Tax Filing for Dual Citizens [2023 Edition]
Dual citizenship provides many benefits, including job mobility and voting rights. It provides a platform for individuals to travel and stay as long as they wish in the country of their dual citizenship for personal and professional reasons, without restrictions and without being required to apply for a visa. Importantly, they are not subject to a border officer’s discretion as to whether to be permitted or denied their entry.
Since the United States renewed in around 2009 its efforts to fight non-compliance and money laundering around the globe by U.S. citizens, U.S. dual citizens who live outside the United States have been renouncing their U.S. citizenship because of significant burdens and challenges the dual citizenship “offered.” The challenges are especially significant for accidental Americans, especially those who just recently found out they are U.S. citizens, even though they have never been in the United States or left the United States shortly after their birth and since then spent their whole lives outside the United States. Many of them have never filed U.S. tax returns and have not heard about Foreign Bank Account Reporting (FBAR). Of course, since the IRS introduced its Offshore Voluntary Disclosure Initiative in 2009, many non-compliant Americans became compliant, but it cost them significant professional fees and a lot of stress and anxiety. Staying tax-compliant is also not that simple. The U.S. international tax law is complex and even tax professionals have been learning the “new” old rules all along. Finding a qualified U.S. tax advisor takes diligence and time.
The IRS and U.S. Treasury had good reasons to fight non-compliance and money laundering. Unfortunately, many “bystanders” got into a cross-fire. Take Canada, for example. The Canadian individual income tax rates are generally higher than the U.S. federal and state tax rates. Unless there is a mismatch in the tax treatment of a particular transaction/item of income/expense or timing difference for income inclusion, the U.S. tax liability for dual U.S. / Canadian citizens is minimal, if non-existent. Many taxpayers are wondering what is the purpose of filing a “zero” return then? Of course, they need to be educated that the reason for a “zero” return is due to invoking various mechanisms to eliminate double taxation (such as Foreign Earned Income Exclusion or Foreign Tax Credit). But to claim such protective mechanisms, one must file a tax return. The U.S. tax liability doesn’t just go away if you simply filed your Canadian taxes and assumed that the foreign tax credit would take care of your U.S. tax. Filing tax return can also be beneficial in some instances where a taxpayer qualifies for certain credits. For example, during COVID, the Economic Impact Payments issued by the U.S. Treasury helped many Americans.
Another misconception sometimes leading to not filing a U.S. tax return is based on trying to think that the U.S. tax law is similar to the Canadian tax law, and as such there may not be much harm in filing tax return late, maybe after a few years. The faulty logic about such thinking is in harsh penalties that the IRS assesses on taxpayers for failure to file on time or failure to file a return all together. Draconian penalties apply for failure to file an FBAR. A penalty for willful violation of FBAR filing obligation is US $131,210 or 50 percent of the highest / maximum value or balance of the account, whichever is greater! Imagine, you forgot to disclose a bank account with a maximum balance of $40. A willful conduct determination is not simple and is based on all facts and circumstances. Penalizing those who deserve such a penalty is not an issue and probably finds little or no compassion. It is when such a penalty may be assessed against a non-deserving taxpayer, that’s when it is a real problem.
What about non-willful FBAR violations? No penalty, right? WRONG! A US $10,000 penalty is assessed for non-willful violations of the statute. Again, we are not going to discuss what is considered “willful” or “non-willful” here, but suffice it to note that this penalty, while having its merits, is also not always just or targets the “right” taxpayers. The U.S. Supreme Court is deciding whether the non-willful penalty should apply on a per account or per form basis. The difference can be in millions of dollars.
The IRS has provided non-willful taxpayers with Amnesty Programs that can eliminate penalties in certain circumstances. For example, the IRS Streamlined Compliance Submission Procedures for taxpayers situated outside the United States offer penalty protection, as do IRS Relief Procedures for Certain Former Citizens. In addition, in case of non-willful violations, taxpayers who can show reasonable cause leading to their delinquency can avoid penalties. But the reasonable cause standard is quite high and few taxpayers are able to use it to preotect themselves from penalties.
Cross-border taxes are very complicated and usually require professional help that comes at a premium. It is not only a tax return or FBAR, but a huge “menu” of internaitonal tax returns and forms that taxpayers are required to comply with that continue leading to confusion, misunderstanding, harsh penalties, and making sure that U.S. international tax professionals keep busy helping their clients.
Canada and the United States have different tax filing and reporting requirements depending on the citizenship and residency of the taxpayer. In Canada, one’s tax filing obligations depend on the residency of the taxpayer, while in the United States, the tax filing requirements are based on your U.S. person status or Green card holding, irrespective of where you live. If you are a U.S. citizen, a Green card holder, or otherwise are treated as a U.S. tax resident, you are subject to worldwide taxation in the United States. U.S. citizens and Green card holders are considered to be U.S. persons, no matter where they live and work.
Over one million U.S. citizens living in Canada have to file income tax returns in both countries. When it comes to holding a dual citizenship, you have to understand your tax filing and reporting obligations and consider various tax factors associated with the dual citizenship status to stay out of trouble and to be tax compliant on both sides of the border.
Foreign Account Tax Compliance Act (FATCA)
Thanks to the enactment and implementation of the Foreign Account Tax Compliance Act (FATCA) in U.S. intergovernmental FATCA agreements, generally, non-U.S. financial institutions are required to report to the U.S. Internal Revenue Service (the IRS) (through the Canada Revenue Agency under the Model I Intergovernmental Agreement (IGA)) accounts held by Canadian residents who are U.S. persons. Some thresholds and exceptions apply, but generally, if the financial institution does not comply with FATCA requirements, U.S. payers are required to withhold a tax equal to 30 percent on payments made to the non-compliant financial institution. That 30 percent withholding is effectively a penalty, and, if found in violation of the FATCA requirements, the financial institution risks such a penalty being applied to all of its account holders. Of course, that is something that no Canadian financial institution can afford.
All Canadian financial institutions have been going through the due diligence process of identifying pre-existing accounts (as of the FATCA effective date) held by U.S. account holders. You have probably been asked already to complete a non-U.S. person certification or IRS Form W-8BEN (non-U.S. persons) or Form W-9 (U.S. persons). Besides the obligations of financial institutions, U.S. citizens and Green card holders are required to personally inform the U.S. Department of Treasury of certain non-U.S. bank accounts and financial assets by filing with the U.S. Department of Treasury Form FinCEN 114, Report of Foreign Bank & Financial Accounts (FBAR) and filing with the IRS Form 8938, Statement of Specified Foreign Financial Assets where applicable.
The FBAR disclosure requirement extends far beyond checking and savings bank accounts. It also includes the requirement to report registered (retirement or other registered accounts) or non-registered financial / investment accounts in Canada, provided the aggregate highest maximum value or balance in the accounts exceeds a certain threshold (currently, US $10,000). Note that once the threshold amount is reached, even accounts with zero balances must be reported. Under the IGA, not all accounts are required to be reported to the CRA for further reporting to the IRS. Certain accounts are exempt from the FATCA reporting requirement (not taxpayer’s individual reporting, but rather the reporting to the CRA under the IGA). Examples of such exempted accounts include Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF), Registered Education Savings Plan (RESP), and Tax-Free Savings Account (TFSA). However, even though these accounts are exempt from intergovernmental reporting, they are still required to be reported by U.S. taxpayers on their timely and duly filed FBARs and Form 8938, where applicable.
Double-Check Your Citizenship Status
Many people neglect to file their tax returns with the IRS because they are unaware of the filing obligations they have. This can be due to the lack of knowledge about the tax filing and reporting obligations, as well as the lack of knowledge that they are U.S. citizens (Accidental Americans). Some dual citizens, even when they do realize that they may have or do have the U.S. tax filing and reporting responsibilities, may try to avoid the hassle and expense associated with catching up on delinquent tax returns and forms (such as FBAR). The time is running out for those taxpayers.
The question delinquent taxpayers should be asking is not how the IRS would catch them. If this is the inquiry delinquent taxpayers are pursuing, it rather suggests potential willful conduct in their failure to file required U.S. tax returns and FBAR. Instead, they should ask how they can become tax-compliant. Any such taxpayers should take advantage of the IRS amnesty programs, while still available (see below).
The U.S. immigration law has been changing and evolving over the decades and some provisions have been changed retroactively. As such, even if you were not born in the United States, you may still be considered a U.S. citizen if you, for example, were born to U.S. citizen parents (in some instances, the parents may not be aware of their U.S. citizenship that they acquired from their respective parents). So, if your parents or grandparents were U.S. citizens, or if your ancestors have obtained their U.S. citizenship, you’d better check your situation and make a determination of whether you may be considered a U.S. person. If in doubt, you should consult a U.S. immigration attorney to determine your U.S. citizenship status.
If you need any help with understanding your U.S. tax filing and reporting obligations or in determining the best option available to you to become tax-compliant, you can schedule an initial consultation and we will guide you through all applicable tax requirements based on your facts and circumstances. Please note that at least one hour initial consultation is required in this case.
Simplifying Investments
Being a dual citizen and having various tax forms to file with more than one government means that you will have to follow two sets of rules and regulations. Such a complicated tax compliance landscape usually results in added tax return preparation and accounting fees. The U.S. tax law, especially, when it involves cross-border and international tax context, is complex. One way to reduce one’s tax compliance costs is to re-evaluate your investment strategy and simplify your investment portfolio.
For example, there is uncertainty as to how the TFSAs and RESPs should be treated for U.S. federal income tax purposes. Some tax advisors take a position that they should be treated as foreign grantor trusts (which requires filing Forms 3520-A and 3520), while others are taking a different approach. In any event, these accounts must be reported on FBAR and Form 8938, where applicable. In addition, any income (dividends, interest, capital gains) must be reported on the individual’s U.S. tax return, even though there is no instance of taxation in Canada. Each dual citizen should evaluate potential benefits of their investments (including comparing the associated tax liability and tax return preparation costs) with a financial/investment advisor and a qualified U.S. tax advisor to ensure proper compliance and to mitigate potentially adverse U.S. tax implications related to their investments.
Investments in Canadian mutual funds or Canadian passive companies may be subject to one of the U.S. anti-deferral regimes – Passive Foreign Investment Company (PFIC) regime. Any investments in PFICs, with limited exceptions, are required to be reported on Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund. Please note that this link may not be updated and you should ensure that you are accessing the current information. This adds further complexity and cost to annual U.S. tax compliance for dual citizens.
If you need any help with understanding your U.S. tax filing and reporting obligations or in determining whether you are required to file a U.S. tax return or U.S. international information returns (such as Forms 3520-A, 3520 or Form 8621), you can schedule an initial consultation and we will guide you through all applicable tax requirements based on your facts and circumstances.
Another complication arises when a dual citizen owns a Canadian corporation. If U.S. shareholders (U.S. persons who own at least 10 percent by vote or by value of a foreign corporation) own more than 50 percent by vote or value of a non-U.S. corporation, such corporation is considered a Controlled Foreign Corporation (CFC) for U.S. federal income tax purposes and is then subject to another anti-deferral regime – Subpart F and Global Intangible Low-Taxed Income (GILTI) tax. This, again, leads to additional tax and increased tax compliance costs. Proper tax planning is usually required to mitigate the impact of GILTI and Subpart F rules for dual citizens.
If you come across any of the scenarios discussed above, you should consult with your qualified U.S. tax advisor to ensure timely compliance and to review your tax mitigation options
If you need any help with understanding your U.S. tax filing and reporting obligations related to your Canadian corporation or in reviewing available options to mitigate adverse U.S. tax implications of Subpart F or GILTI, you can schedule an initial consultation and we will guide you through all applicable tax requirements based on your facts and circumstances.
One viable strategy for dual citizens is to re-evaluate their investment portfolio and choose those investments that, while providing an acceptable return, do not lead to additional tax and compliance costs. They may also want to restructure their corporate ownership in some cases.
IRS Amnesty Programs
Starting from 2009, the IRS has been putting extra efforts in enforcing the U.S. laws requiring U.S. persons to file U.S. tax returns and FBARs, especially those living abroad or having foreign financial accounts or assets outside the United States.
On September 1, 2012, the IRS announced a simplified way for delinquent U.S. taxpayers to come into compliance by establishing streamlined procedures. In 2014, the IRS made significant changes to streamlined procedures and announced a program that would assist delinquent U.S. taxpayers in catching up with their US tax filing and reporting obligation – the IRS Streamlined Filing Compliance Procedures. It aims to help alleviate several tax issues the dual citizenship community has been facing. Most importantly, the IRS Streamlined Filing Compliance Procedures allows certain delinquent U.S. taxpayers to become tax-compliant penalty-free. Only non-willful taxpayers, those who were unaware of their tax filing and reporting obligations or may qualify under the program based on other applicable grounds, are generally eligible for the IRS Streamlined Filing Compliance Procedures. The delinquent U.S. taxpayers are required to meet certain requirements to qualify for the IRS Streamlined Filing Compliance Procedures, including meeting the nonresidency test.
The IRS Streamlined Filing Compliance Procedures can be used by U.S. taxpayers with undisclosed foreign financial assets and accounts residing in the United States and residing outside the United States. The respective IRS programs are referred to as the “Streamlined Domestic Offshore Procedures” (SDOP) and the “Streamlined Foreign Offshore Procedures” (SFOP), respectively. Both procedures are designed for non-willful U.S. taxpayers, but SDOP comes with a price – there is a 5 (five) percent miscellaneous offshore penalty that applies based on the highest aggregate balance/value of the taxpayer’s undisclosed foreign financial assets and accounts.
Delinquent U.S. taxpayers with non-willful conduct can address their noncompliance through other IRS Amnesty Programs, depending on their facts and circumstances and what particular area of U.S. tax compliance they need to address.
Currently, in addition to the IRS Streamlined Filing Compliance Procedures, the IRS has the following amnesty programs:
● Delinquent FBAR Submission Procedures;
● Delinquent International Information Return Submission Procedures;
● Delinquent Return Procedures.
Please note that the links above may not be updated and you should ensure that you are accessing the current information.
Prior to 2018, delinquent U.S. taxpayers with willful conduct could address their non-compliance via the IRS Offshore Voluntary Disclosure Program (OVDP). The OVDP was closed on September 28, 2018. Currently, delinquent U.S. taxpayers with willful conduct can become compliant by addressing their noncompliance via the IRS Criminal Investigation Voluntary Disclosure Practice, the longstanding practice of the IRS Criminal Investigation (CI). Please note that this link may not be updated and you should ensure that you are accessing the current information.
If you are are delinquent U.S. taxpayer who failed to file their U.S. tax returns, FBARs, and/or any U.S. international information returns (including Forms 5471, 3520-A, 3520, 8621, 8938, 8865) and need any help with determining options available to you to become U.S. tax compliant, potential tax and penalty exposure, as well as review the best course of action under your facts and circumstances, we can help. You can schedule an initial consultation and we will be happy to assist you. Please note that at least one hour initial consultation is required for any delinquent U.S. taxpayer.
One of the very important determinations assessing the eligibility for the applicable IRS Amnesty Program is a determination of willfulness. Depending on whether the delinquent U.S. taxpayer may be considered willful or non-willful, they may have one or more options available to them to become tax-compliant. This is a highly factual determination and requires careful review of all of the taxpayer’s facts and circumstances.
Tax Filing Deadlines
The tax return deadline is usually April 15th of the year following the calendar year (usually, for individual taxpayers, the tax year corresponds to the calendar year) that is being reported (unless it falls on a weekend or a holiday). For example, the general U.S. tax filing deadline for the 2022 tax year is April 18th, 2023.
U.S. Filing Deadlines and Forms
We created a reference chart on our website that provides a detailed list of IRS forms and applicable filing deadlines based on category of the taxpayer, individual or business, as well as based on the taxpayer’s tax residency status – resident or nonresident.
Requirements for Dual Citizens Residing in Canada
For U.S. persons living outside the United States, the general tax filing deadline of April 15th is automatically extended by two months until June 15th. If you are unable to file your return by June 15th, you can further extend the filing deadline to October 15th by filling with the IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. Please note that the link above may not be updated and you should ensure that you are accessing the current information.
Although dual citizens residing in Canada get a 2-month automatic extension for filing their U.S. tax return, they are required to pay any tax owed by the general filing deadline of April 15th.
The 2-month automatic extension, as well as additional extension accomplished by filing Form 4868 are considered to be automatic because neither extension requires consent of the IRS. In rare instances, U.S. taxpayers residing outside the United States can request an additional 2-month extension to file their U.S. taxes until December 15th. That extension request, however, requires a consent from the IRS. Although in practice the IRS would not unnecessarily deny such additional 2-month extension requests, granting those requests are within the IRS discretion and are based on particular taxpayer’s facts and circumstances
I Missed the Tax Filing Deadline! What Do I Do?
If you accidentally miss the tax filing deadline, don’t panic – you can still fix this. The IRS has a couple of tips for you:
● File the forms you are required to file as soon as possible — this will minimize interest/penalty charges. If you do not owe any tax, you may not be penalized. However, there are certain forms that may lead to penalties for late filing. You may be able to request penalty abatement, but it depends on your facts and circumstances.
● Use IRS Free File to e-file your federal taxes for free! Certain income thresholds apply.
● For paying taxes, try to pay them off all at once. If that is not possible, work towards paying your tax liability off as soon as possible to avoid further penalties and interest charge. You can also enter into a payment plan with the IRS.
If you find yourself in this situation, where you failed to file your U.S. tax return, FBAR, or any other international information form on time, please contact us to evaluate your options on becoming tax-compliant and to review any opportunity to request penalty abatement. We require at least one hour initial consultation in these cases because there are multiple factors that need to be evaluated to determine the best procedural alternative to pursue to achieve the best possible outcome.
Professional Assistance
The dual citizenship provides many benefits, but is entrenched with significant complexity and cost when it comes to tax filing and reporting obligations. It may be easy to use one of the inexpensive software solutions to file your U.S. tax return when all you got is the employment income, you reside in the United States, and do not have cross-border transactions or foreign assets/accounts. As the cross-border and international tax context become relevant, you should consult qualified cross-border tax professionals who are knowledgeable about the U.S. international tax and cross-border tax rules. Talking to a qualified U.S. tax advisor, such as U.S. Tax IQ, can be beneficial to you so that you can resolve your U.S. tax matter and rely on the advice of a qualified U.S. tax professional for penalty protection purposes. Below are some of the services we offer to dual citizens.
Consulting
Whether you are a small to medium-sized business or looking for personal tax return assistance, our team can provide you with tax consulting, compliance, structuring, and planning services. With dual citizenship, it may be complicated to understand in which instances tax returns need to be filed or what due dates apply to your case. More importantly, being proactive will save you both time and extra costs if your case is audited by the IRS.
Legal Services
Along with the tax services provided by U.S. Tax IQ, we are also integrated with the Law Office of Alexey Manasuev that can provide certain legal services that can be extremely helpful in cases where you are U.S. citizen living outside the United States (holding dual citizenship). By combining legal and tax expertise, we are uniquely suited to help you with your U.S. international tax and cross-border tax matters.
DISCLAIMER: Please note that the information contained in this article is general in nature, is current only as of the date of posting the respective information on the website, and does not (nor is intended to) provide legal or tax advice or an opinion on any matter or issue discussed. You should consult your qualified U.S. tax advisor for any advice on any matters or issues discussed in this article.