# Delinquent FBAR Fillings and Tax Returns



## jaxtayler

Hi, 

I am a Canadian expat, who moved to the US in late 2012. I have not filed my taxes for 2012, 2013, and 2014. I held a brokerage account, TFSA account, RRSP account, and various checking and savings accounts in Canada when I moved. The aggregate value of the accounts were likely around ~$45K USD.

I understand I am seriously delinquent with my tax returns however I am generally expecting a tax refund over all so wasn't too worried until recently. I am just now becoming aware of FBAR filing as well as special filings for Form 8938, Statement of Specified Foreign Financial Assets (Because I have a TFSA in Canada) and a T1161 filing for Canada all with significant penalties. I am trying to get some direction on what my options are. 

Since I haven't actually filed my returns I don't need to make any adjustments to income from the assets in Canada as we will make sure to include all income/losses on our returns. Based on some preliminary research online it looks like there are three options for delinquent FBARs:

1. Delinquent FBAR Submission Procedures
2. Streamlined Filing Compliance Procedures
3. Offshore Voluntary Disclosure Program

I am hoping I can qualify under option 1 or 2. Option 3 seems to be more for people with larger accounts and have potentially willfully hid their assets. 

The IRS page states that option 1 is for filers who declared their income from foreign assets on their returns and don't need to make adjustments for prior years. Would I qualify under this? I haven't filed but when I do I will take into account the income and losses (mainly losses) of these assets as part of my return. Will the fact that I haven't filed my taxes to date disqualify me from this program?

The second option appears to be for people who have already filed their taxes and omitted their income form foreign assets and need to make adjustments. This one seems a bit more complicated - so I am hoping I qualify under option 1. 

Any insight anyone can provide into this would be great.

Also what is the likely hood of me getting stuck with a penalty? One of the accountants I spoke with said that the FBAR penalties I am up against are $10K a year and another $10K a year for the TFSA filing - so a total of $40K (2012 & 2013). I have also racked up another $2.5K CAD for not filing T1161 (declaring that I own real estate in Canada).

The worst part is that my wife is also in the same situation so the fines are double - so a total of $80K USD and $5K CAD - this is far beyond the value of all our accounts considering we lost money in them.

I couldn't find any special information pertaining to delinquent filing of Form 8938 - any guidance on this form would be very helpful. 

Also for any Canadians having experience dealing with a T1161 penalty is also greatly appreciated.

Thank You


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## BBCWatcher

jaxtayler said:


> The aggregate value of the accounts were likely around ~$45K USD.


Then you likely did not meet the minimum threshold to be required to file IRS Form 8938 ("FATCA") with your U.S. tax return. There is no separate penalty for failure to file IRS Form 8938 if there is no penalty for your not filing your tax return, and there is no penalty for failure to file (or filing late) if you genuinely owe zero U.S. tax.

You were/are likely required to file FinCEN Form 114 ("FBAR"). However, the U.S. Treasury Department is currently not imposing any penalty on late filing as long as three things are true: 1. you file truthful reports; 2. you provide an adequate explanation for the late filing ("I didn't know" is a popular choice in the drop-down box on the form); 3. they didn't contact you first, i.e. your filing is unprompted and voluntary.

That's your option #1, and it's a perfectly fine option. Now would be a very good time to get your FBARs filed (and for your wife to file hers), even before you get your U.S. tax returns filed.

I can't help you with Canadian penalties that you may be liable for.


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## Bevdeforges

Frankly, the amounts you're talking about are "peanuts" in the IRS grand scheme of things. File the FBARs asap - they haven't been levelling any penalties so far on back filings as long as you use one of their "canned excuses" on the form (drop down menu).

It may or may not be necessary to go the streamlined route. Fill out the returns first and see what you're looking at in terms of payments, refunds and/or interest for simple "late filings" and then decide from there.
Cheers,
Bev


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## Nononymous

I don't quite understand. Are you working in the US? If so, how did you manage to do that for three years and not file a tax return? (I guess if there's no taxes owed there's no penalty, but still, kind of a dumb risk to take when you move to a country semi-permanently.)

The declaration of Canadian accounts and so forth is probably not going to be an issue. Small amounts of money and not uncommon for people to not know about the requirement (especially if didn't file tax returns and therefore didn't see the bit about foreign accounts). Fines are largely theoretical, by all accounts - you should be able to catch up on those without penalty.


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## jaxtayler

*HBP Repayment*

Hi, 

Thank you for the information everyone has provided. 

I also just discovered that I had to pay my Home Buyers Balance back to my RRSP 60 days after departure. Since I didn't do this the amount will need to be added to my income. 

I actually starting working in the US in early November, but did travel to Canada over Christmas and came back in the new year of 2013 with my final belongings. Given the situation it makes sense for us to push the HBP income into 2013 since it will be a lower marginal tax rate, so I am claiming full year residency in Canada and declaring my world wide income and filing a Non-resident return in the US for 2012. The question is will I need to show the HBP income on my 2013 US Return?

I tried to find some information regarding this on a few forums and it seems some people were saying that this money was exempt from US tax under Article 18. 

I mentioned this to my accountant today and he mentioned that money put into an RRSP has a 0 cost basis for US and Canadian Tax purposes and that I would have to pay tax on any distributions on it.

However he did come back and say we may be able to get out of it because I took the distributions out in 2012 before I moved to the US - and since I am declaring as a Non-resident in the US for 2012 I would not need to report this distribution from the RRSP because it was before the date I actually moved to the US. 

We would still take the HBP income in 2013 for Canadian tax purposes reducing my tax liability to %15 instead of the %43.5 I would need to pay if I took the income in 2012.

However as I mentioned earlier it seems the forums I was looking at said that HBP income was an exemption as per the US-Canada Tax Treaty and didn't need to be declared as income - anyone know anything about this?


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## BBCWatcher

jaxtayler said:


> The question is will I need to show the HBP income on my 2013 US Return?


Yes, but....



> I tried to find some information regarding this on a few forums and it seems some people were saying that this money was exempt from US tax under Article 18.


Possibly. If it is, you can file IRS Form 8833.



> We would still take the HBP income in 2013 for Canadian tax purposes reducing my tax liability to %15 instead of the %43.5 I would need to pay if I took the income in 2012.


Sounds OK to me, to let Canada handle Canada and the U.S. handle the U.S. As long as you're telling the same truth to both tax agencies -- notably the date and amount of the distribution -- all should be fine. If Canada allows you to report a 2012 withdrawal in tax year 2013, great.

The U.S. still expects you to report (practically all) income, but if it's treaty protected "there's a form for that": 8833.


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## jaxtayler

Thanks. 

Would I still need to fill out Form 8833 given will not be a resident in the US in 2012 and the distributions from the RRSP happened in 2012 before I moved to the US?

Since I am doing a step-up in basis and claiming full year residency in Canada which will push the HBP income to 2013 for Canadian purposes, does this then need to also disclosed on Form 8833 even though the distribution happened in 2012 before I was a US resident?


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## BBCWatcher

Only _required_ (probably) if you're required to file a 2012 U.S. tax return of any sort.

But there's still a good reason to file an 8833 (in 2012 or 2013, as applicable) even if not required: statute of limitation reasons. It starts the clock on a firm time limit for the IRS. Once the clock expires, sooner, the IRS cannot challenge your position.

It's up to you, but I don't see how it could hurt, assuming you're reasonably sure how the tax treaty views things. It'd get the issue documented and in your rear view mirror sooner, whereas otherwise the IRS could come back much later and say, "Hey, wait a minute...." Since the IRS doesn't actually look at very many things, burying the issue with the shortest time clock is generally the right play.


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## jaxtayler

Thank you very much for the information. 

I will need to file a 1040 NR because I did earn income in the months of November and December. 

Do you know what the statue of limitations is for this form?


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## BBCWatcher

I think it's generally 3 years, but Bev might have a better idea. That is, if you file an 8833 the IRS has 3 years to raise an objection. If they don't, they cannot raise an objection on anything you've disclosed.

It sure sounds like the right play to me. The truth is an absolute defense in tax (and many other) matters.


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## jaxtayler

Thanks for the feedback. 

Form 8833 has to be filed anyways to make the treaty claim in order for me to file as non-resident for 2012 and file as a full year resident in 2012 for Canada correcT?


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## Bevdeforges

Last I knew, the statute of limitations on income taxes runs for 4 years. But then again, I haven't had reason to check it recently. Still, 4 years to be safe. A tax accountant friend of mine actually advises her clients to shred all returns and documents supporting the returns after the statute has passed. (Never quite understood that one, but hey, it sounds like fun!)
Cheers,
Bev


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## BBCWatcher

Bev, that seems like the opposite of what to do. How do you prove the statute of limitations has passed if you don't have the records to prove that you started the clock? You're relying on the IRS's recordkeeping at that point to prove your innocence. That seems like a weird thing to do.

Yes, Jaxtayler. You're filing a U.S. tax return in all of the relevant years (2012 and 2013 -- 2012 is probably relevant on the U.S. side), and the IRS must see that income reported somewhere since it's not clearly in a non-reportable category. (One example of something you don't have to report to the IRS, generally, is a gift, even a hefty $10,000 gift.) Unless you see some other place in your U.S. tax return to report that income (and not pay tax on it, and without relying on the tax treaty), IRS Form 8833 is the way to do it since it's treaty-shielded income, and 8833 is how you claim treaty protection on the IRS side. That's exactly the purpose of 8833, and (like everything else you file) it starts the shortest available (4 year -- I stand corrected) countdown clock. After 4 years the IRS can't pursue you to try to collect tax on that income, even if you really should have paid tax in the U.S.

If the income is unreported then there's a longer clock. I can't remember offhand what it is, but it's longer. In certain scenarios when you don't provide information the clock never quits, as a legal matter.


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## Bevdeforges

BBCWatcher said:


> If the income is unreported then there's a longer clock. I can't remember offhand what it is, but it's longer. In certain scenarios when you don't provide information the clock never quits, as a legal matter.


Unreported income stays actionable forever! (In theory, anyhow.) 

No, I don't know why my friend advised shredding the stuff from beyond the statute. Unfortunately, I've fallen out of touch with her so can't really ask her at this point. Seemed odd to me, too. But then again, I still have some of the stuff I filed back in the 1990's. Might be time to shred that.
Cheers,
Bev


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## BBCWatcher

Bevdeforges said:


> Unreported income stays actionable forever! (In theory, anyhow.)


OK, then! There's a big difference between 4 years and unlimited. 

Jax, I think we're pretty well agreed that IRS Form 8833 is the way to go, to get that income reported, U.S. tax exempted per treaty, and to get the 4 year statute of limitations clock started on it. Too bad you didn't file 2012 on time in 2013 since the clock would already be about halfway to expiration by now, but better late than never.


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## jaxtayler

Thanks again for the information. 

Since I am doing a treaty claim to do a step up in basis and file my Canadian return as a full year resident in 2012 and my 2012 US return as a non-resident should my accountant already be filling out the Form 8833 regardless (we would of course add this situation to it if so)?


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## BBCWatcher

Sure, that's fine. Form 8833 is for taking one or more tax treaty positions.


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## jaxtayler

Hi Bev/BBC Watcher, 

My accountant just started sending me draft versions of my returns and we are getting prepared to file the "Streamlined Foreign Offshore Procedures".

Since I did not live in the US in 2011 I met the non-residency requirements to file under the "Streamlined Foreign Offshore Procedures". The IRS page relating to this procedure specifies that six years of FBARs are required. It doesn't say anything regarding filing FBARs for that long if you were not a resident (not a citizen or green card holder). 

I only moved to the US in October 2012 (on a L1A visa and still on that same visa), and will be filing my 2012 as a Non-resident. Am I still required to file the FBAR for six years? If so does this mean I will need to file 2008,2009,2010, 2011, and 2012, 2013? Also we are filing FBAR for my wife for 2013 as well - she moved here at the very end of 2013 but it was more beneficial to file jointly so we are also including her FBAR for 2013 - does this mean she should also file for six years? 

The language on the IRS website regarding having a complete application with all the relevant details is pretty stern - so I would hate to go through all of this an later find out that we do not qualify because we didn't file the six years of FBARs.

I had asked the accountant at the beginning of this engagement if six years was required and he mentioned that we only need to file for 2013 and 2014 since I was not a resident of the US for 2012 and before. I have this in an email, not sure if that's worth anything. 

Also will I still need to file the FBARs myself from the FinCen website or will they be sent with the streamline package ?

The accountant will not be doing the 2014 FBAR filing, since it wasn't late I thought I could do this myself on the FinCen website.


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## BBCWatcher

I don't understand how/why you'd be filing tax year 2012 as a non-resident. U.S. tax residency (for non-citizens) nearly always starts from your date of entry. There are _very_ few exceptions. Did you mean that you'll be filing 2012 as a "dual status alien," as IRS Publication 519 explains?

Your FBAR (FinCEN Form 114) filing responsibilities, if they exist, began when your U.S. personhood did. The IRS Streamlined Program requires that you file the 6 delinquent FBARs plus the current FBAR. If you actually have fewer delinquent FBARs than 6, that's fine, just file whichever are delinquent. If that's only 2012 and 2013, since you only became a U.S. person in 2012, fine, that's what you file.

Your wife evidently became a U.S. person in 2013, so that's when her FBAR filing responsibilities started. So she only has one delinquent FBAR (2013) at this point.

As mentioned, I think you were a U.S. tax resident for part of 2012 -- a "dual status alien." (You may have the option to file as a full year resident in 2012 -- check Publication 519 to see if that option is available if you wish to take it.) Your wife was a "dual status alien" in 2013, but she has the option to participate in a joint tax filing with you for the whole year 2013, yes.


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## jaxtayler

From what I understand we are doing a treaty claim and I am filing a 1040NR - the accountant determined that this is possible based on my travel dates. I actually went to Canada a couple time after I entered in October the last of which was over Christmas and I returned in 2013.

I think the main point of doing the NR return was to avoid the FBAR and Form 3520/3520-A for 2012.


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## BBCWatcher

The IRS and the U.S. Treasury do not particularly care whether you or your accountant want to avoid FinCEN Form 114 ("FBAR") and/or IRS Form 3520/3520-A for a particular tax year.

I don't know the details of your particular situation beyond what you've described. Take a look at IRS Publication 519 starting on page 3 ("Nonresident Alien or Resident Alien?") -- and the specific provision in the U.S.-Canada tax treaty that your accountant can point to -- to decide whether you feel comfortable with your accountant's recommendation. You are solely responsible for what is (or is not) reported, not your accountant, so it's your decision to make. Your accountant can only advise you. Often the advice is sound but not always.

Note that FinCEN Form 114 is a separate report, independent of IRS tax reporting, that has its own definition of "United States person." Refer to FinCEN Form 114's instructions for that separate guidance. I'll pull this particular sentence to make sure you're aware of it: "The federal tax treatment of an entity does not determine whether the entity has an FBAR filing requirement."


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## jaxtayler

Hi BBCWatcher, 

Thank you for your prompt response again. I am able to file a 1040 NR due to the Canada-US tax treaty - since I do not meet the substantial presence test I am able to do this according to the accountant. I did take a look at the publication you referred too and it does make reference to treaty claims overriding and acting as tie breaker. I had talked this over with a few other accountants and they had also mentioned that this could be done. So given I can file as a NR for 2012 I do not need to worry about FBAR and 3520 filings as I will not have been required to file these therefore they are not delinquent. 

I received the entire package from the accountant today and I think I had to kill a tree to print all the Forms. I went through the information as humanely possible and everything seems in order we are also making a 6013(g) treaty claim for 2013 - I believe that is for my wife (to be able to file jointly with her). 

In the package the accountant sent there were a few forms that I needed to sign and send back to them. The first three were related to giving them permission to file the late FBARs on our behalf and also authorizing them to e-file my first NJ state taxes for 2012 (2013 had to be paper filed for some reason). 

However they are also asking for Power of Attorney - they have Form 2848 filled out and they are also requesting Authorization of Agent Forms for Form 3520/3520-A filings. I am little weary about this as we never discussed these and I am not entirely sure that these are necessary. I wanted to get your opinion if this is normal practice for accountants to request power of attorney from their clients in these cases? I would prefer that the IRS contact me first if they had any questions or request for information which I may be able to provide fairly easily rather than going to the accountants who seem to charge in 15 minutes increments ( I almost fell over my chair when I saw the final invoice/timesheets today). If I really needed them to represent me then I can file the necessary paperwork?


Also we will be putting in a W-7 application in tomorrow by going into the IRS Office because my wife does not have an ITIN number yet. The streamline package will be going to a different address than my 2014 return, I was wondering if I need to wait for the ITIN to be created before we can file the 2014 return or can we attach a copy of the W-7 to the form and also mail in the 2014 return? If I need to wait for 2014 I will file an extension at the IRS office as well.

I am not entirely sure if once the IRS Office verifies the W-7 application will allow us to actually mail the return ourselves or we need to drop it off there? Since the streamlined offshore filing procedure has very specific instructions I would feel better mailing these in myself.

Your thoughts are greatly appreciated.


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## BBCWatcher

jaxtayler said:


> So given I can file as a NR for 2012 I do not need to worry about FBAR and 3520 filings....


That logic does not work. I'll repeat: your IRS status as a non-resident, assuming that's correct, does not automatically mean you are exempt from Treasury FinCEN Form 114. Form 114 has its own, separate definition of U.S. personhood. Review that definition (only) to decide whether you have a FinCEN Form 114 filing obligation for 2012. There is no correspondence here -- B does not flow from this A.

Moreover, I would err on the side of filing if you're even slightly unsure. I don't see the harm in doing so, and I could imagine potential benefits.



> ....we are also making a 6013(g) treaty claim for 2013 - I believe that is for my wife (to be able to file jointly with her).


That's not a treaty claim. That's your wife's voluntary, optional election under the U.S. tax code to participate in a joint U.S. tax filing with you.



> However they are also asking for Power of Attorney.... I wanted to get your opinion if this is normal practice for accountants to request power of attorney from their clients in these cases?


A limited power of attorney is sometimes appropriate.



> I would prefer that the IRS contact me first if they had any questions or request for information which I may be able to provide fairly easily rather than going to the accountants....


That's quite easy. Take a look at IRS Form 1040, for example. You'll see a section labeled "Third Party Designee" on the second page. If you want the IRS to contact you if they have any questions, make sure the checkbox next to "Do you want to allow another person to discuss this return with the IRS (see instructions)?" is marked "No." The "Paid Preparer Use Only" block must be filled out if a paid tax preparer was involved -- no choice there -- but the "Third Party Designee" is what determines who the IRS contacts (if they do). Also make sure your correct contact details -- your mailing address, in particular -- appear on page 1. Some tax preparers have been known to "intercept" correspondence from the IRS by filling in their own addresses with client "department codes." If that's OK with you, fine, but since it's not OK with you make sure your contact details are correct.

It's possible a couple of the other IRS forms include address and "Third Party Designee" blocks -- maybe Form 3520/3520-A, for example -- or similar blocks so check those, too.



> The streamline package will be going to a different address than my 2014 return, I was wondering if I need to wait for the ITIN to be created before we can file the 2014 return or can we attach a copy of the W-7 to the form and also mail in the 2014 return? If I need to wait for 2014 I will file an extension at the IRS office as well.


Not sure, but I'd file a Form 4868 now just as a precaution.



> I am not entirely sure if once the IRS Office verifies the W-7 application will allow us to actually mail the return ourselves or we need to drop it off there?


The IRS really doesn't expect to ever meet face-to-face except perhaps in a face-to-face audit. I don't recommend popping over to an IRS office to drop off any forms.



> Since the streamlined offshore filing procedure has very specific instructions I would feel better mailing these in myself.


Yes, I think the instructions say "mail," which certainly doesn't mean "pop over and have a cup of tea with us."


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## jaxtayler

Thanks for the feedback. I read the instructions you referred to for FinCen Form 114;

- It states that United States persons are required to file the FBAR
- United Persons are US Citizens and US residents
- Since I do not meet the substantial residency test I am not considered a US Resident as defined by United States Residents paragraph in the instructions for 2012. 

This was my interpretation of it and thats what the accountant also pointed out, below are the excerpts out of the instructions:


Who Must File an FBAR: A United States person that has a financial interest in or signature
authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign
financial accounts exceeds $10,000 at any time during the calendar year. See General
Definitions, to determine who is a United States person.

United States Person: United States person means United States citizens (including minor
children); United States residents; entities, including but not limited to, corporations,
partnerships, or limited liability

United States Resident: A United States resident is an alien residing in the United States. To
determine if the filer is a resident of the United States apply the residency tests in 26 U.S.C.
section 7701(b). When applying the residency tests, use the definition of United States in these
instructions.


Regarading going to the IRS office, it was due to the W-7 application. You are required to either provide a certified copy of your passport from the issuing agency, mail in your passport to the IRS and hope they send it back, or go to an IRS office that serves as a Taxpayer Acceptance Center and can certify W-7 applications. 

So we went to the IRS office, and it was quite a mess, aside from the long lines and waits we couldn't accomplish what we set out to do. The IRS agent wanted us to send our 2013 tax return with the ITIN application but because you have to attach a return. Our accountant had mentioned we should send in a COPY of our return not the actual return, because the actual return is to be sent to the specific address that is outlined in the streamlined offshore procedure instructions. 

Since we did not want to send our 2013 tax return with our W-7 application to the ITIN office which would forward the return for regular processing we came back empty handed since the agent would not accept a COPY return to be attached to the W-7 application. 

The accountant is now saying we should submit the W-7 with our 2014 (we will file an extension today) tax return since that will be processed as a regular return since it wont be "late". However he also mentioned to send the streamlined offshore procedure ASAP without the ITIN application. The idea is that hopefully the ITIN will be created before the streamlined application begins processing.

Not sure what else to do as we do not want to send the passport in.


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## BBCWatcher

The question of whether you are required to file a FBAR for 2012 turns on whether you are a "United States Resident" _as defined in the FinCEN Form 114 instructions_. You seem to have agreed with that logic so far, so I have no concern to that point.

OK, that definition in the instructions then points you to 26 U.S.C. section 7701(b). You have to scroll down quite a bit at that linked page, but I'll quote the important part for you:

_(b) Definition of resident alien and nonresident alien
(1) In general
For purposes of this title (other than subtitle B)—
(A) Resident alien
An alien individual shall be treated as a resident of the United States with respect to any calendar year if (and only if) such individual meets the requirements of clause (i), (ii), *or* (iii):
(i) Lawfully admitted for permanent residence. Such individual is a lawful permanent resident of the United States at any time during such calendar year.
(ii) Substantial presence test Such individual meets the substantial presence test of paragraph (3).
(iii) First year election. Such individual makes the election provided in paragraph (4)._

Emphasis mine. I don't think (iii) applies, but my concern would be whether you met test (i) in this section, i.e. were you lawfully admitted for permanent residence in 2012? That'd depend on your visa type, and I cannot remember that offhand. If you had a non-immigrant visa type, then I'd vote no. If you had an immigrant visa type, then I'd vote yes, you do have a FBAR filing requirement for 2012.

On edit: I see you had an L-1A visa. I assume that means you were not "admitted for permanent residence" but rather admitted for temporary residence, so I think you're off the hook. But please do triple check my interpretation and make sure _you_ are comfortable with it. (Never mind your accountant.) Also bear in mind there is absolutely no _harm_ in FBAR overreporting (unless you're doing something really stupid), so if there's _any_ ambiguity I would err on the side of reporting.


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## jaxtayler

Thank you so much for the further analysis! 

What makes a visa fall under the immigrant category? L1A is known to be a dual intent visa - where there is a path to GC - and its fairly easy to apply and get the GC under this category. I haven't applied for a GC yet.

I sent the streamline application today, no W-7 application, but wrote a quick letter explaining why the W-7 wasn't there. I filed an extension for 2014 today as well, and sent them a check as well even though I am expecting a refund (just in case I am wrong, and a sign of good faith). 

I am now working on my 2014 and we will include the W-7 application with that return, hoping to get that out this week or early next week. 

I don't mind filing the 2012 FBAR, I actually gathered all the data for it, however the accountants did the FBAR filing for 2013 and I sent the copy of the reports together with my streamlined package today. So can I still file the 2012 myself without causing any issues?


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## BBCWatcher

jaxtayler said:


> L1A is known to be a dual intent visa - where there is a path to GC - and its fairly easy to apply and get the GC under this category. I haven't applied for a GC yet.


Yes, hence my "ambiguity" comment. 

For what it's worth *I* think you're on solid ground if you don't file a 2012 FBAR. But I'm not a visa expert either. 



> So can I still file the 2012 myself without causing any issues?


Don't see why not.


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## jaxtayler

Also going through the 2013 return I just realized that the accountants did not give me the benefit of the "Special Allowance for Rental Activities" and entered my rental losses (mainly due to depreciation) under "All Other Passive Activities" - which is limited to only reducing passive income. I understand there is an MAGI cap and this benefit reduces as the income goes up and is eliminated at $150K MAGI, but I feel like I am missing out on this one based on my quick calculations. 

We are actively involved in advertising, reviewing applications, picking tenants, calling out service requests etc, we do not have a mgmt company looking after our properties and we tend to most of everything remotely and it has worked out so far. Turbotax seems to be giving me the benefit of the "Special Allowance for Rental Activities" based on my answers to their questions. I was reading the instructions for Form 8582 and was confused by the below sentence: 

Instructions for Form 8582 (2014)

"The special allowance is not available if you were married, are filing a separate return for the year, and lived with your spouse at any time during the year."

The instructions later go on to mention married filing jointly etc, so is the above sentence mean that it disqualifies someone that got married in that tax year but allows the benefit in following years? I was married in 2013, so not sure if thats why I am not able to take advantage of this?

If I can take advantage of this I am hoping I can make an amendment later on. I plugged in the carry over amounts for the rental amounts in the 2014 return and increased the refund quite a bit with a good chunk left for carry over. 

It seems every day a new thing comes up.


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## jaxtayler

Thanks I will look into doing 2012 to be on the safe side.


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## jaxtayler

I just reread this :

"The special allowance is not available if you were married, are filing a separate return for the year, and lived with your spouse at any time during the year."

and it now makes sense to me It was a long day and was up late last night so was confused when I read this...

Since we are filing jointly I would qualify under this special allowance - if I meet the MAGI limits.


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## jaxtayler

Hi Bev, 

I had a question about Form 1116 - when entering rental income in this form do we use the Gross Rental income for line 1a or the net income?

More importantly for line 2 (Expenses definitely related to the income on line 1a): if the the Gross income on the rentals are entered in Line 1a - do we include depreciation expense in this line or just all the actual expenses? If net income is entered into line 1a - same question applies, does it include depreciation or not? 

If it makes any difference we did take depreciation in Canada to reduce the income to 0. However due to the special allowance in the US I am able to show a loss of $4800 to deduct from regular income. The accountant drafted an amendment for me but is showing a loss on Form 1116 so it is reducing the FTC by almost a $1000 - so essentially wiping out the benefit of taking the loss on the rental from depreciation in the first place. Does this sound right?

In line 1a the accountant has entered the gross income from all rentals, and line 2 is made up of the gross income plus the allowable depreciation losses - once the 3g (pro rata share of other deductions) is added it makes it a quite a bit of loss and reduces the foreign income therefore reducing the FTC as well.

Also do we need to enter the rental into Form 1116 given we did not pay any taxes on the rental income in Canada because we were able to reduce the income 0 with depreciation.


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## Bevdeforges

I have to admit that I have little or no experience with form 1116. Let's see if someone else here can help with your question.
Cheers,
Bev


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## BBCWatcher

I think the basic concept is that if your rental income (loss) caused a foreign tax savings within that category of income then that's what your Foreign Tax Credit ought to show.

Let's suppose that your rental income (loss) is Income A and you have some other Income B in the same category. You paid $100 in foreign income tax on Income B but Income A amounted to a foreign tax savings of $50. Then the total allowable foreign tax credit should end up at $50 for that category.

That's the basic principle. Does that translate into what you're doing?


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## jaxtayler

In 2013 I had dividend, interest income, and rental income under the passive category and I did not pay or accrue any Canadian tax on any of it (hence my question earlier, are we suppose to even put these on 1116?). My wife had maternity benefits (we are filing jointly) which fall under General category income and she did pay tax on this income to Canada.

Passive category
Income A - Dividend: 500
Income B - Interest: 200
Income C - Rental: -5000

General category
Income D - Maternity benefits: 27,000 (4000 in taxes were remitted to Canada)
Income E - Maternity benefits: 7,000 ( 1000 in taxes were remitted to Canada)


The net income is -4300 (loss) in the Passive category when the pro rata standard deduction is added this increases the loss to over $7000. This 7000 loss then reduces the 33000 income on the General category side down to 26000 and the FTC comes out to~4000. 

Before we were not claiming the special allowance to deduct losses on depreciation from the rentals on our general income. In this scenario Income C was 0 and the FTC was ~5000 – when we claimed the special allowance since we are active landlords our income was reduced by the 5000 loss we were able to take but the FTC dropped from 5000 to 4000 pretty much eliminating the benefit of taking this loss because net income on the rentals was a loss hence reducing the General category income. 

So my question is when filling out 1116 for Income C:


-	Do we use the Gross Rental Income in Line 1a? ( My accountant has entered Gross Rental income and added the expenses on Line 2)
-	If so when entering the Expenses definitely related to income Line 2– do we include the depreciation expense?
-	If we are to include only net income on Line 1a and no expenses on Line2 then do we include depreciation when figuring out net income?

As mentioned earlier we did not pay any tax to Canada on the rentals because we did depreciate the properties in Canada. In Canada you are not allowed to created losses by depreciating properties so the net income is 0 in our Canadian returns. 
Essentially removing the depreciation loss from the rentals saves me a ~1000 on FTC. Can I remove the depreciation from the equation in this case?


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## jaxtayler

Just a quick correction - my wife had both maternity benefits and employement income in 2013. 

Income D is employement income and Income E is maternity benefits, both of them fall under the general category.


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## BBCWatcher

This isn't going to be a precise answer, but one important thing to keep in mind is that the IRS doesn't particularly care about _Canada's_ view of depreciation. So you aren't necessarily going to be copying numbers directly. You'd have to take a look at what the IRS allows for rental property depreciation before deciding what number to report in that space on the form.

Yes, as a general principle you report gross amounts while also reporting IRS-allowable subtractions.


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## nickel1212

*FBAR advice.*

I have a question regarding the FBAR (and paying interest on a foreign bank account).

I am a permanent resident of the US. Will be eligible for Citizenship in about 6 months. For the past many years i've been doing my Taxes by myself using Turbo-Tax-like software. Pretty straightforward Tax situation & didn't need to consult an Accountant. Until yesterday i was unaware that 'all' US residents (and not just US Citizens with Foreign Bank Account(s)) had to file an FBAR (and Taxes if there was Interest income). I will spare you the 'i'm a really good guy who hasn't got a parking ticket in a decade' routine (which is true btw) ... but i did not know it applied to me.

The account in question did not have > $10 K for most of its existence & neither was there any interest income. It was setup primarily to be able to transfer money quickly/conveniently for my family still living in my 'native' country (where i'm still a Citizen). However, in the last 2+ years it has had > $10 K and it has earned income. (The total amount in question is < $30 K.) Suffice it to say this has got me rattled. I will wait until next week (early-Jan) when people get back to work and talk to a professional about this in more detail.

But for now (as in 'right now'), does it make sense for me to atleast file the FBAR (online) by myself for atleast the last 1 year & start the ball rolling ? Is filing the FBAR online simple enough ?

Transactions:
- Transferred several amounts (10K+) in 2010/2011, which just sat in the account, not earning interest. Was eventually withdrawn in 2011 by family (partly for their expenses & partly for an investment in property on my behalf).
- Then in 2013, a part of it was deposited back into this account where it earned interest for 2 yrs.
- Mid-2015 i transferred this amount back into my US bank account & will be reporting it when i do my Taxes in a few months.

So: i'm assuming i need to file delinquent FBARs for 2010/2011, 2013/14 ... and adjust Taxes for 2013/14 (the 2 yrs that interest was earned).

Thanks in advance.


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## KRM2015

Can I ask a question regarding form 14653 - the certification form for the Streamlined process. 

On page 2 it requires a narrative explanation of your specific reasons for failing to report previously. I have done a search for examples that people have written before but haven't found any. My situation will no doubt be common of many people who are filing - that I wasn't aware of the requirements. 

I left the US when I was 7 years old, meaning all of my tax paying life I have been living outside of the US (in the UK). I have paid all my taxes in the UK on any income I have ever earned, and I only recently learnt that as I still have my US passport I have a responsibility to report my income their too. As soon as I became aware of my responsibility I have acted to make good on this responsibility. 

Does something along these lines seems acceptable for the purpose of this form?

Many thanks


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## Bevdeforges

> However, in the last 2+ years it has had > $10 K and it has earned income. (The total amount in question is < $30 K.) Suffice it to say this has got me rattled. I will wait until next week (early-Jan) when people get back to work and talk to a professional about this in more detail.
> 
> But for now (as in 'right now'), does it make sense for me to atleast file the FBAR (online) by myself for atleast the last 1 year & start the ball rolling ? Is filing the FBAR online simple enough ?


Don't get too rattled about this. It sounds like you're only nominally out of compliance and you can easily fix things.

Assuming this account is your only "foreign" account, you can easily file the missing FBAR (now called FinCEN 114 or something like that) for the past years in which the high balance exceeded the $10,000 mark. Filing online is mandatory - and actually pretty simple.You download a pdf file, fill it in, save it and then upload it back to the site. There is even a ready-made option to select when asked why your filing is late - for "I didn't realize I had to file." 

https://www.fincen.gov/forms/bsa_forms/fbar.html - and don't worry about the rather OTT name of the agency involved (Financial Crimes Enforcement Network). Bit of governmental overstatement.

As far as the interest paid on the account - it should have been included with your interest income on your US tax returns for the years in which it was earned. However, given the rather feeble interest rates these last couple years, and the amounts involved, it's rather unlikely the additional interest would have made a significant difference in the amount of taxes you would have owed. If it does make a difference of more than $100 or so, you can always just file amended returns (a form 1040X) for the years where the difference is significant.
Cheers,
Bev


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## nickel1212

Thanks very much Bev for your response.

I will take a look at the FBAR document. I will do it for each of the 5 years that the balance exceeded $10 K (i'm assuming that even if the account had > 10 K for a few days/weeks or months, without earning any interest, an FBAR still needs to be filed).
As for amending the tax returns (for the years there was interest income), i will have an Accountant do it.

I have 2 other accounts but they have had, atmost, the equivalent of between US $10 (ten) and $100 (hundred) when i opened them years ago. After opening the accounts i never did much with them and actually thought the banks may have closed them due to inactivity; apparently they are still open and have hardly anything in them now. 1 of them earns $1 of interest every 6 months or so ... I'm assuming these 2 accounts do not need to be reported (i can't imagine why they would need to be ...).

Thanks again !


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## BBCWatcher

All foreign financial accounts for which you have signature authority must be reported, regardless of their balances, if you meet the filing threshold.


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## BBCWatcher

KRM2015 said:


> Does something along these lines seems acceptable for the purpose of this form?


Yes, that sounds fine. Keep it short and to the point, and truthful.


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## Bevdeforges

As BBC mentioned, ALL foreign accounts need to be reported for any year in which the accumulated total of all your foreign accounts exceeds the $10,000 threshold.

Having an accountant file the amended returns, however, may wind up costing you more than the interest you'll be declaring. Take a look at the numbers for yourself before committing to a costly "solution" to what may be a very minor problem. 

Thinking here of a cluster of accounts I have, with no more than about $50,000 total, and interest income of less than $500 a year these last few years. Yes, I report them - but in your case, what's the max. possible impact on your taxes owed? Take a look at the 1040X form before you fork over a few hundred bucks for what is probably a minor "correction" to those prior returns.
Cheers,
Bev


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## BBCWatcher

It's generally not that difficult to prepare amended returns (IRS Form 1040X) for adding missing bank interest.

Please note that foreign income tax paid on your bank interest can be taken as a Foreign Tax Credit (IRS Form 1116) on your U.S. tax return. Many countries withhold income tax at the source, before the net interest is paid. In such cases you report the gross interest paid (before tax was withheld) but also take your Foreign Tax Credit. In many countries this is quite easy to determine since there's a flat rate for tax withholding.

It's possible that the Foreign Tax Credit is equal to or more than the U.S. income tax you would have owed on that income. That would be a particularly happy outcome if so. But even if not a minor amount of income such as this is not likely to result in significant interest and penalties. It's extraordinarily common to miss a bit of income like this and have to file amended returns.


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## KRM2015

I have completed my past 3 years 1040 and 2555-EZ in order to file under the streamlined process. Reading the past few posts I have remembered that I have not included any interest income from bank accounts. After having calculated these they are very small (less than $50 in each of the three years). I have paid UK income tax on all of these amounts. 

Given that I have claimed the Foreign Earned Income Exclusion (Form 2555-EZ), how do I deal with the interest income? Can I also complete Form 1116 to claim the Foreign Tax credit?

Thanks a lot


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## Bevdeforges

Interest income isn't subject to the FEIE in any event. If it raises your AGI to the point where you owe taxes, then yes, you file a form 1116 to take the foreign tax credit for the UK tax you paid on your "passive income."
Cheers,
Bev


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## BBCWatcher

Bevdeforges said:


> If it raises your AGI to the point where you owe taxes, then yes, you file a form 1116....


Well, let's elaborate a bit....

If your interest income and your other non-excluded income is enough to generate a U.S. tax liability in that particular year, yes, you would _surely_ want to take the Foreign Tax Credit (IRS Form 1116) to account for any foreign income tax paid on that income.

However, you might still want to take a trip through IRS Form 1116 even if you don't owe more U.S. tax. You might want to do so when you can accumulate excess foreign tax credits. Those excess credits can be "spent" on past (up to one year in the past), current, and future (up to 10 years in the future) U.S. tax liabilities in the same income category.

The income is still reportable on a gross basis whether or not it generates a tax liability and whether or not you take the FTC.


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## KRM2015

Thank you. I have added this to my 1040s now and completed schedule B for each, as the interest has accrued on UK bank accounts. 

Couple of minor questions now that I'm ready to send these off. 

(1) Is it ok to staple the additional schedules to each 1040? It says to attach them, but opinion (when googling) seems divided on how this should be done?

(2) I have filled in all of my returns and followed the streamlined procedures to the best of my knowledge after doing a lot of research. If I have made any mistakes, in good faith, when filling out the forms, would you expect the IRS to have some leniency, or if there are any mistakes would you expect my application for the streamlined procedure to be thrown out, leaving me facing penalties and having to catch up through an audit process?

(3) How long do you think I should expect to wait before I hear back from the IRS? I'm conscious that I now need to complete my 2015 return in the regular way, but I assume I should wait until my catch up returns have been properly processed first? That is assuming that if everything is filed ok, I will get a confirmation from the IRS?

Thanks for all your help, it's been invaluable


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## Bevdeforges

Sounds like you're ready to roll. But to answer your questions:

1. I wouldn't staple the schedules to the forms - though it's not a capital offense if you choose to do so. Paper clip is fine - or just make sure the schedule is immediately behind the appropriate form. The IRS has their own logic as to how they distribute and process the returns on arrival.

2. The IRS doesn't work that way. The fact that you've made a good faith effort to follow the procedure as outlined is good enough. They don't deduct points for small mistakes, nor do they throw out the returns if they misinterpret one of the instructions.

3. If all goes well, you probably will never hear from the IRS. This is one of those "no news is good news" situations. Assume all is well until and unless you receive a letter from the IRS. (There are a number of scams where you may receive an e-mail purporting to be from the IRS. The IRS does NOT communicate via e-mail like that.)
Cheers,
Bev


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