US streamline tax return catch up and inherited IRA

US streamline tax return catch up and inherited IRA

Key Points

• The U.S. Streamlined Filing Compliance Procedures allow Americans abroad to catch up on missed tax returns without severe penalties.
• Inherited IRAs require careful handling to ensure compliance with both U.S. and Canadian tax laws.
• Timely and accurate reporting of inherited IRAs can prevent unexpected tax liabilities and penalties.
• Cross-border tax planning is crucial to manage the tax implications of inherited IRAs and missed U.S. tax filings.
• Consulting with a cross-border tax advisor is essential for navigating the complexities of U.S. tax compliance and inherited IRAs.

If you need help in reviewing your cross-border tax or investment situation, please feel free to reach out to us here. We look forward to speaking to you soon.

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Question

I am a US citizen who has been living in Canada for many years. My husband is also a US citizen. We are PRs in Canada. We live together in Toronto and have one dependent, a minor daughter born in Canada; she is a Canadian citizen. My husband’s income is about $185,000 annually and mine is about $95,000 annually. I have a very tiny investment account with IBKR valued under $10K and a nascent RRSP valued under $9K. We have a large mortgage and at least $100K in debt.

I have two inquiries: 

First: My husband and I are both up to date on Canadian tax filings but need to catch up on US filings. We want to do the 3-year IRS catchup process we have heard about, if possible, plus FBARs, but the process seems incredibly Byzantine and difficult to understand, so we are seeking assistance on this. I have done some very light, low-value self employment work as an independent editor over the past several years, and I gather this may cause tax filing headaches. 

Second: My two siblings and I recently inherited an IRA from my mother, who died June 1 2021. Morgan Stanley has been very slow to talk to us about how to proceed as beneficiaries, but it looks like it will be divided into three equal portions, of which each is about $38K. I gather we each will likely need to take annual payouts for 10 years or take the entire amount as a lump sum. However, there may be other options.

I am wondering how best to approach this from a tax perspective. I also wonder if there’s an advantageous way to transfer these funds into my RRSP, whether in yearly contributions or even one lump some into my RRSP. My father also left me approximately $95K from her combined checking and savings accounts at Chase Bank, although again I have not been able to actually receive any funds due to Chase dragging its feet and wanting me to show up in person at a US branch, which I cannot do anytime soon. I would like to use these funds (if I ever receive them) to pay off debts I hold in the US and Canada. I am also interested in any tax implications this small inheritance may pose.

Thank you in advance,xxxx xxxxxx

Answer

Hi XXXXXX

Thanks for the message.

Yes, if you’re interested in catching up on your US tax return your most beneficial option is likely going to be the IRS streamline tax filing procedures for non-residents of the US.

Assuming you qualify under the program you’ll be required to file the last 3 years of the most recent late 1040 US income tax returns (including all schedules, forms and disclosures). So, if you didn’t extend your 2021 US income tax filings 2021 would be late and eligible for streamlined. Therefore 2021, 2020 and 2019 1040s will be eligible to be filed under the program.

In addition to the income tax returns above you’ll also need to file 6 years of FBAR filings which report any signing authority interest you have in non-US bank and investment accounts.

You can read more about the streamline program here:

https://www.irs.gov/individuals/international-taxpayers/u-s-taxpayers-residing-outside-the-united-states

And you can also learn more about FBAR filings here:

https://bsaefiling.fincen.treas.gov/NoRegFBARFiler.html


https://philhogan.com/fbar-exchange-rates/

With respect to the IRA there are a few things to consider. As you mention below you do have 10 years to withdraw from the inherited IRA and considering the amounts are not significant it might be easier to simply leave the investments in the US. If you’re caught up on your tax returns it won’t be a huge problem, however you will want to ensure they withhold 15% on any withdrawals. This amount can be used as a credit on your US income tax return.

Because the IRA is an inherited IRA unfortunately you won’t have the opportunity to transfer it to your RRSP.

Also, if any of the US banks ask for a W8-BEN please note that as a US citizen you are not eligible to complete this form. You’ll need to complete a W-9 form for the bank.

I hope the information above helps and please let me know if you would like me to refer you to someone in the office to help with the streamline filings.

Regards

Phil