The IRS has its eyes on you
Jeff Fortin has been living in this country since he was a boy, but every year he endures the drudgery of filing both a U.S. and Canadian tax return.
“You go through the exercise, which I can assure you is arduous,” says the tax adviser with Burnet Duckworth & Palmer LLP in Calgary.
“It takes me, I would say, 10 times as long to do my U.S. return as it does to do my Canadian return.”
Tax season isn’t over yet for the one million Americans who call Canada home.
The deadline to file a U.S. return is today, but last-minute filers racing against the clock can get an extension until Oct. 15.
It’s rare that an American living abroad would actually have to pay anything to the U.S. Internal Revenue Service, said Fortin.
With a few exceptions, a Canadian tax bill will be higher than a U.S. one, cancelling out anything that’s owed south of the border.
Yet, the paperwork is necessary.
Another deadline to keep in mind is June 30, when the Report of Foreign Bank and Financial Accounts, or FBAR, is due. It applies to any American with a total of $10,000 in foreign chequing, saving or investment accounts.
“The genesis of the FBAR was really targeted at Americans trying to hide money offshore,” said Craig Maurice, a tax specialist with Torys LLP in Calgary.
There are stiff penalties on the books for U.S. expats who fail to properly file their FBAR. For those who weren’t aware of their obligations and made an honest mistake, the fine is $10,000 per error.
But those found to be deliberately dodging the tax man face fines of up to 50 per cent of what’s in their accounts, or $100,000.
“That’s obviously a really huge stick that the IRS holds over people,” said Maurice.
However, neither Maurice nor Fortin have heard of a case in which an individual has actually been forced to pay a fine.
U.S. legislation coming into effect July 1 will make it harder for foreign account holders to fly under the radar.
Under the Foreign Account Tax Compliance Act, foreign financial institutions will have to report accounts held by Americans to U.S. authorities.
“Anyone that’s been sitting on the fence, saying this really can’t be an issue for me, or I’ll deal with it when it becomes a problem, it’s probably now getting to the stage where you should be seeking some advice and making sure that you’re getting yourself up to compliance,” said Maurice.
The FBAR has long been required, but awareness has been raised in the years since FACTA was announced, said Roland Sabates, a tax attorney at H&R Block who specializes in expat services.
“There was just a lack of awareness that this was an obligation. It wasn’t readily enforced by the IRS and the tax industry in general. It was an issue that may have been commonly overlooked,” he said in an interview from Kansas City, Mo.
Making matters a little more tricky is the U.S. Affordable Care Act, also known as Obamacare, said Sabates.
“Expats are deemed compliant under the Affordable Care Act legislation if they live outside for 330 days during a 12-month period or pass a bone fide residence test, which is a fact-intensive analysis looking at your connections to the foreign country and whether you plan to be there on a permanent or indefinite basis,” he said.
“So if you meet one of those two tests, then you’re deemed compliant and you don’t have to worry about the individual mandate for health insurance coverage.”
Tax preparation specialists at H&R Block have been “extremely busy” helping Americans abroad figure out their taxes in recent weeks, said Sabates.
“They know they need to file, they just don’t know what they need to do. We’re dealing with a large portion of the expat population that is confused about their specific filing requirements.”