Some things in life I just don't understand. Like hot water heaters, pairs of scissors, chicken fingers, pizza in a square box--and Canadian accountants dispensing US tax advice. I shudder to think of how many times Canadians have told me and my +KeatsConnelly colleagues that their accountants advised them, as green card holders, to file nonresident US tax returns because they are still filing Canadian resident (T1) tax returns in Canada.
NOTE: Uncle Sam does not care how green card holders file tax returns in Canada. US immigration and US tax rules require green card holders to file IRS Form 1040 resident tax returns annually. 2 + 2 = 4. Black and white. Period. No analysis required. What gets reported, what gets claimed (and how much tax to pay and to whom) is a different set of issues.
It is possible that green card holders could file nonresident returns for years and escape CIS or IRS scrutiny. However, such a green card holder is immediately under the US government microscope when he/she files a US naturalization application. Naturalization applicants must show that they have followed the rules generally. Filing nonresident tax returns is not following the rules. In fact, it may be a route to denial of the naturalization application and loss of the green card.
Awkward questions on the naturalization application
There are four questions on the naturalization application that may pose difficulty for a person who filed a 1040NR while a green card holder:
- Part 10A, Question 4: Have you ever failed to file a required Federal, State, or local tax return?
- Part 10C, Question 13: Have you ever called yourself a ''nonresident'' on a Federal, State, or local tax return?
- Part 10C, Question 14: Have you ever failed to file a Federal, State, or local tax return because you considered yourself to be a "nonresident"?
“Yes” answers must be explained on a separate sheet. Note that the time frame being examined in these questions is since becoming a green card holder--which could be decades, not merely the last five years as is sometimes cited.
Fortunately, a “yes” answer does not automatically trigger a denial of the naturalization application (or cancellation of the green card, followed by deportation from the US)—though both outcomes are theoretically possible.
USCIS naturalization examiners look at more than just the historical record of an applicant’s missteps. In the absence of clear evidence of tax evasion, CIS examiners will consider what the applicant has done to remedy the situation.
Correcting prior year tax returns is required
Keep in mind that we are looking at this from an immigration perspective, rather than a tax perspective. If this were a simple tax compliance exercise, a US citizen taxpayer living in Canada might amend US returns for the past three to six years to get into compliance. To get into immigration compliance for naturalization purposes, the green card should amend ALL nonresident returns filed since becoming a green card holder.
Correcting prior year tax returns is not enough
Amending old returns with no subsequent track record of filing correctly is asking for trouble. Don't do it. A track record of filing correctly and on time for several years before applying for naturalization is almost certainly required.
How lucky do you feel?
Some applicants may ask why admit to incorrect tax filings, especially if there were only one or two years of incorrect returns? There are two related reasons:
- CIS and IRS are sharing information. How deeply? How far back historically? We do not know. So the more important question for the applicant is “How lucky do you feel?” Assume that the left hand knows what the right hand is doing. Assume that CIS will check the applicant's tax history.
- While the incorrect tax filings are forgiveable, misrepresentation to CIS is not. CIS will almost certainly deny a naturalization application in which the applicant is caught in misrepresentation regarding tax filings. While the applicant might forfeit his/her green card as a result, it is more likely that the applicant will have to accrue a new five year period of "good moral character" before applying for naturalization a second time.
Before applying for citizenship, a green card holder who has not filed a US resident tax return each year should talk with a US accountant and a US immigration attorney about amending the 1040NR filings to 1040 filings and paying any tax due before applying for naturalization. Canadian foreign tax credits may be available to offset all or part of the US tax paid.
[Author's Note: See this blog post for interesting commentary by a Canadian cross-border tax advisor, a US immigration attorney, and me. The Canadian is adamant that I am wrong and cites regs and the treaty to prove his point. As the immigration attorney points out, he is wrong because he fails (as the IRS failed) to take a broader integrated approach that takes into account the impact of his advice on other areas of a client's life. Following the regs to the exclusion of other factors would get the client into serious trouble.]
http://xbplanning.blogspot.com/2013/06/about-that-nonresident-return.html