Uncle Sam Wants YOU to file US tax returns… and he has recruited foreign banks into his army to report you! Now you will get caught if you don’t file returns and report foreign income.
Until last week, United States persons who had never earned income in the United States and had never opened a bank account in the US were generally not on the IRS’s radar screen. With the legislation signed into law on March 18, 2010 foreign financial institutions must determine if any of their account holders are US persons, and if so, the financial institutions must report information to the IRS about those accounts. This blog answers the most popular questions that we have received in regards to this new legislation.
“My mother/father was born in the US, but I was born in Canada and have never lived or worked in the US and I do not have a US passport or Social Security number. I have never filed a United States tax return. Am I a US citizen and am I required to file US tax returns?”
The rules surrounding citizenship are complex and depend upon when you were born. However, if one of your parents is a US citizen and spent sufficient time living in the US, you may be a US citizen. If both of your parents are US citizens, you are probably a US citizen regardless of whether you or they ever lived in the US. We can help you make a preliminary determination on citizenship, then refer you to qualified immigration counsel who can give you a final legal conclusion on whether you are a US citizen.
If you meet very low income thresholds, you are likely required to file US returns and comply with US tax laws. The good news is that in most cases, the taxes that you paid to Canada will result in foreign tax credits that will cover the taxes that you owe in the United States. We recommend filing tax returns for the current year, and possibly filing for the past several years, in order to avoid finding yourself on the wrong side of the table with the US Internal Revenue Service! The Moodys LLP Tax Advisors team is experienced in handling these types of returns and working with the IRS.
What information is my bank in Canada required report to the IRS?
First, your bank will need to determine whether you are a United States person. If you are a US person, your bank must report your name, address, taxpayer identification number, account number, account balance or value, and the gross receipts and gross withdrawals from the account.
I am a US person who is a minority shareholder in a private corporation. Will this affect me or the private corporation?
Probably. If you own more than 10 percent of the stock in a corporation, more than 10 percent of the profits interests or capital interests in a partnership or beneficially own more than 10 percent of a trust, your bank must report the above information to the IRS. If you own a sufficient interest in the entity or if there are other US persons who own part of the entity, there could be significant tax consequences. Your company might be a Controlled Foreign Corporation (“CFC”) or a Passive Foreign Investment Company (“PFIC”). Ownership of CFCs and PFICs can have disastrous tax consequences if your tax situation is not proactively managed. Talk to an advisor experienced in cross-border tax planning to determine if you have any tax liability. Moodys LLP Tax Advisors are experienced in rendering this type of advice.
I am a shareholder in a corporation, but I am not a US citizen. Could this legislation affect me?
That depends. Do you have any shareholders that are US persons? If so, you may be subject to additional reporting requirements and US tax liabilities, even if you don’t conduct any business in the United States. Discuss your situation with a tax advisor experienced in cross-border planning to determine if you have US tax reporting requirements or exposure. Moodys LLP Tax Advisors are experienced in rendering this type of advice.
I am a shareholder in a corporation that occasionally does business in the United States or that has investments in the US. Will this legislation affect me?
Yes. Even if you don’t have a single US shareholder and you do not have a permanent establishment in the US, if you earn any income in the US, that income may be subject to a 30 percent withholding tax unless you provide the payor with a certificate that states that no US person owns more than 10 percent of the company.
I know that I’m supposed to file a US return, but I’ve never been caught. Why should I start filing now?
This legislation imposes a reporting requirement on foreign (including Canadian) financial institutions. Once these institutions report information about your account to the IRS, the IRS is more likely to find you. If you fail to disclose your assets and the aggregate value of all of those assets is greater than $50,000, the IRS could impose a penalty of $10,000. If you receive a notice and do not provide the information after 90 days, the IRS could impose a $10,000 penalty each month up to $50,000. Moreover, if you fail to disclose the information and the IRS determines that there was an underpayment, an additional 40 percent tax will be assessed on the amount of the underpayment. The statute of limitations with respect to a tax return do not begin running until a return is filed! This means the IRS may pursue you for an unlimited period of time if you do not file a required US tax return for a particular year (or years).
The penalties imposed by this new legislation are in many instances imposed in addition to other penalties which exist under other tax law and bank secrecy law provisions. Failing to file required returns, particularly those related to foreign assets or entities, can result in draconian penalties and criminal prosecution. Moodys LLP Tax Advisors has an experienced team of US tax experts who can assist you with catching up past filings and finding solutions to your tax problems.