How to catch up on missed US tax returns while living in Canada

Which IRS option fits you?

It depends on whether your failure was willful, where you lived, and what is missing. The IRS offers three compliance options (IRS), and former citizens have a separate relief procedure.

Who qualifies for the Streamlined Foreign Offshore Procedures?

You qualify only if all of these are true (IRS; IRS):

• You are an individual, or the estate of one. Businesses cannot use it.
• Your failure was not willful. The IRS means negligence, a mistake, or a good-faith misunderstanding of the law. You certify this under penalties of perjury. Whether conduct was willful depends on your facts. For FBARs, the IRS treats knowing or reckless conduct, and willful blindness (a conscious effort not to learn the rules), as willful (IRM 4.26.16.5.5.1).
• You failed to report income from a foreign financial asset, such as interest on a Canadian bank account. You may also have missed FBARs.
• In at least one of the last 3 years whose US return due date (or extended due date, if you properly applied for one) has passed, you had no US abode and were outside the US for at least 330 full days. On a joint return, both spouses must meet this.
• You have a valid taxpayer ID. For a US citizen that is a Social Security number (SSN). If you are eligible for an SSN but don't have one, you cannot use the procedures (SFO FAQ 10).
• The IRS has not opened a civil examination of your returns for any year, and you are not under criminal investigation.

If you already filed some late or amended returns on your own, you can still use it, but penalties already assessed stay.

What goes in a Streamlined Foreign Offshore package?

Four parts (IRS):

1. Three years of returns. A Form 1040 for each of the last 3 years whose due date (or extended due date, if you properly applied for one) has passed, with every required information return. Examples are Form 8938 (foreign financial assets), Form 8621 (passive foreign investment companies, which can include non-US mutual funds and ETFs), Form 5471 (certain foreign corporations) and Form 3520 (foreign trusts and large foreign gifts) (Pub. 54). Write "Streamlined Foreign Offshore" in red at the top of each return and information return.
2. Form 14653. One signed original, plus a copy attached to each return and information return but not to the FBARs. It lists the tax and interest for each year, confirms your days outside the US, and tells your story: why you did not file, where the money in each account came from, and how you used the accounts. The IRS asks for unfavorable facts as well as favorable ones (Form 14653; SFO FAQ 6).
3. Payment. All tax shown on the returns, plus interest on each late amount, with your taxpayer ID on the check.
4. Six years of FBARs. One for each of the last 6 years whose FBAR due date has passed, for every year the non-US accounts you own or can sign on together topped US$10,000 at any time (FinCEN). E-file them through FinCEN's BSA E-Filing System, choose "Other" as the late-filing reason, and enter "Streamlined Filing Compliance Procedures."

Mail parts 1 to 3 on paper to the Austin address on the IRS page. Electronic submissions are not accepted.

The treaty lets income earned inside an RRSP or RRIF go untaxed in the US until it is paid out. The submission gets that treatment for the years it covers if you meet the other conditions of Rev. Proc. 2014-55, such as never having reported the plan's unwithdrawn income on a US return. The Form 14653 narrative should say you meet them (SFO FAQs 2 and 3). See Canadian registered accounts on a US return.

The IRS does not acknowledge receipt or sign a closing agreement. It processes the returns like any others, and they can still be picked for audit. The IRS may check them against information from banks and others, and says a submission can still lead to extra civil penalties or, where appropriate, criminal liability. After that, you file every year under the normal rules (IRS).

How much will you pay?

If you qualify, you pay tax and interest only. The IRS waives failure-to-file, failure-to-pay, accuracy-related, information return and FBAR penalties, unless a later audit finds fraud or a willful FBAR violation. Penalties can still apply to any extra tax an audit finds (IRS). If you miss any step, the returns are processed normally and those penalties can apply.

These rules change what you owe:

• Foreign tax credit. Canadian income tax on the same income can be claimed on Form 1116 against your US tax (Pub. 54). The IRS says this credit cannot reduce the Net Investment Income Tax, which can apply to interest, dividends and gains once your modified adjusted gross income passes US$200,000 (US$250,000 married filing jointly, US$125,000 married filing separately) (IRS).
• Foreign earned income exclusion. It lets you leave part of your pay for work abroad out of US income, on Form 2555. The exclusion is normally chosen on a timely return. On a late return you can still choose it within one year of the due date. After that, you can choose it if you owe no US tax after the exclusion, or if you file before the IRS finds you did not choose it. Those late returns must be labeled "Filed Pursuant to Section 1.911-7(a)(2)(i)(D)" at the top (26 CFR 1.911-7). You cannot claim the credit on income you exclude. Once chosen, the exclusion applies to later years until you revoke it. Claiming the foreign tax credit or the refundable child tax credit in a later year counts as revoking it, and choosing it again within 5 years needs IRS approval (Pub. 54).
• Child tax credit. Part of it can be refunded, but not in a year you claim the foreign earned income exclusion. You can claim it for a year only if your SSN and your child's were issued by that year's return due date (including extensions). An SSN you get now does not count for past years (Schedule 8812 instructions).
• Self-employment tax. Under the US–Canada social security agreement, you generally pay social security tax only to the country where you live. To claim the US exemption, get a statement from the Canadian agency confirming your coverage. Attach a copy to Form 1040 instead of filing Schedule SE, and enter "Exempt, see attached statement" on Schedule 2, line 4. If the agency won't issue the statement, the IRS points to the SSA's online certificate of coverage service. The earned income exclusion does not reduce self-employment tax (Schedule SE instructions). If you live in Quebec, Quebec has its own agreement with the US, and the statement comes from Retraite Québec (Retraite Québec).

What if you don't meet the non-residency test?

The Streamlined Domestic Offshore Procedures are for people who fail it, for example because they lived in the US. They require that you already filed any required returns for the 3 years, so they do not fit someone who never filed. You file amended returns and 6 years of FBARs, and pay a miscellaneous offshore penalty of 5% of the highest combined year-end value of the foreign assets the penalty covers (IRS).

What if no streamlined option fits?

You file the late returns under the normal rules (IRS). That covers someone whose conduct was not willful but who fails the non-residency test and never filed, or whose unreported income did not come from a foreign financial asset. Penalties can apply. The failure-to-file penalty is a percentage of the tax still unpaid after on-time payments and credits, so it does not arise when no US tax is due, and it does not apply if you show reasonable cause (IRS). Information return and FBAR penalties are separate.

What if only FBARs or information returns are missing?

These routes fit people who filed their US returns and reported all their income, or who had no return to file. They do not replace income tax returns you never filed.

• Late FBARs. The IRS list of compliance options has no separate FBAR-only procedure. Its FBAR page says that if the IRS has not contacted you and you are not under civil or criminal investigation, you should file late FBARs as soon as possible to keep potential penalties down, and explain why they are late (IRS; FinCEN).
• Late information returns, such as Form 8938, 5471 or 3520. Use the delinquent international information return submission procedures if you are not under civil examination or criminal investigation and the IRS has not contacted you about the missing forms. Attach the forms to an amended return (Forms 3520 and 3520-A are filed on their own) with a reasonable cause statement. Penalties may still be assessed. For Forms 3520 and 3520-A the IRS reads the statement before assessing any penalty (IRS).

What if you have given up US citizenship, or plan to?

The Relief Procedures for Certain Former Citizens let some former citizens file past returns with no penalties and no payment, and avoid being treated as a "covered expatriate". A covered expatriate pays an exit tax on the gain in all their assets above an exempt amount, as if they had sold everything the day before expatriating (IRS). All of these must be true:

• You gave up citizenship after March 18, 2010, shown on a Certificate of Loss of Nationality approved by the State Department.
• You have never filed a US return as a citizen or resident.
• Your net worth is less than US$2,000,000 when you expatriate and when you submit.
• Your total US tax for the year you expatriate and the 5 years before, after credits and before penalties and interest, is US$25,000 or less.
• Your average yearly net income tax for the 5 years before is not above the IRS limit for covered expatriates (section 877(a)(2)(A)).
• Your failures were not willful.

You file 6 years of returns: Form 1040 for each of the 5 years before, and a dual-status return (citizen for part of the year, nonresident for the rest) with Form 8854 for the year you expatriate. File any FBARs you owe too. If you file them before or with the submission, the IRS will not assert FBAR penalties. If you plan to renounce, submit only after your loss of nationality is approved. The IRS processes a submission without that proof under the normal rules, with tax, penalties and interest.

Order matters. The relief requires that you never filed a US return as a citizen, so filing streamlined returns first ends your eligibility. Outside the relief, you avoid covered-expatriate status only if your net worth and average tax are under the limits and you certify on Form 8854 that you met all federal tax obligations for the 5 tax years before the year you expatriate. A streamlined package covers only 3 years of returns. If you became a citizen of both countries at birth, are still a Canadian citizen taxed as a Canadian resident, and were a US resident for no more than 10 of the last 15 tax years, the net-worth and average-tax tests don't apply, but the 5-year certification still does (Form 8854 instructions).

What if you hold a green card?

The streamlined procedures work the same way for you, but the former-citizen relief does not: it is for citizens only (IRS). You stay a US tax resident until your green card is taken away or formally abandoned, for example by filing Form I-407. Living in Canada does not end it (Pub. 519). If you held the card in at least 8 of the last 15 tax years, giving it up, or claiming Canadian residence under the treaty on Form 1040-NR with Form 8833, ends your long-term residency. That is an expatriation: you file Form 8854 and certify 5 years of compliance, or you may be a covered expatriate (Form 8854 instructions).

What if your conduct may have been willful?

The streamlined procedures require you to certify, under penalties of perjury, that your conduct was not willful. The IRS directs people who worry their conduct was willful to the Criminal Investigation Voluntary Disclosure Practice, and to their own tax or legal advisers (IRS). Penalties apply under that practice. The IRS has proposed new terms for it, and its page says they apply only once finalized.

Why is your Canadian bank asking about US citizenship?

Under the Canada–US intergovernmental agreement, Canadian financial institutions identify accounts held by US citizens and US residents and report them to the CRA, which passes the information to the IRS (CRA; CRA). That is why your bank asks you to certify your citizenship when you open an account.

Registered plans are left out of this bank reporting: RRSPs, RRIFs, TFSAs, RESPs, RDSPs, registered and pooled registered pension plans, deferred profit-sharing plans and FHSAs (CRA; CRA). The CRA says the agreement does not change your own US filing. An account your bank does not report, such as an RRSP, may still belong on your FBAR or Form 8938 (SFO FAQ 2).

Can the CRA collect US tax from you?

Only in some cases. Article XXVI A of the Canada–US tax treaty lets each country help collect the other's finally determined tax debts. Paragraph 8(a) bars that help to the extent an individual shows the debt relates to a tax period when they were a citizen of the country asked to help. For Canada, that means periods when you were a Canadian citizen. If you became a Canadian citizen before November 9, 1995 and still are one, periods that ended before that date are also covered (treaty; Justice Laws). The CRA states it will not help the IRS collect your US tax if you were a Canadian citizen when the liability arose (CRA).

Outside those cases, such as tax from years when you were only a permanent resident of Canada, the limit does not apply. Where it applies, it limits collection help only. It does not cancel the US tax, the interest or your duty to file.

The US also has its own tools. If assessed tax debt is more than US$66,000, which counts as seriously delinquent, and the IRS has filed a lien or issued a levy, the IRS certifies it to the State Department, which can deny or revoke your US passport (IRS).

What do you need to start?

• Your SSN, for a streamlined submission. If you never got one, apply to the Social Security Administration first. The former-citizen relief does not require one (IRS).
• Your Canadian returns, notices of assessment and slips (T4, T5 and others) for the 3 tax years.
• For each non-US account you own or can sign on, including business accounts: its maximum value in each of the 6 FBAR years, and its year-end value in the 3 tax years.
• The days you spent in the US in each of the 3 years.
• Details of any Canadian corporation or trust, and of any mutual funds and ETFs you hold outside an RRSP or RRIF. Funds inside a TFSA, FHSA, RESP or RDSP can need Form 8621.
• If you are self-employed: the statement confirming your Canada or Quebec Pension Plan coverage.
• Notes for the Form 14653 story: when and how you learned of the rules, and where the money in each account came from.

Example

Illustrative only. Maya is a dual US–Canadian citizen, born in the US, who has lived in Calgary since she was two. She earns about US$60,000 a year in wages. Her chequing account, savings account and RRSP together peak at about US$45,000 each year. She has an SSN but has never filed a US return or FBAR. She learns of the rules when a new bank asks about her US citizenship.

She lives in Canada all year, every year, so she meets the non-residency test. Her package:

If her Canadian tax on each year's income is higher than the US tax on it, the credit may leave little or no US tax to pay. That turns on each year's numbers.

Different for you?

• You want the yearly rules for US citizens in Canada: Americans living in Canada.
• You need the FBAR and Form 8938 details: Foreign account reporting.
• You hold a TFSA, RESP, FHSA or RRSP: Canadian registered accounts on a US return.
• You own a Canadian corporation, spent long stretches in the US, or filed some returns before: Cross-border tax.
• You worry your conduct was willful: the IRS points to its Voluntary Disclosure Practice and your own tax or legal advisers.
• You want the returns and FBARs prepared for you: Tax preparation.