At least some Canadians may be aware that the United States’ method of taxation is unique among all other developed nations. That is, U.S. individuals are generally taxed on the basis of their citizenship rather than on the basis of an economic nexus. Therefore, individuals with U.S. citizenship are typically liable for U.S. taxes on foreign income – even if they never set foot in the United States during the tax year.
In many cases, taxpayers are aware that they will need to file U.S. taxes to leverage provisions of international tax treaties to reduce or eliminate potential double taxation. However, when a person does not realize that he or she has U.S. citizenship, the ingredients for a potentially serious tax mistake are present. In particularly egregious cases, the individual could face tens or hundreds of thousands of dollars in back taxes and penalties.
If you are a resident of Canada or another nation and are concerned about U.S. taxes due to potential dual citizenship, Ted Kleinman and U.S. Tax Help may be able to assist.
Are You a Canadian Citizen Who is also Accidentally American?
As some Canadians may be aware, there are several ways that one can obtain U.S. citizenship. Most cases involving “accidental” Americans stem from citizenship through birth. That is, individuals who are born to a U.S. parent or have U.S. grandparents will also be a U.S. citizen at birth will also be U.S. citizens. Additionally, individuals who are born on U.S. soil receive citizenship at birth. Finally, if a parent became a naturalized U.S. citizen while a child was under the age of 18 and a green card holder, he or she may also be a citizen without realizing it.
U.S. Citizens in Canada Typically Need to file Taxes
In light of the fact that individuals can “accidentally” acquire U.S. citizenship, the United States’ unique form of taxation is an important consideration. That is, individuals who are unaware of their U.S. citizenship can incur U.S. tax obligations simply by working and earning money in Canada. In fact, the tax filing threshold is extremely modest so most people engaged in full- or even part-time employment will have an obligation to file taxes.
Taxpayers who fail to file taxes and make a tax payment to satisfy existing tax obligations due and owing by the expat tax deadline will face interest. Furthermore, these taxpayers may face additional penalties for non-filing of taxes that can further inflate the tax obligation owed.
U.S. Citizens Living Abroad May need to File FBAR and FATCA
For individuals who are U.S. citizens without realizing it, perhaps the greatest and the potentially most costly mistake is the failure to make required offshore account disclosures. The duty to disclose foreign accounts is often duplicative since taxpayers may need to file both a Foreign Account Tax Compliance Act (FATCA) disclosure and a FinCEN Report of Foreign Bank Account (FBAR). Each obligation is independent. Therefore disclosing one account via FBAR does not satisfy the duty to disclose the same or other accounts to satisfy FATCA and vice-versa.
In general, the obligation to file FBAR exists when the aggregate value of the taxpayer’s covered accounts exceeds $10,000. One’s obligation to file FATCA is dependent on both one’s tax filing status and whether the taxpayer qualifies as a foreign resident. A CPA or tax professional can help you determine if you have an obligation to file FBAR, FATCA, or both.
Generally speaking, penalties for foreign account reporting failures are harsh. Even an accidental failure to file FBAR can result in a penalty of $10,000. More serious failures can result in a penalty of the greater of 50% of the account balance or $100,000. Penalties for FATCA failures can also result in a $10,000 penalty followed by additional penalties for continued non-compliance. Due to the potential for huge fines, maintaining compliance with these obligations is essential.
Work with a CPA Experienced in International Tax Issues
At U.S. Tax Help, CPA Ted Kleinman has helped many expatriates achieve or maintain compliance with their U.S. tax obligations. If you are concerned about being an accidental American living in Canada or in other foreign nations, Ted can help you assess whether you have a tax and foreign disclosure obligation. To schedule a free initial review of your concerns, call U.S. Tax Help at (541) 923-0903. You can also contact Ted by completing the web form in the upper right