U.S. citizens always have tax obligations

For U.S. citizens, the phrase “you never leave home” may apply to their tax situation. Over the last few weeks, we have been hearing from U.S. citizens who have lived in Canada for many years but are now being asked to catch up on their tax returns. In some cases, they married a Canadian citizen and moved here. Or they moved as a child but always thought of themselves as Canadian.

It turns out that even if you feel like a Canadian, the IRS expects you to keep up your tax filing obligations if you are still a U.S. citizen. And the IRS has been more attention to these filings and coordinating efforts with foreign revenue departments to ensure compliance.

As a U.S. citizen, you are required to file a U.S. 1040 tax return every year to report your world income. It doesn’t matter if you have no U.S. source income. All of your Canadian income is fully taxable to the U.S. because you are a citizen. However, it is not all bad. There are benefits in the Canada-U.S. Tax Treaty to avoid double taxation but you have to file a return in order to claim the benefits. And you may actually qualify for U.S. tax credits such as the $400 Making Work Pay refundable credit or the $1,000 U.S. child tax credit.

You are also required to report other financial accounts like RRSPs, and all foreign bank and investment accounts if the total at any time during the year was more than $10,000. This includes accounts that you hold a signature authority over. The disclosure is sent to the U.S. Department of Treasury and is due on June 30. The penalties for not filing these forms can be severe. However, voluntarily coming forward and reporting seems to help avoid the penalties. And in 2011, the IRS is allowing certain taxpayers a grace period until August 30 before assessing penalties.

If you are a U.S. citizen living in Canada but not filing U.S. taxes, we suggest filing three years of returns to show the IRS there is no U.S. tax liability and then continue to file annually. If there is U.S. tax owing, then you can go back further as the IRS is likely to request more returns be filed.

And if this situation does apply to you, I would recommend working to get caught up quickly. The IRS will most likely find you and the penalties will be more severe.

Doug Morgan
Master tax pro and franchise owner