Haven�t Properly Surrendered Your Green Card? -The IRS May Soon Ask If Your Us Tax Filings Are Up To Date

Ed Arbuckle

U.S. citizens living in Canada who have not kept current with their US tax-filing obligations should know that the IRS has significantly increased their tax surveillance and is looking for them. Recent laws under the US Foreign Account Tax Compliance Act (FATCA) rules guarantee that sooner or later Canadian banks and other financial Institutions will ask their clients if they are a US taxpayer based on any one of the following reasons:

They are a US citizen;
They reside in the United States;
They were born in the United States or under certain situations were born outside the US with one or more US citizen parents;
They have been lawful permanent residents of the United States, having continuously lived there at one time for eight or more years (or part years) as a green card holder prior to permanently leaving the US.

Once the IRS has the information from Canadian financial institutions via CRA, they will contact you to see if you have been filing, and will perhaps arrange with CRA to take some of your account distributions.

Green Card Holders

This article zeroes in on green card holders mentioned in the last point above. It will not define the term because, if you ever have been a green card in order to be a lawful permanent resident of the United States, you will know what that’s about. Essentially, you must have a green card to live in the United States on a long-term basis.

Many Canadians have lived in the United States to work, go to school or for other reasons. Many often return to Canada and don’t properly turn in their green card to Homeland Security. Furthermore, it is unlikely that they officially notify the IRS of their US departure in the prescribed way. Both actions must happen in order that Canadians can get out of the US tax net.

US Citizen Or Green Card Holder ñ Both Must File

You can be living outside the United States and be a US taxpayer for two main reasons. Either you are a US citizen or you are defined as a US long-term resident. You are as a long-term resident for US tax purposes if you have ever been a lawful permanent resident of the United States (green card holder) for more than seven continuous years ending with the year that your US residency ended.

The problem is that you will continue to be a US taxpayer once you qualify as a US long-term resident until you take two actions to end that status. It doesn’t matter if your green card has expired or that you mailed it back because you must do it in a specific way and you must also file form 8854 with the IRS.

FATCA

Now comes the possibility of the IRS finding you through letters sent from Canadian financial institutions –something we have already seen. Canadian financial Institutions may send a letter to you if their records show any indication that you are a US taxpayer (born in US, have bank accounts there, have lived there, etc.). If the person does not reply, we have also seen letters say that the bank will notify CRA that they believe that you are a US taxpayer and CRA will notify the IRS. Of course the IRS will then send you a letter in due course asking you for your explanation for not filing and ask CRA to do a US tax withholding. US penalties could also apply for not filing US tax forms of up to $10,000 per form.

Now To Fix The Problem

Obviously you want to fix this as quickly as possible to avoid the IRS getting to you before you get to them. The process is complex and space does not allow a complete explanation. Generally, here’s what you need to do:

Properly abandon your green card to Homeland Security.
Make a streamlined voluntary disclosure for five years to bring US tax filings up to date.
File form 8854 (Initial and Annual Explanation Statement) with the IRS to officially expatriate with a final tax return.

Your tax expatriation will not be recognized until both steps one and three have been completed, and you can’t complete step three unless you do step two so don’t delay getting at it. It’s a long process.

Filing Past Due Returns

In order to expatriate, you must be able to swear on form 8854 that you have complied with all of your tax return filing obligations (income tax returns, gift tax returns, etc.) for the five preceding tax years so you will need to get them up to date before you do anything.

Because you are a US taxpayer after leaving the United States, you will need to do a streamlined filing—a form of voluntary disclosure to the IRS—because you need to clear up your past filing obligations even if no tax is payable. That’s where the filing of tax returns and related schedules for three years and FBAR returns to provide details of non US investments for six years come into play. You actually need to file five previous years of tax returns so you meet the 8854 rules for expatriation as noted above. Supporting forms are required to provide details about such things as mutual funds, Canadian pension plans, TFSAs, RESPs, reliance on tax treaties and so on.

The IRS has many excellent information packages and form instructions on line but they are difficult to understand and they are constantly changing as the law and official interpretation changes—much more frequently than in Canada, we might add.

Summing Up

Many US citizens have dragged their feet on becoming US-tax-compliant but this will eventually catch up to them. Remember that under the green card rules, your tax filing obligations go back to the time that you left the US—maybe 30 years ag—and only streamlined filing or another voluntary disclosure program gets you out of this. Streamlined filing is not available to some snowbirds so you may need to find a different way to make a voluntary disclosure. Surrendering your green card properly and filing form 8854 are both necessary to complete the process. This is no walk in the park so get at it.

For those who continue to delay in attending to this matter I am afraid to say that your decision will not have a happy outcome.

J. E. Arbuckle Financial Services Inc.

30 Dupont St. E., Suite 205, Waterloo, Ontario N2J 2G9

Phone: 519-884-7087 Fax: 519-884-5741

Email: jea@personalwealthstrategies.net

www.personalwealthstrategies.net