We often receive inquiries about United States (“US”) filing requirements. It is not a surprise, as a large number of Americans living aboard do not know about their US filing obligations. The USA is one of the few countries that have a citizenship-based, rather than residency-based, taxation system. This means all US citizens are required to file US tax returns regardless of where they live or whether they must also pay tax in another country.
In addition, non-Americans may also have a US filing requirement. The following is a non-exhaustive list of situations which could require you to file an income tax return in the US:
- You are an American citizen living abroad
- You are a Green Card holder even though your green card may have expired
- You meet the substantial presence test. To meet this test, you must be physically present in the US on at least:
- 31 days during the current year, and
- 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
- All the days you were present in the current year, and
- 1/3 of the days you were present in the first year before the current year, and
- 1/6 of the days you were present in the second year before the current year.
- You are a non-resident of the US but have income from sources earned in the US (such as salary, rental income, disposition of a US real property directly or indirectly through a flow-through entity etc.)
You may not have a US tax filing requirement if your income is below a certain threshold. However, you must file a tax return to claim a refundable tax credit or a refund for income tax withheld. You may also make elections to override the substantial presence test.
The Internal Revenue Service (IRS) imposes severe penalties and fines on failure to file certain information returns. For example, every year, under the law known as the Bank Secrecy Act, you must report certain foreign financial accounts, such as bank accounts, brokerage accounts and foreign mutual funds, to the US Treasury Department and keep certain records of those accounts. You report the accounts by filing a Report of Foreign Bank and Financial Accounts (FBAR). The minimum penalty you may face for non-willful violation is US$10,000 for each year that you fail to file the FBAR.
If the IRS considers the failure to file as willful, then the penalty will be imposed up to the greater of US$100,000 or 50% of the account balance at the time of the violation. The enforcement of the Foreign Account Tax Compliance Act (FATCA), and Tax Information Exchange Agreements generally require that foreign financial institutions and certain other non-financial foreign entities report on the foreign assets held by their US Account holders.
You should strive to become US tax compliant as the US government is more lenient towards taxpayers who come forward before they have been notified by the IRS.
We’re Here to Help
Do you have any questions on becoming and staying compliant with your Canadian and US tax obligations? Do you need help with the preparation of your US or Canadian tax return? Please not hesitate to contact a member of our team for any filing requirements.