Snowbirds Should Beware of Penalty Risk for Not Filing Correct Forms with the IRS

MONDAY, NOVEMBER 14, 2022

If you spend more than four months a year in the U.S., it is very important to consider whether you should file forms with the US tax authorities. There is significant penalty risk associated with not filling out the correct form.

Below are the two  tests to determine whether or not you need to file and a description of the implications of not filing correctly.

 Do you spend more than 183 days a year in the US?

You are deemed a tax resident of both Canada and the US if you have your family, job and most of your possessions in Canada but spend more than 183 days in the US.  In this situation you must file a US income tax return and establish Canadian residency through the Canadian / US Tax Treaty tie-breaker rules. Under the Canadian / US tie-breaker rules, you will be a resident of the country based on the following list:

• Where you have a permanent home,

• Where you have closer personal and economic ties,

• Where you regularly live,

• Where you are a citizen,

• If none of the above, then the two countries will decide.

If under the Canadian / US tie-breaker rules, it is determined that you are a tax resident of Canada, you need to file a 1040NR tax return and Form 8833 to claim a treaty based position. You will only be taxed in the US on your US sourced income.

The filing deadline is June 15th of the following year. If you don’t file the Form 8833 then the IRS has the ability to assess a penalty for not filing equal to $1,000 per item of US source income! For example, if you receive a monthly US interest payment, since there are 12 payments in the year, your penalty is $12,000 USD. There are also potentially other large US penalties for missed filings.

Do you spend over 100 days a year in the US but less than 183 days?

If you do then you need to each year determine if you meet the substantial presence test which is :

• 183 days during a three year period using the following calculation

◦ All days in the current year, and

◦ 1/3 of days in the 1st preceding year, and

◦ 1/6 of days in the 2nd preceding year.

• For example – You spend around 4 months in the US – let’s assume 125 days each year. Under the substantial present test this would be 125 + 125/3 + 125/6 = 187.5 days. So you would be considered to be a US resident under this test.

If you fall below the substantial presence test then no further work is required.  You can move forward until the following year when you apply the test again.  If you exceed the 183-day test then you should claim the Closer Connection Exception by filing Form 8840. By completing this form, you are establishing that you had a tax home in another country, and that you had a closer connection with that country than to the US. Note that no US tax number is required.

The deadline is June 15th of the following year. There is no penalty for not filing, but if you do not file, you cannot claim the closer connection exemption.   

In this unfortunate situation where a taxpayer meets the 183 3-year test but doesn’t complete the Form 8840 they would need to prove to the IRS that they are a tax resident of Canada under the Treaty. This means they are in the same position as the individual spending more than 183 days in the US:  they need to file a tax return and  Form 8833 to take a position under the Canadian/US treaty.  Obviously, this form will end up being late filed and the penalties relating to Form 8833 will kick in resulting in a very nasty penalty.

The bottom line is clear:  if you meet the substantial presence test described above make sure you fill out the 8840 Form otherwise you could face substantial penalties. See below for 8840 Form and link to I-94 admission records for US travel history.

8840 Form - https://www.irs.gov/pub/irs-pdf/f8840.pdf 
US records for travel history: https://i94.cbp.dhs.gov/I94/#/home

If you have any questions please reach out to us.