How screwed am I?

August 24, 2011 9:26 AM

I am a US citizen who has been living and working in Canada for the past 10 years. I have not been filing tax returns to the IRS since 2001.

My husband, a Canadian citizen, assured me years ago I should have no obligations to the IRS if I was living and working in Canada, and had no assets here (they're all in his name for reasons I won't get into here). I have come and gone to the US a number of times, voted in US federal elections, they know where I am. I even spent the first year or so paying off money I owed to the IRS for my last tax return filed in 2000. At no point did anyone mention the serious penalties I might be facing if I didn't file a yearly tax retuen, even though I probably didn't owe any money to the US.

But then this morning I heard a frightening report on the radio of a US citizen who has lived in Canada since childhood and was unaware that she needed to be filing with the IRS. They brought on a tax expert to speak on the topic, and he's talking about negligent non-filing penalties in the tens of thousands of dollars, a $30,000 penalty for not filing a foreign bank account report, etc.

This article seems to agree that my situation is dire; however, they're selling a service so I have to take that with a grain of salt. The IRS's website seems to indicate that at the very least I should have been filing a 1040 each year. But why? I am living in Canada and working in Canada. What possible obligation would I have to the IRS? That is the sticking point with my husband, who thinks I'm being silly. Personally this seems a little too-scary-to-be-true to me. Until I can prove to my husband this is a real issue, paying for a lawyer or tax consultant is out of the question. I need to find a definitive answer for free. On one hand, I don't really want to open a can of worms with the IRS, and would prefer to do nothing. On the other hand, I don't want to go to visit my mom (who lives in the US) and get nabbed at the border.

Help? Any advice, particularly from tax professionals or anyone in the same situation, would be hugely appreciated.

Here's some more specific information:
My husband is Canadian and has no responsibilities to the IRS
I have been paying income tax in Canada since I began working here in 2001
My gross income in Canada is roughly $22,500 per year
My husband files both our tax returns; he earns the most money and all bank accounts and assets are in his name
I am a landed Canadian resident as of 2001
I am 42
I have no assets in the US or Canada, and no income from US sources
I hold a valid US passport (I just renewed earlier this year)

posted by happy scrappy to law & government (44 answers total)

Your husband is likely wrong. US citizens are taxed on their income worldwide, regardless of where they live.

It is perhaps true that there is a tax treaty between the US and Canada which allows US citizens living in Canada to avoid double taxation.

But you need to get on the horn with a qualified US tax attorney to clear this up.
posted by dfriedman at 9:29 AM on August 24, 2011

You may want to check the IRS website out. This part, in particular:
"If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside."
posted by Grither at 9:30 AM on August 24, 2011

I lived and worked abroad for 7-8 years and I still had to file taxes every single year I was away, despite having $0 income to report within the USA.
posted by elizardbits at 9:31 AM on August 24, 2011

My experience is the same as elizardbits'. I file in the U.S. every year, even though I no longer live or earn income there. But I've never had to pay tax on my international income because I don't make enough (I think you have to make something like $80k?).
posted by neushoorn at 9:36 AM on August 24, 2011

I am living in Canada and working in Canada. What possible obligation would I have to the IRS?

Heh, that's very much not how the US government works. Unlike Canada (which does tax based on residency), the US taxes based on citizenship. If you haven't renounced your US citizenship (which some people have done to avoid being taxed) you absolutely, positively are still under the purview of the IRS.

It sorta makes sense, in that the IRS doesn't want some multimillionaire US citizens living on their Caribbean island and avoiding all taxes completely.

The good news is you probably don't owe the IRS any money since you're not a multimillionaire. The IRS allows a exemption for foreign income of just under $100,000 (see Foreign earned income exclusion).

I too am a US citizen living in Canada. For my first two years of grad school ('05 and '06), I didn't file a US tax return. Thus far, the IRS hasn't cared. But every year after I have filed a 1040 with a 2555-EZ which basically says, "I made less than the exemption, I don't owe anything." It's a stupid exercise, but far better than taking a chance on the IRS getting their knickers in a twist about it.

The question I can't answer, and the one you should talk to a professional about, is whether or not you need to file those old returns. Given the consequences of not doing so, while unlikely, have an outside chance of being quite severe, I would want to be very sure about the right thing to do.
posted by Nelsormensch at 9:43 AM on August 24, 2011 [1 favorite]

Nthing consult a qualified attorney, as you absolutely had an obligation to file returns.

This IRS document says "Generally, you must file a return if your gross income from worldwide sources is at least the amount shown for your filing status in the Filing Requirements table in Chapter 1 of Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad."

That table shows that if you filed Married filing separately, the filing requirement is for income of $3,650 or more.

You wouldn't have had any taxes due, because you were under the foreign earned income exclusion of $91,500, but you absolutely had to file.

Sorry :( Good luck. Hopefully a good attorney can make this less awful.
posted by colin_l at 9:44 AM on August 24, 2011 [1 favorite]

I am a US citizen living in the UK, earning money in GBP and paying taxes here.

That said, I also file a 1040 every year and also a Report of Foreign Bank Accounts.

What possible obligation would I have to the IRS? That is the sticking point with my husband, who thinks I'm being silly.

IRS taxes on worldwide income. You can avoid double taxation because of tax treaties but you can't just take that for granted. I earn more than the income exclusion but I use tax credits (because of the taxes I pay the UK) so that I don't owe the IRS anything.

If I happened to live in a country where the taxation was very low, I could very well owe the IRS money because of insufficient tax credits.

The take-away for your husband: The IRS doesn't know any of the above is true until/unless you file a return. If you don't file one they could assume you're trying to avoid paying taxes.
posted by vacapinta at 9:53 AM on August 24, 2011

From the IRS's Frequently Asked Questions For Past Due Return Filers:

A long-standing practice of the IRS has been not to recommend criminal prosecution of individuals for failure to file tax returns, provided they voluntarily file, or make arrangements to file, before being notified they are under criminal investigation. The taxpayer must make an honest effort to file a correct return and have income from legal sources. A letter from the IRS concerning taxes is not a notice that a taxpayer is under criminal investigation.

They will expect payment of penalties and interest on past taxes due, but you are likely to not owe any taxes due to the Foreign Earned Income Exclusion and tax treaties. While you should definitely contact a qualified tax attorney about this, if it were me, I would probably skip that and just file the old returns, given that the IRS has a stated practice of not prosecuting people who do so.

You only need to file a Report of Foreign Bank and Financial Accounts if you have signature authority or a financial interest in over accounts with more than USD 10,000 in aggregate value. Even if the account is in your husband's name, you may still be considered to have a financial interest in the account. Consider the instructions on form TD F 90-22.1 and contact a qualified attorney or the U.S. Department of the Treasury to be sure.
posted by grouse at 9:58 AM on August 24, 2011

My husband is Canadian

Have you been paying Canadian income taxes?

For that matter, have you considered becoming Canadian?
posted by justsomebodythatyouusedtoknow at 10:01 AM on August 24, 2011

You'll still be required to file taxes with the U.S. unless you renounce your U.S. citizenship. Dual citizenship is irrelevant.
posted by grouse at 10:02 AM on August 24, 2011

Also, you may want to re-think your "I have no assets" thing, depending on what province you are in... most provinces have some sort of community-property laws, and it's possible that you own half of ALL the assets in your husband's name, and probable that you own half of anything acquired since you got married.
posted by brainmouse at 10:13 AM on August 24, 2011

I am not a CPA.

It is my impression tax treaties are for citizens of the country only, and not for US Citizens living in that country.

Perhaps it would be worth an investment for you to talk to a tax attorney in the US. The several hundred dollars for that session (I am guessing) may ease your worries.
posted by BuffaloChickenWing at 10:15 AM on August 24, 2011

unless you renounce your U.S. citizenship

Something to ask a tax attorney: would you still owe back taxes to the IRS if you've been paying Canadian taxes all along?

Has your husband been mentioning you as part of the household on his taxes?

I am not a/your tax attorney, but if you have income but haven't been paying either Canadian or American taxes you almost certainly owe somebody something.
posted by justsomebodythatyouusedtoknow at 10:21 AM on August 24, 2011

It is my impression tax treaties are for citizens of the country only, and not for US Citizens living in that country.

That's an incorrect impression.

The United States has tax treaties with a number of foreign countries. Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from U.S. taxes on certain items of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and specific items of income. Under these same treaties, residents or citizens of the United States are taxed at a reduced rate, or are exempt from foreign taxes, on certain items of income they receive from sources within foreign countries. Most income tax treaties contain what is known as a "saving clause" which prevents a citizen or resident of the United States from using the provisions of a tax treaty in order to avoid taxation of U.S. source income.

If the treaty does not cover a particular kind of income, or if there is no treaty between your country and the United States, you must pay tax on the income in the same way and at the same rates shown in the instructions for the applicable U.S. tax return.
posted by vacapinta at 10:24 AM on August 24, 2011

Your husband may be confused because Canada does not generally tax the income of its non-resident citizens, or require non-residents to file a return. (They still can file if they want to — I'm a dual U.S.-Canadian citizen living in the States, and I file a T1 every year to keep my education credits rolling over.) The United States, however, does tax non-residents, and does require them to file returns.

I have come and gone to the US a number of times, voted in US federal elections, they know where I am.

I kind of doubt that they know where you are. I suspect that you're really just under IRS's radar right now; in general, there's not some central gubmint database where the IRS and the State Department and the voter registry of [insert state here] compare notes. As noted above, it's likely that you don't actually owe any money, so you can have your "come to Uncle Sam" moment by filing your back returns and all will (probably) be forgiven. However, you should definitely consult an accountant and/or lawyer familiar with U.S. tax law before you send anything in.
posted by Johnny Assay at 10:25 AM on August 24, 2011

The US and Eritrea are the only countries in the world that requires its non-resident citizens to file taxes.

You should file for each and every past year that you haven't - you can find old 1040 forms on the IRS site. They won't bite - I had to do this for a 3-year period I'd missed (have lived overseas for 12 years), and that was several years ago, no worries. So long as it's voluntary and before the IRS has taken action against you, as others have pointed out, it's all OK.

But you do need to file (it's required). Here's the IRS page on U.S. Citizens and Resident Aliens Abroad.

FWIW I use H&R Block's Free File every year (the IRS says you need to earn less than $58,000, that's info from this year), and it's really helpful since it doesn't let you forget or overlook any weird things you might otherwise.
posted by fraula at 10:26 AM on August 24, 2011

I have been paying Canadian taxes, as stated above.

The OVDI deadline is in one week, which makes me wonder why this is in the news today. Tax attorneys sure stand to make a lot of money.

I cannot pay a tax attorney, but I'll try calling one anyway. I'm thinking what I might end up doing is just quietly filing those 1040s for the past 10 years, and see what happens.

My big problem at the moment is my husband is definitely not on board with this, and I don't know how to convince him this is real. He's got an ugly temper and when he doesn't want to discuss something further, he means it.
posted by happy scrappy at 10:28 AM on August 24, 2011

My big problem at the moment is my husband is definitely not on board with this, and I don't know how to convince him this is real. He's got an ugly temper and when he doesn't want to discuss something further, he means it.

That's kind of even more distressing than the tax situation, tbh. He would rather see you get into some kind of trouble with the US Govt than admit he was wrong?
posted by elizardbits at 10:30 AM on August 24, 2011 [11 favorites]

Well, have him read that link I just posted, where the IRS itself states: "If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside."

It also says the IRS Philadelphia office is available for "international tax assistance".
posted by fraula at 10:31 AM on August 24, 2011

It is my impression tax treaties are for citizens of the country only, and not for US Citizens living in that country.

This is wrong, as vacapinta points out.

would you still owe back taxes to the IRS if you've been paying Canadian taxes all along?

For small amounts of foreign earned income, as you seem to earn, you don't even have to consider whether other tax has been paid (use Form 2555). For unearned income (interest, dividends, etc.) it is a little more complicated. The foreign tax credit form (Form 1116) is a pain in the ass. I figured it out once and still file it every year for interest-bearing and tax-paying accounts abroad, but if I had to do it over again I would just pay double tax rather than spend the hours figuring that form out and setting up spreadsheets to convert foreign income amounts to U.S. dollars.

My big problem at the moment is my husband is definitely not on board with this, and I don't know how to convince him this is real.

It doesn't matter whether your husband is on board or not. You don't need his consent to file your taxes separately.
posted by grouse at 10:34 AM on August 24, 2011

That's kind of even more distressing than the tax situation, tbh. He would rather see you get into some kind of trouble with the US Govt than admit he was wrong?

It is causing me added stress to be sure. He's not completely unreasonable; if faced with irrefutable proof he will relent. But he's got The Fear about our finances already, and the prospect of owing money to the US is too much for him I think. If they start examining our assets now, who knows what they'll decide I owe them.
posted by happy scrappy at 10:36 AM on August 24, 2011

It doesn't matter whether your husband is on board or not. You don't need his consent to file your taxes separately.

Yeah, but what about the FBAR? Wouldn't I need his signature? And what if the IRS decides I owe a penalty? Then he'll know I filed without discussing it with him first, which is also bad news.
posted by happy scrappy at 10:39 AM on August 24, 2011

I would consult with an attorney before filing past-due returns on your own. Things can get crazy pretty quickly--do you know if they are preparing a criminal prosecution against you as we write? Do you know what penalties you'll need to pay? It's very worth having a lawyer navigate the waters as you get right with the IRS.
posted by lockestockbarrel at 10:41 AM on August 24, 2011

Yeah, but what about the FBAR? Wouldn't I need his signature?

No.
posted by grouse at 10:43 AM on August 24, 2011

I lived and worked outside of the U.S. for 6+ years and hadn't filed in all that time either. When I decided to move back, I realized my mistake and filed all those missing years at once. I didn't owe anything and hadn't gotten into any trouble for it.

Just file your missing years and remember to file every year after this, and you should be fine.

One thing to note, however, is that there is a limit on the amount of time you can spend in the U.S. before they decide that you owe them tax money. (This website says it's 35 days in a calendar year.) I knew an American grade school teacher who ended up owing U.S. income tax because she spent her summer with her family in California. She never made that "mistake" again.
posted by zerbinetta at 11:05 AM on August 24, 2011

BTW, you haven't committed any crimes. You are not going to get arrested over this at the border or anywhere else. Negligently fucking up your taxes can be illegal, yes, may result in penalties, sure, but it's common and not criminal. For this to be a crime you had to have known of your obligation and then intentionally and willfully disregarded it. [I am not a lawyer]
posted by phoenixy at 11:09 AM on August 24, 2011

Ah, here it is from the IRS site. Scroll down to "Requirements" and "Physical Presence Test." But it looks like, if you did end up spending more than 35 days in the U.S., you could still be exempt if you can prove that you're a "bona fide resident" of Canada.
posted by zerbinetta at 11:18 AM on August 24, 2011

there is a limit on the amount of time you can spend in the U.S. before they decide that you owe them tax money

This hard limit is for people who are justifying their use of the Foreign Earned Income Exclusion via the physical presence test. If you are a bona fide resident of some other country, you need not do this.
posted by grouse at 11:18 AM on August 24, 2011

Thanks for the responses. I've put in a couple calls to tax attorneys; hopefully they'll be able to give me a little advice before I need to shell out any cash. I'm certainly not against paying for a lawyer, but it's not really up to me at this point.

Still welcoming further input. Thanks again.
posted by happy scrappy at 11:52 AM on August 24, 2011

As others have said, as a U.S. citizen living in Canada for several years, I did have to file, and you should have been filing. I didn't ever actually owe any money to the IRS because the tax treaty did indeed cover me as a U.S. citizen.

I suspect, as long as you never actually owed the IRS any taxes during those years, you can file amended returns now that say so, and you'll be golden. However absolutely talk to a CPA. You will surprisingly have some difficulty finding one that knows a lot about cross border tax issues. But any CPA will be better equipped to find such a specialist than you are. So talk to someone immediately.
posted by Naberius at 12:51 PM on August 24, 2011

Background: U.S. citizen living and working in Canada for four years now; Canadian permanent resident. I file my 1040 along with my T-1 every year.

What you really need to read is this -- Publication 54 from the IRS, "Tax Guide for U.S. Citizens and Resident Aliens Abroad". It covers the laws on taxation of US citizens abroad, the physical presence test and bona fide residence test to help determine whether or not you owe taxes, how to file, etc.

Most importantly: you absolutely, definitely have to file, and can be penalized for not doing so, even if you wouldn't otherwise owe income. You can (and legally must) file back taxes. You probably won't owe anything, given the numbers you list above; I haven't paid a dime in US taxes on my Canadian income yet.

When you're ready to file, in addition to your 1040, you'll want to file Form 2555--it's the one that exempts your foreign income. Here's the form and instructions.

Good luck!
posted by criacow at 12:56 PM on August 24, 2011

IANAL, nor a tax professional. That said, my understanding is that tax penalties are all based on a percentage of the tax owed; that is, since you owed nothing you will need to file returns, but probably will not owe any money.

Also, the IRS has free advice lines. They'll probably even give you advice based on hypotheticals, so you can probably get (non-binding, of course) confirmation that you a) need to file returns, and b) will not owe insane amounts of money.
posted by contrarian at 1:02 PM on August 24, 2011

Yeah, I think my best bet at this point is to just bite the bullet and call the IRS, and explain the situation. I have no hope of making the August 31 OVDI deadline.

The bright side is they have not yet started a criminal investigation. Maybe if I call now and it's on my file, they won't start one before I can get all my tax info together.
posted by happy scrappy at 2:08 PM on August 24, 2011

I don't have a crystal ball, but the IRS is very unlikely to start a criminal investigation against you. Plenty of people get audited, but they reserve criminal charges for people who willfully refuse to file their taxes, not for people who were slow in getting around to it. Just relax and file the forms. You aren't going to jail. You probably aren't going to have to pay a thing, although it will depend on the circumstances.
posted by grouse at 2:24 PM on August 24, 2011

Thank you grouse. Your information has been the most helpful (and hopeful).
posted by happy scrappy at 2:28 PM on August 24, 2011

Not just any tax adviser. Something like these guys.
posted by megatherium at 3:12 PM on August 24, 2011

My husband files both our tax returns

my husband, who thinks I'm being silly

my husband is definitely not on board with this

Until I can prove to my husband this is a real issue, paying for a lawyer or tax consultant is out of the question

assets are all in his name for reasons I won't get into here

-- Doesn't it look a little wacky all spelled out like this? ---
posted by selfmedicating at 5:35 PM on August 24, 2011 [5 favorites]

Would love some more recommendations of cross-border tax specialists, praticularly if they offer a free consultation.
posted by happy scrappy at 7:38 AM on August 25, 2011

Selfmedicating, that's a topic for a separate AskMe question. It's the reality I have to work with now.
posted by happy scrappy at 7:39 AM on August 25, 2011

I think everyone above answered your question. but here's another link for you from the CBC: http://www.cbc.ca/news/business/story/2011/08/25/wdr-taxing-americans-living-in-canada.html
posted by ajackson at 1:13 PM on August 25, 2011

Yeah, it was a CBC radio report which informed me of this on Wednesday, ONE WEEK before the OVDI deadline, which is really fucking helpful, thanks a lot, and a follow-up report this morning that had me shaking and in tears, with some tax lawyer from Minneapolis chirping that they'll probably charge me upwards of hundreds of thousands of dollars in penalties for the decade in which I had no fucking clue I was supposed to tell the IRS anything. I was in contact with the IRS on a regular basis for an entire year from 2000-01, dutifully paying off my year 2000 taxes on a payment plan. At that time the IRS had no website, nor did anyone I was in contact with bother to mention this immensely important bit of information to me. US tax info is nonexistent in Canada. So where in hell was I supposed to find this out?? OF COURSE I would have filed, on time, every goddamned year if I had known. I am INCREDIBLY ANAL about ALL of my responsibilities. And now, because of something I had no way of knowing about, I can potentially be financially ruined or go to jail?? The initial report I heard mentioned a negligent non-filing penalty of $10,000 per year, plus a $30-60,000 penalty for each FBAR I failed to file (which I'm still not sure I need to file, but that's beside the point). How can they possibly justify charging regular working people this kind of penalty for something they had no way of knowing about?? It seems absurd to me, and I feel like I'm in a nightmare. The way I manage my life and my responsibilities, this is just so incredibly unfair. And I cannot afford a lawyer or US CPA, so I have to figure this all out on my own.

The timeliness of this horrifying report is what really gets me. How are we supposed to be able to do anything ONE WEEK from the deadline? Of course I could run screaming to a lawyer or tax expert and shell out hunders of dollars in expedite fees to get them to whip something up for me, if I had that kind of money. I'm sure this will prove to be incredibly lucrative for cross-border tax specialists like the ones I've heard on the radio in the past couple days. They say the IRS is "cracking down" on non-filers, but they don't mention they had another initiative in 2009, and no one's "cracked down" on me since then, so I really think they're just trying to scare people. And it's working, because I'm terrified. I don't need this shit, and I don't deserve it.

I think my only option is to call the IRS anonymously and explain my situation and ask how I should proceed. Then I'll just have to figure out how a resident Canadian taxpayer with a Canadian husband is supposed to fill out the 1040, the language of which refers to US filers. Maybe I'll have to post another AskMe question to get help with that.

I'm sorry for the rant, but I doubt anyone's even reading this thread anymore, since it's 2 days old. If the mods delete this comment, I'll understand. This is just so goddamned crazy. Mostly, I really need a hug.
posted by happy scrappy at 8:29 AM on August 26, 2011

*hug* I'm sorry you're going through this; it sounds incredibly stressful. I hope you can get a second opinion, because I'm pretty sure everything will work out. also, I'm looking forward to your next AskMe about your husband, because I imagine that situation is not helping. *hug*
posted by gretchin at 8:52 AM on August 26, 2011

According to my husband, I only have signature authority over one account, which is under $10,000 at all times. This may turn out to be a Very Good Thing, if I can confirm it with the bank. I am named the beneficiary should my husband die, but he is sole owner of all accounts. If this is indeed the case, I don't need to file an FBAR at all and I only need to worry about the 1040s. And it looks as though the OVDI is only concerned about offshore accounts, not tax returns. I really hope this is the case.
posted by happy scrappy at 2:40 PM on August 26, 2011

That sounds promising. Don't let it stop you from filing the back returns, though.
posted by Johnny Assay at 2:44 PM on August 26, 2011