For those who are reading this blog for the first time, I presented my situation as an expat American living in Canada who was not aware of my duty to report revenues to the IRS. I eventually decided to file myself, explaining the forms and process that I ended up taking. Then, I received a letter from the IRS describing how I owed nearly $10,000 for my 2010 taxes. Shocking. It had to be a mistake right? I was convinced it did of course so I contacted the IRS to straighten out everything. The problem was trying to speak to the right person in order to rectify my things, which proved to be a major challenge.

My Latest Update

As discussed, I decided to contact a professional accountant specialized in cross-border taxation in order to get my situation resolved. The person I hired ended up finding a few things that needed to be corrected in my 2010 filing and also helped out with my 2011 filing. Needless to say that I was relieved to see that he agreed that I would not owe any money.

What’s Next?

The first step for me will be to send my amended filings to the IRS, I will then contact them 10 days later or so in order to confirm that they did receive my amended filing

Hopefully, I will then receive a confirmation from the IRS of the amount owed (0$)

I will then look into the corrections that were made and discuss those on this blog! Make sure to sign up for the newsletter if you want updates!

Finally, as discussed, I will also be working on the declaration of my financial assets that must be declared to the US Treasury

Once all of that is done, I might try to work on a more descriptive post on filing taxes as an expat although it’s always tricky given the differences from one individual to another.

Some of you have contacted me regarding your own situations, I’d love to hear what your status is and if you’ve had any adventures during your process.

I know that this blog is mostly about tax and more specifically IRS tax requirements for US citizens living abroad, usually better known as expats. Initially, that was also the extent of what I believed was expected. It does turn out that one other US government agency requires an annual filing that I am late on.

The US Treasury requires all US persons to file a statement to inform the treasury of their financial assets. I’m not exactly certain when this started or how it is used although I guess reporting huge assets to the treasury but little income to the IRS could help trigger further investigation. Maybe not. I’m really not certain how this info is used but since I have nothing to hide and want to be in good standing with all US agencies, I started preparing to file.

I got both the form and explanations here:

http://www.irs.gov/pub/irs-pdf/f90221.pdf

Here are some conclusions from my readings!

Who Must Report?

United States citizens or residents that hold over $10,000 in accounts held outside the United States at any time during the year.

What Should Be Included?

Very broadly, this includes securities, brokerage, savings, demand, checking, deposit, time deposit, insurance policy with a cash value, annuity with a cash value, etc.

Determining The Amount To Report

Basically, you must use a reasonable way to determine the maximum amount that you had during the year (using monthly statements seems to usually be ok) then when necessary, convert back to $USD using the year end rate of the US Treasury.

When It Needs To Be Filed?

At the latest on June 30th for the previous year. The penalties for not filing can be up to $10,000 per year and penalties for intentionally misreporting can go up to $100,000…

My Next Steps

I will be preparing this form for the past 6 years and will then send them over to the US Treasury.. As usual, I will keep you posted on how things go. I do not expect to get a bad surprise as I did with the IRS (still working on that) but better file earlier than later to deal with any issues.

Let me know if you have questions, comments or anything to add:)

What’s Next?

I had a very optimistic view that one call and everything would be settled and fixed. I wish it were that easy. Unfortunately, it has proven a bit more complicated. I did call the number given to me in the answer from the IRS which directed me to another number where I was able to speak to someone. Unfortunately, that person did not seem to be any type of specialist on expat taxes as most of my questions seemed fairly new, especially regarding the RRSP credits.

She seemed to think that my file was showing I had not claimed a foreign tax credit which I was certain to have done. In the end, while the lady was useful and did give me the information I was looking for regarding forms that I need to fill… I still don’t feel as if this were resolved.

More Questions

The problem is that even though I did call the IRS and get some questions, I’m feeling less convinced about my situation now. First of all, the RRSP deductions do not seem to be as straight forward as I was hoping for. There might be some limit to who can get an exemption for such a credit. Also, it’s unclear to me why she was saying that I had not asked for the foreign tax credit.

My Next Step

I feel like at this point, I need to review the letter that they sent a lot more carefully. I will also be sending an answer by email which might help the communications but also will help both them and myself understand the other more clearly.

Still Believe I Will End Up Paying Nothing

At this point, I am certainly not feeling amazing but I remain very confident that I will be able to find the best possible solution:) Will keep you posted of course

Wow, the last time I wrote a blog post, I was getting ready to call the IRS after not getting any answer. Not that I felt it was shocking (these things tend to take a while) but I just wanted to follow up.

On the day I had planned to call I did actually receive a letter from the IRS. I was insanely busy and while I was happy to get the letter, I feared whatever would be inside. Thus, I waited a couple of days before opening while being fearful of the result.

I Wish Those Feelings Would Have Been Wrong

When I opened the letter, I very quickly got to the part where the result was and was shocked to see that the IRS was reporting that I owe 9K $USD or so!!! They had found one issue on my report that added up 5K or so. Add up interests and so on and it increases oh so quickly. You can imagine that I did not feel so great.

Cooling Off

I then headed to work trying to avoid thiking about that letter but of course that did not go so well. I was trying to figure out what I could have forgotten or messed up. Then it hit me! I had contributed 25K or so in RRSP’s in 2010.

RRSP Deductions For The IRS

I started doing some research about how RRSP’s could be deducted for US tax purposes and found out the existance of form 8880 that exists exactly for that reason. Clearly, I should have found out about this and filed it on my first request. Arghhhh

Should Be Ok

I am hoping that all will have a good ending. My first reflex will be to contact the IRS to explain what happened. According to the letter, I have 60 days to make changes to my letter thus I should be ok. I can’t say that I’m feeling great but I do feel like there should be a good way out of this.

Learning Experience

I did not expect to get it right the first time but i certainly would have preferred not getting such a huge bill. I expected small issues but nothing that would come with a bill for almost $10K… oh well! I will give the IRS a call and report back.

I would love to say that I expected to already have an answer from the IRS but truth is that I didn’t. In fact, I expected a long delay and that I would probably need to contact them for a follow up. Unfortunately, that day has arrived. To give you some context if you are new to this blog, I am a US citizen that lives in Canada and had not known about my duty to report my income and assets to the IRS. I got information about different ways to get this done and in the end, the only viable option seemed to be to learn how to do it myself and send everything to the the IRS.

I emailed the IRS for instructions, got a very detailed email about what I needed to do. It took me a bit over a month to figure out which files I needed to use and how to actually fill them out, I ended up filing using form 1040, form 2555 and form 1116.

Then, I sent the material along with proof and a letter explaining my situation off to the IRS. I did not (and still don’t) expect everything to be perfect but I think most of it should be ok and hopefully the IRS can inform me of any possible modifications that need to be done.

Additionally, I hope to get some guidance from the IRS regarding past years and how far back I should go when reporting my income. In the initial email, the IRS had mentioned 6 years and that would certainly be fine, especially since I don’t expect things to be very different from one year to another since so few sections actually apply to me.

Here I am, 1 month later with no answer which is not shocking in any way. I will however prepare to call the IRS to get more information about my file. Is something missing, did they receive it alright, can I do anything further to make it easier for them? I actually have a decent amount of questions and will be sure to prepare everything before calling them. I’m hoping for a very nice conversation with them but in all honesty, I don’t know what to expect. Hopefully I will not be disappointed.

If anyone has had experience calling the IRS, I’d love to hear from you. On one hand, I have clearly been wrong about not producing this earlier and could probably deserve to not get much “sympathy”. However, I am now volunteering and trying to do the right thing, I would hope that it would help me out.

In my next post I will be reporting back about how discussions were.

Many US citizens that live and have lived abroad for decades are tempted to downplay IRS warnings despite those warnings being very clear and scary:

“Taxpayers who do not submit a voluntary disclosure run the risk of detection by the IRS and the imposition of substantial penalties, including the fraud penalty and foreign information return penalties, and an increased risk of criminal prosecution,” the IRS said.

“The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts.”

Anyone convicted of criminal tax evasion could face a prison term of up to five years and a maximum fine of $250,000.

Why Is The IRS Suddenly So Active?

There are many reasons why the IRS is suddenly more vocal. Many seem to think that the IRS is all talk but I would caution anyone who thinks that. Why?

-The IRS is going after revenues for the US government which in these days of massive deficits are critical to acquire.
-The IRS is getting much more power to get information from foreign entities and governments. That has happened thanks to increased pressure by the US government and more bilateral agreements with governments such as the Canadian government.
-Increased power to collect assets abroad thanks to new regulations thanks to among others the QI regime and the dual collection

For example, the new law that will require Canadian banks to share client information with the US government is one of many initiatives that will make it much easier for the IRS to find and go after those acting illegally. No bank, no matter where it is in the world can afford to go against the US treasury and US government so I think such information exchanges will only become more popular over time.

Honestly, Why Would You Resist

In almost all cases, US citizens living and paying taxes in Canada do not have anything to pay out, so why they would choose to act illegally and start battling it out with the IRS is beyond me. Can you imagine starting to get communications from the IRS with questions or requests? Wondering about your next trip to the US? It just doesn’t seem worth it.

In the past few years, thousands of Americans have decided to file taxes to the IRS even though they had not done so in the past. Not only that but thousands more who were reporting suddenly decided to declare income and assets that had been held offshore. Why? For many, it’s been all about reacting to the IRS’ actions. In fact, the 2009 Amnesty program that made it possible for US tax payers to report such income & assets, and face no penalties or prosecution if they agreed to pay taxes on them turned out to be a great success.

The IRS commissioner reported to the Wall Street Journal that they have collected $4.4 billion from 33,000 people who did come forward. Offering that program alone would probably not have been enough but the IRS has been very agessive and public about its intentions to find those who are acting illegally. There are 2 major ramifications here:

-Individuals who like me were not fully aware of their duties as US citizens heard a lot more about it through the media
-Individuals living in the US and abroad became much more fearful of getting caught and being prosecuted at some point.

Suddenly, those who were acting illegally to avoid paying taxes seemed much more foolish. There are so many perfectly legal ways to diminish tax bills that how smart would someone be to go down the “illegal road”? For most US citizens that live in Canada such as myself, there are really no benefits to not declaring. Why?

-In almost all cases, no taxes will be owed since the Canadian government charges such high tax rates and the US-Canada tax treaty makes those taxes paid deductible for taxes owed to the IRS.

-While no money is owed, by the simple act of acting illegally, citizens such as myself could expose themselves to penalties going up to jail time

The only downside really is taking the time to do so. It is considerable but very much worth it in my opinion. If you have kept proof of income, taxes paid, etc from years past, you should be more than capable of following the same route that I ended up taking.

For Those Brave/Stupid Ones That Choose Not To File…

I have one message for you… Be careful. Increasingly, the IRS will have the poer to gather data about you. In fact, starting in 2013, Canadian banks will be forced to report some of the data concerning individuals that the IRS suspects are hiding data. Sure, you might think that you are such a small fish and that it wouldn’;t be worth it for the IRS to go after you. I’ll tell you this.. At some point the IRS will go after a few individuals not for the money but in order to set an example, to encourage more “illegal citizens” to come forward. Do you really want to take that risk?

Finally, I was able to get through it, after filing my form 1040, form 2555 and form 1116, I had everything I needed to finally send my 2010 taxes. I added to that copies of my federal and provincial revenue statements that also confirm the amount of taxes to be paid. Then, I also wanted to include a short letter to the IRS. I had been recommended doing so by a friend who deals with the IRS. The letter had to be short because I know that these people are very busy and would likely not have much time to read it. I did however want to get a few point across:

-I am sorry for not filing earlier (I should have known about this requirement and filed earlier, I did state that I would pay close attention to my duties going forward

-I filed to the best of my knowledge and abilities. I did spend quite a lot of time trying to get everything right but I’m not a tax professional so there is certainly the possibility that I missed a number or made a mistake. Hopefully that is not the case but I wanted to state that.

-I would be more than happy to help answer any further questions: Remember, I am trying to be transparent in order to get everything right

-I am more than happy to file past years if that would be helpful, I would simply prefer having a confirmation that my 2010 statement was done correctly so I can do the other ones right from the start.

-Explaining that my income and taxes paid were made through a job so paid throughout the year which I think makes it logical to use the “average USD/CAD fx rate”

Those were the main points I was trying to get across, I do invite you to see my letter here though:

Next step for me will hopefully be to get an answer from the IRS. I do intend on calling in a few weeks if I don’t hear back just to make sure that they did get everything and what the normal procedure would be.

How are you doing with your expat tax returns?

It was with great satisfaction that today I headed back to form 1040. After starting to fill Form 1040, I ended up filling form 2555 and form 1116 which grouped together made it easy for me to avoid owing money to the IRS.

In this section, I did actually fill out a few numbers:

Line 38 – The number from the first page of form 1040
Line 40 – As I had discussed, I am filing a married but filed separately form, so the standard deduction as per the guide is $5700
Line 41 – Easy:) Line 38 – Line 40
Line 43 – Same number as line 40 since I did not look for exemptions
Line 44 – I used the number in the 1040 guide, which gave me an amount of payable taxes for my adjusted gross income
Line 46 – same as 44
Line 47 – the total from form 1116
Line 54 – total credits, so line 47
Line 55 – $0 (as expected)

Line 60 – $0
Line 76 – $0

I then also signed and put my information!! In my next post, I will discuss a letter that I will include before sending out my taxes to the IRS.