November 2012 Archives

November 30, 2012
Posted by Sanger & Manes, LLP

So Canadian Snowbirds in California need A Taxpayer ID Number to Avoid Mandatory Withholding When Renting Or Selling US Property; But Now It's Harder to Get Taxpayer ID Numbers (hint- Get Read to Send in Your Passport to the US Government...)

If you read my most recent post on the importance and (I think really) necessity that Canadian snowbirds obtain US individual taxpayer ID numbers an "ITINs". Remember, Canadian snowbirds must complete an IRS Form W-7 to get a taxpayer ID number, but there's only certain occasions when the IRS will actually comply and issue you one (such as when you fill out a US tax return or when you want to be relieved of the awful mandatory US tax withholding obligation on renting or selling US real estate). It's now a good time to review the process for how the Canadian actually gets an ITIN.

What Documents Must the Canadian Snowbird Submit to Get an ITIN?

An original valid passport is the best document you can give. If you submit that, that's all you need to give. If you don't submit a passport, you'll need multiple documents to prove both your foreign status and identity. The documents must be current, verify your identity (that is, contain your name), and support your claim of foreign status (that you're from Canada). Among the group of documents which you may use are national I.D. cards, visas issued by U.S. Department of State, U.S. or foreign military identification card, civil birth certificates, medical and school records, U.S. state or foreign driver's licenses, U.S. state identification card, foreign voter's registration card and U.S. Citizenship and Immigration Services photo identification. Again, you'll need multiple documents if you're not using the passport.

On June 22, 2012, IRS announced interim change to its ITIN application requirements.
What are the biggest changes to the process of getting a taxpayer ID number?:

1) Notarized copies of key documents are no longer acceptable.

The IRS will continue to require original documentation or copies certified by the issuing agency with the Form W-7 and federal return attached. It will no longer accept notarized copies of documents for ITINs (although, an important note, notarized copies remain acceptable when the Canadian is just getting the withholding back from selling a home via the Form 8288...a full tax return is not necessarily required for that). Documents subject to this requirement include passports. Canadians may be able to request a certified copy of their passport or similar international identification at their local consulate's office.

2) Taxpayer ID Numbers are Now Only Good for 5 Years- They Are No Longer Indefinite:

Newly issues ITINs will expire after five years, rather than be issued for an indefinite period. This will provide additional safeguards to the ITIN program. Taxpayers who still need an ITIN will be able to reapply at the end of the expiration period.

How Long Will the IRS Have My Passport Or Other Documents?

The documents will be returned to applicants using the mailing address on the application via postage paid standard U.S. mail within 60 days of receipt and processing of the Form W-7.

The IRS Knows Its A Hardship For Canadians to Be Without Their Passport For an Extended Period, And Has Steps To Help With That (supposedly)

The IRS has provided alternatives to mailing in passports and other original documents. Trusted outlets other than its centralized ITIN processing site need to be available to review original documentation (although they don't appear to be available yet, so we'll have to wait for that information). While original documents or copies certified by the issuing agency are still required for most applicants, more options and flexibility are provided for people applying for an ITIN.

Certifying Acceptance Agents ("CAAs") and Taxpayer Assistance Centers ("TACs") May Provide an Nice Alternative to Sending in Critical Documents to the IRS

CAAs and TACs will be able to engage in the ITIN process by reviewing original documents or copies certified by the issuing agency, but will be subject to new safeguards. But where these locations are locally that do this, I have no idea.

My Recent Trip to the Local IRS Office in Palm Springs

In the Palm Springs area, we have a local office/TAC at the following location: 556 S. Paseo Dorotea Palm Springs, CA 92264 ((760) 866-6125)). I personally visited there just last week (and waited one hour and half just to ask a question about the new procedures for obtaining taxpayer ID numbers!!!). But they don't review documents at that office, and they don't issue ITINs, as these TACs and CAAs supposedly do (all they do is forward them to the Austin Texas office, so it's hard to see what is gained by going to the Palm Springs office for this may as well just mail them in) .

November 26, 2012
Posted by Sanger & Manes, LLP

Palm Springs, Indian Wells, La Quinta Attorney For Canadians Discusses Why Canadians Must Get US Taxpayer ID Numbers

We are asked constantly by Canadians why they have to go through the pure drudgery of getting a US taxpayer ID number. And apparently, drudgery is absolutely the correct word as now the IRS wants to review either your actual passport, which is the best stand alone document you can provide (which means it may be out of your possession in the hands of the IRS for a few weeks), or a combination of a series of additional documents. We'll talk in our next blog post about how you actually get the taxpayer ID number (via the Form W-7). But why does the Canadian snowbird need to get it? The answer is simple- it will cost you money if you don't.

You will Need A Taxpayer ID Number to Avoid Mandatory 30% Withholding When You Rent Your US Property.

Without a taxpayer ID number, the Canadian Snowbird who rents US real estate must have the tenant or property manager withhold 30% of gross rent payments (and forward these amounts to the IRS). If the tenant or prop manager fails to withhold, the IRS will look to the Canadian for the withholding tax. However, if the Canadian snowbird completes a Form W-8ECI withholding certificate (which requires a US taxpayer ID number to get) and gives it to the tenant or property manger instructing them not to withhold, and then files the Form 1040NR tax return by June 15 of the next year, no withholding is required. This is a great option for the Canadian snowbird because it: (A) Allows the taking of deductions (e.g., property taxes, mortgage interest and depreciation) and (B) the tax rate is likely lower, much lower, than 30%.

Example. Snowbirds Suzy & Jeff purchase a house in Rancho Mirage. They personally use the house 2 months a year, and they rent it for $3,000 a month for the other 10 months. Before US taxes, Suzy & Jeff will receive $30,000 in rental income per year. What about after US taxes?

Option 1: They don't go get a US taxpayer ID number. Tenant or property manager must withhold $900 a month from rent payments ($9,000 total for the year). Suzy & Jeff receive $21,000 per year after US taxes paid.

Option 2: First, Suzy & Jeff get a US taxpayer ID number and then complete a Form W-8ECI and then give it to the tenant or property manager and file a Form 1040NR tax return the next year. The tenant or property manager now knows he shouldn't withhold. Suzy & Jeff deduct $400 of monthly interest from their mortgage and $200 of monthly property taxes. Their taxable US rental income for the year is $24,000. On $24,000, the US income tax rate is approximately 15% and the tax is approximately $3,600 (leaving Suzy & Jeff $26,400 for the year after US taxes paid).

You will Need A Taxpayer ID Number to Avoid Mandatory 10% Withholding on Your Gross Sales Price When You Sell Your US Property.

A similar rule exists in the sale of a house area, where, if the Canadian snowbird does not get a taxpayer ID number, the purchaser must withhold 10% and forward it directly to the IRS.

Example. Suzy & Jeff purchase a La Quinta house in 2009 for $800,000. In 2012, they sell the house to buyer for $1,000,000.

Option 1: No action taken. Buyer must withhold $100,000 for IRS (10% of the $1,000,000 sales price). Suzy & Jeff receive $900,000 after federal taxes withheld.

Option 2: Prior to the sale, Suzy & Jeff get a taxpayer ID number and then file an IRS Form 8288-B. Buyer must now only withhold $30,000 for IRS ($200,000 appreciation x 15% capital gains rate in 2012). Suzy & Jeff receive $970,000 after U.S. taxes paid.

So, unfortunately Canadians in the US, you really do have to face the drudgery of getting a taxpayer ID number.

November 12, 2012
Posted by Sanger & Manes, LLP

Palm Springs, Palm Desert, Attorney for Canadian Snowbirds, Discusses More About The Amnesty Program Allowing Dual US/Canadian Citizens Residing in Canada to File Old US Tax Returns Without Penalty, Part 2.

We continue our discussion on Canadians who had the legal requirement to annually file US tax returns and FBARs (reports of foreign bank, your bank accounts in Canada which had more than $10,000 (US) in them at any point in the year), but who haven't filed a US tax return or a FBAR in many years (if ever). Again, this amnesty program offers really is peace of mind. If you haven't been filing your US tax returns (or FBAR's) for years, maybe you know (now) you have that obligation, but you don't know how to "come clean". This new amnesty program is your chance. Under the new amnesty program, for those who qualify, the IRS will not impose penalties nor conduct an audit. In order to "come clean" you must: (1) File all tax returns with appropriate related information returns required for the past three years (i.e., 2009, 2010, and 2011); (2) File Foreign Bank Account Reports (FBARs) for the past six years (i.e., 2006- 2011); (3) Pay any tax and interest if applicable on the unfiled returns (there probably won't be any US tax or interest); and (4) Complete and sign under penalties of perjury a 20-question questionnaire. In Part 1 of this series, we discussed how only Canadians who "reside in Canada" could take advantage of this new amnesty. In Part 2, let's review some more of the unusual conditions of the new amnesty program.

The Taxpayer Cannot Owe More Than $1,499 in US tax in any of the tax years beginning in 2009 and ending on 2011.

We suspect this requirement generally won't be problematic. Although the US does impose tax on income earned by its citizens and residents no matter where they earn it anywhere in the world (e.g., Canada), due to the tax credit system and the relief offered by the US-Canada Tax Treaty, as long as the taxpayer has been paying the appropriate tax in Canada he or she probably (although not certainly) won't owe any US tax. So owing not more than $1,499 in US tax in any of the tax years beginning in 2009 and ending on 2011 is probably not a difficult hurdle to overcome.

The taxpayer has filed a US tax return for any tax year subsequent to 2008.

Sort of an unusual requirement (not having filed the taxes), but one can suppose the rationale behind it is the IRS wanting to help only those people who more or less have been unaware of their obligation to file their US taxes (not the ones who knew of their obligation but simply tried to pay less than they should have in prior years).

The taxpayer presents a "low compliance risk"

Ah, this is where it gets really interesting. I want to apply for the new amnesty so as to clear up my unfiled US back taxes, but I must be considered by the IRS as a low compliance risk. How do I know if I'm a low compliance risk?

Based on the questionnaire the taxpayer is required to complete, the IRS will determine whether the taxpayer is considered "low compliance risk". According to the IRS, the taxpayer's risk level may rise above "low" if he or she has any of the following:

-Any of the returns submitted through this program claim a refund;
-There is material economic activity in the US;
-The taxpayer has not declared all of his/her income in his/her country of residence;
-The taxpayer is under audit or investigation by the IRS;
-FBAR penalties have been previously assessed against the taxpayer or if the taxpayer
has previously received an FBAR warning letter;
-The taxpayer has a financial interest or authority over a financial account(s) located outside his/her country of residence;
-The taxpayer has a financial interest in an entity or entities located outside his/her country of residence;
-There is US source income; or
-There are indications of sophisticated tax planning or avoidance.

So what do we learn here? If you have US source income (like from the sale of a US house), and you did not at least file a nonresident tax return, you may not be an ideal candidate for the new amnesty program (although at least with real estate you as a Canadian should have had an excess tax amount automatically withheld at the time of sale due the FIRPTA rules). It is of course entirely possible the taxpayer has bank accounts in other countries, it's hard to see what is so damaging about that. Based on this list, the factors which give me pause in going forward with the program are owing back US taxes (above $1,500 per year), or being at all involved in any FBAR hot water. If you have any of the remaining factors, you should at least explore the possibility to joining the new IRS amnesty program for dual citizens who haven't filed US tax returns recently.