complicated and there is a significant amount of additional disclosure required for the average person.

You may ask what kind of disclosure and who cares? Unfortunately what people do not realize is that when the US government sits down and creates its US tax law it is not considering the needs or issues that would face its citizens living in other countries.

Report of Foreign Bank Accounts – “FBAR”

A prime example would be all of the rules that revolve around “Foreign Reporting”. When I sit down with new clients and start trying to explain that the US Treasury department requires a “Report of Foreign bank accounts” typically referred to as the “FBAR” the first thing the taxpayer says to me is…….

“I don’t have any foreign bank accounts”

My response typically is…. Do you have any bank accounts in Canada? Yes of course I do. Well to the US Treasury department a Canadian bank account is a “Foreign Account”. As such you need to report each and every Bank / Investment/Financial account you have in your name and the highest balance in each of them for the year. The form asks for the Name of the financial institution, the address and the account number. Also, the highest balance in the account which means now you might be going through 12 bank statements.

You might ask, why can’t I skip this step? Who really cares? What a strange report and what value does it have. Well the report is required by law and falls under a section referred to as the Financial Crimes Enforcement Act “(also called “FinCen”). The IRS in creating this rule was not after US Citizens living in Canada, but those living in the US not reporting income earned on monies held in other countries.

In the past ten years the requirement for this report has been highlighted in the press numerous times. Some of the articles focused on the penalties of $10,000 for not doing the correct reporting. Other articles focused on various voluntary disclosure programs where the IRS would allow taxpayers to repatriate funds from other countries back to the United States at a fee of 25 cents on the dollar or more.

The year this first voluntary disclosure program that was initiated was a profitable year for the US government as people came clean and brought back money to the US at a fee. It sounded strange to me at first and then a tax lawyer gave me a few examples.

A Swiss couple had come to live in the US in their younger years. They inherited money from family who had passed away in Switzerland. At the time they opted to leave the money invested in Switzerland. Knowing that they had not reported the income they were earning in the past 20 years or more and had not reported the account on their returns they did not know how to access the money. Now the couple was elderly and had a divorced daughter with young children to support. What is better the lawyer said, $5 million dollars that you have no access to, or $ 3 million of clean dollars your family can use in the United States. When explained that way it made all the sense in the world. People had left money in other countries and didn’t even know how to get it out without incurring prison time.

The IRS has replaced one voluntary disclosure program after another. For US Citizens living in Canada who have not complied with their reporting requirements the issue is not as bad as it is for US Citizens living in the US. Canadians also pay tax on their worldwide income. As such, the fact that Canadians have bank accounts in Canada is normal. The income earned on those accounts has been reported to their government agency.

The FBAR is a separate return with disclosure that is filed separately from the 1040. It is electronically transmitted to the US Treasury Department. In recent years there has been a legal requirement that this return be filed electronically.

In the US return itself there are other components of Foreign reporting which will not be addressed.

Summary

If you determine you are a US Citizen or you already know it then filing is not an option, it is mandatory. Unfortunately you cannot just renounce Citizenship in order not to escape this obligation. A minimum of five years of 1040 Individual Tax returns and six years of the FBAR/Report of Foreign Bank accounts are required before one can renounce.

Alternatively a US Citizen who has not filed can commence filing returns. Typically the requirement is still 3 years of 1040 returns and 5 years of FBARS. In some cases US Citizens who had left the US actually find out that they are eligible for US Social Security after they file their returns. Filing however is a necessary evil and should not be attempted without the assistance of a professional accountant.

The Author

Laurie Zon, CPA, CA, CPA (IL) is widely acknowledged to be one of the leading practitioners in her field.

Laurie has over 30 years experience specializing in all aspects of US and Canadian Tax. She has worked directly with leading corporations in the Financial Services and Real Estate sectors and is widely respected for her intimate knowledge in the specific field of Canadian and US Tax policies and issues on both sides of the border.

A graduate of the University of Toronto (BA in Commerce, 1985). Laurie received her Chartered Accountant’s designation in 1988 and completed the CICA In-depth Tax Course in 1991. Laurie became a CPA in 1999 (Illinois).

Laurie has presented seminars on tax related issues such as mortgage interest deductibility for groups including the Toronto Home Builders Association.

Laurie Zon’s contact information is lzon@us-taxservices.com and 416 490-9898