The U.S. government requires all U.S. citizens and green card holders to comply with U.S. tax laws. In addition to filing income tax returns, U.S. taxpayers are required to file a number of reports disclosing their foreign assets.
U.S. citizens, regardless of whether they reside in the US or abroad, need to comply with the US tax reporting measures that were designed to prevent tax evasion. One such report, Form 8938, Statement of Specified Foreign Financial Assets, was introduced under the Foreign Account Tax Compliance Act (FATCA) .
In order to encourage compliance under FATCA, in 2014 the IRS started signing Inter-Government Agreements (IGA) with various foreign tax authorities and foreign financial institutions, including Canada, to report directly to the IRS information about financial accounts held by U.S. taxpayers. Thus, U.S. citizens, who do not disclose their foreign assets, may face severe consequences for failure to disclose.
Recently, the U.S. government sued a Canadian-U.S. citizen for millions in penalties and interest for non-disclosure of his foreign assets, which included his domestic Canadian financial assets. The Canadian bank did not inform the individual before proceeding with the disclosure. Many U.S.-Canada dual citizenship holders considered this outrageous and unfair, which has led these foreign (Canadian) banks and financial institutions to, now, inform their clients before providing the details to the U.S. Internal Revenue Service.
Therefore, if you are a U.S citizen, residing in a foreign country, you may receive a FATCA letter from your bank and/or financial institution.
Here is what you need to know about the ‘FATCA Letter’ and what you should do upon receiving it.
FATCA Compliance Letter
If you receive a FATCA letter, DO NOT ignore it. As Foreign Financial Institutions are required to comply under Canadian law with the IRS rules for FATCA, these institutions must identify certain pre-existing accounts owned by U.S. taxpayers. Some banks are attaching a Form W-9 or W-8 to the letter. U.S. Taxpayers residing Overseas should complete all forms and send them back to the bank within the time limit stated in the letter.
Refusing to Comply with the FATCA Letter or Providing False Information
Regardless of whether the taxpayer decides to respond to the letter or not, the bank and/or financial institution will share the information with the IRS. Stating incorrectly that you are not a US person might lead to grave penalties. The bank might ask you to prove you’re not a U.S. person by showing that you were never a U.S .person or by providing a ‘certificate of loss of nationality’. In addition, your account might be changed or closed.
Failure to File Tax Returns in the Past
Sometimes U.S. citizenship can be acquired. That is, a person may become a U.S. citizen, simply because one or both the parents are U.S. citizens, even though the person was born elsewhere, such as in Canada, and has never been to the United States. Sometimes, an U.S. citizen moves to another country and doesn’t realize they had to continue filing. Unfortunately, regardless of whether the person is a U.S. resident or not, if he/she qualifies as a U.S. person for U.S. tax purposes, they are required to comply with the FATCA filing requirements. Not complying with U.S. tax laws when one needs to, could lead to the individual being subject to severe penalties and interest for each of the tax years that the person did not comply with their U.S. tax filing responsibility.
At A.G. Tax LLP, many individuals who hold dual citizenship of U.S. and Canada and have never filed a U.S. tax return reach out to us for assistance. In this case, we recommend that they consider using the IRS’s Streamlined Filing Procedure if they were not aware of their U.S. tax responsibility.
If the taxpayer is not eligible to file under the Streamlined filing program, they may be eligible to file under the U.S. Offshore Voluntary Disclosure Program (OVDP) to comply with their U.S. tax responsibility.
Due to the FATCA regulation, some Canadian banks and financial institutions have decided not to enroll Canadians, who are U.S. citizens, as bank customers. U.S. FATCA regulation requires these banks and institutions to disclose significant information, which some banks do not wish to share with a foreign country’s administration.
Banks, thus, are providing the facility to move the accounts of a U.S. person to a U.S. bank with ease. Therefore, we recommend that you reach out to your bank upon receiving the FATCA letter, and inquire about their policies. Also, contact a cross border tax expert to help you carve out a plan that eases your tax burden.
With that being said, if you think you do qualify as a U.S. person for U.S. tax purpose, you should consult a U.S. Canada cross border tax practitioner as they could suggest the proper and easy way for you to comply with the U.S. tax regulations. Note that, if the IRS approaches the U.S. person first, that person will not be able to rely on the Streamlined program or OVDP to comply with the U.S. tax responsibility, and could be subject to significant penalties and interest. If you wish to renounce your U.S. citizenship, as you are a citizen and resident of another country, you may refer to our article on process to renounce U.S. citizenship.
AG TAX LLP CAN HELP
If you have any other tax-related queries, and/or need assistance with tax planning/filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws and can provide you the right guidance to handle your tax situation.
Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts, who are highly-qualified and experienced in handling situations related to U.S., Canada and other international tax laws.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.