11/03/2015 01:28 EST | Updated 11/03/2016 05:12 EDT

Spending Too Many Days In The U.S. May Complicate Your Taxes

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Huge group of Tax related terms gathering together on a white cube

With the government counting the days in either country, filing the right tax paperwork is important

Last week, Canadian government plans for keeping better track of people coming and going from the U.S. were revealed. The driving purpose for the increased scrutiny will save the government millions of dollars in social benefits on those who shouldn't receive them because they are out of the country.

Once the system is in place within the next five years, the savings will be in the millions. But it is just not the social benefits that will be saved. Now the Internal Revenue Service (IRS) and Canada Revenue Agency (CRA) will know exactly how many days you have been in each country. Too many days in the U.S. could make your tax situation much more complicated.

We are seeing the IRS employing a much higher level of scrutiny and now with the introduction of a system that tracks the number of days you cross the border, you need to understand how residency and U.S. taxes work. And it does not just depend on your current year but the last three years.

The Substantial Presence Test is the day counting test used by the IRS to determine if you are a resident for tax purposes and the magic number is 183 days. You add the number of days you were in the U.S. in 2015, one third of the days you were in the U.S. in 2014 and one sixth of the days in 2013. If these three numbers add to 183 or more in a calendar year, you cannot just file a Form 8840 Closer Connection and say you are a non-resident for tax purposes. You may still be able to file as a U.S. non-resident under the treaty but Form 8840 is not an option.

If you break 182 days, you will be required to file a Report of Foreign Bank and Financial Accounts (FBAR) even if you are a non-resident for tax purposes. FBAR reporting includes telling the U.S. Treasury Department about all your foreign accounts if the aggregate of the account highest balances totalled more than $10,000 USD during the year. This includes all open accounts, retirement accounts, prepaid credits, most online gaming accounts and prepaid funeral expenses so there is probably a good chance you reached the threshold.

Proving you are not a U.S. resident for tax purposes can be challenging and time consuming. The Foreign Account Tax Compliance Act (FATCA) means financial institutions need to share information with CRA to find U.S. citizens in Canada. If a bank has reason to believe that you might be a U.S. citizen, then you have to provide information that proves otherwise. The IRS can do the same.

There is a case in New York where a gentleman is being asked to prove he is a non-resident. It seems like a simple request except he was presented with a seven page list of requirements to prove he was actually a non-resident including his foreign tax returns, a multi-year list of all projects or jobs worked, bank statements, receipts, proof of travel expenses, proof of rent or mortgage paid, all savings and investments statements and a myriad of other very personal information to prove he is not a U.S. tax resident. And this does not appear to an isolated request. There have been recent cases of P1 visa holders being asked for a similar amount of documentation.

For snowbirds and Canadians working in the U.S., you want to make sure you take the time to keep good records in case you get asked to supply more information. Based on what we are seeing so far, we would expect the number of IRS audits to increase. It looks like the IRS is beginning to turn some of its attention to citizens of other countries with tax ties to the U.S.

If you are filing tax paperwork in the U.S., conversing with the IRS is not as straightforward as the CRA. Unlike Canada, the IRS requires tax preparers to have a both a Preparer Tax Identification Number (PTIN) and a designation and only U.S. enrolled tax agents (EAs), Certified Public Accountants (CPAs) or lawyers are allowed to represent you to the IRS. Be sure to choose a U.S. tax preparer who can not only complete your U.S. tax return, but represent and fight for you should the IRS decide to conduct an audit or question your taxes.

You can call the IRS to discuss your own accounts but the toll free numbers do not work from Canada and the hold time can be upwards of two hours. My advice would be to call very early or very late to minimize your hold time at 1-267-941-1000. This line is open Monday to Friday from 6 a.m. to 11 p.m. EST to accommodate taxpayers calling from overseas.

As a general guideline, you can usually spend about 120 days in the U.S. and file a Form 8840. If you are planning to spend longer then you should make sure you understand your obligations to the IRS before you cross the border. Though you might enjoy wintering in Florida, trying to figure out your taxes when the snow melts could be much more difficult.

This post has been updated to correct an error.


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