State Tax After Streamlined Filing: What the IRS Program Doesn't Cover, and the States That Notice

The streamlined program is an IRS program. It amends or files federal returns, waives federal penalties, and settles nothing with any state. A US citizen who lived in Canada throughout the covered years usually has no state obligation (no state residency, no state-source income). A Canadian who moved to the US and became a resident of California or New York, and whose federal returns omitted the RRSP, the TFSA, or Canadian investment income, has state returns that omitted the same items, and the state expects amended returns, the state tax, and, unless a state program applies, state penalties. The states learn of federal amendments: most require taxpayers to report federal changes within a fixed period, and the IRS shares amended-return data.

Key takeaways

• No state obligation for a taxpayer who was not a resident of any state and had no state-source income in the covered years: most US citizens living in Canada.
• State amended returns for a taxpayer who was a resident of a state with an income tax in any covered year: the same omitted income (Canadian interest, dividends, TFSA earnings, PFIC income, and in California the RRSP's annual growth) goes on the state amended return; state tax and interest are due; state penalties are governed by state law.
• The reporting obligation: most states require a taxpayer to file an amended state return within 90 to 180 days of a federal change (California 6 months; New York 90 days); failing to report the federal change extends the state's statute and adds a penalty.
• State voluntary disclosure programs exist in most states for taxpayers with unfiled state returns; they typically limit the lookback (three to four years), waive some penalties, and require an application before the state makes contact. California's program is administered by the Franchise Tax Board; New York's by the Department of Taxation and Finance.
• The RRSP in California: California does not follow the treaty; a California resident's RRSP growth is state-taxable each year; a streamlined filer who was a California resident amends the state returns to include it.
• Foreign tax credit: most states allow no credit for Canadian tax; the state tax on the Canadian income is not reduced by the Canadian tax paid, and a Canadian foreign tax credit for state tax is available only in Canada (irrelevant to a US resident).

Who has a state problem

A US citizen living in Canada during the covered years: no state residency; no state-source income unless they had US rental property or worked in a state. The streamlined submission is the end of it. A citizen who moved to Canada from a state during the covered years has a part-year state return for the move year that may need amending.

A Canadian who moved to a US state and became a state resident: state returns for the resident years reported what the federal returns reported; if the federal returns omitted foreign income, so did the state returns. Amended state returns are required. In no-income-tax states (Florida, Texas, Washington, Nevada, and others) there is nothing to amend.

A Canadian with US-source income taxed by a state (rental income in Arizona; wages in New York) who was not a state resident: the state non-resident return may need amending if the federal amendment changed the state-source items (rarely; foreign items are not state-source).

The state amended return

The streamlined federal amended returns (Form 1040-X) add the omitted foreign income and information returns. The state amended return (California Schedule X with Form 540; New York IT-201-X) adds the same income to state taxable income, computes the additional state tax and interest, and is filed within the state's window for reporting federal changes. State penalties (late payment, accuracy) may apply; the state has no streamlined program, and abatement is requested under the state's own reasonable-cause rules.

For a taxpayer who never filed state returns for the resident years (a non-filer in a state), the state's delinquent-filing rules apply, and a state voluntary disclosure program may limit the lookback and penalties.

California

California starts from federal AGI but does not follow the treaty for the RRSP: a California resident's RRSP earnings are included in California income annually. A Canadian who moved to California, filed federal returns without the RRSP deferral position (or with it), and files a streamlined submission adding the RRSP to the FBAR and Form 8938 has California returns that omitted the RRSP's annual growth. The amended California returns include it (with a basis computation so the growth taxed now is not taxed again on withdrawal). California also requires reporting federal changes within six months on Form 540X/Schedule X, and its statute on the year stays open if the change is not reported. California's voluntary disclosure program is aimed at non-filers with unfiled years.

New York

New York requires an amended return within 90 days of a federal change; the statute on the year is extended if it is not filed. New York's treatment of RRSP growth is unsettled; the amended returns should take a consistent, documented position. New York City residents amend the city return too.

The states that share

The IRS shares Form 1040-X data with state tax agencies under information-sharing agreements. A federal amended return that adds $20,000 of foreign income is visible to the state; a state that finds it before the taxpayer reports it assesses with penalties and an extended statute.

Worked example

A Toronto couple moved to San Diego four years ago and filed federal and California returns each year omitting their RRSPs ($600,000 combined), TFSAs ($110,000), and a Canadian brokerage account ($150,000, income unreported). They submit under SDOP (three amended federal returns, six FBARs, 5% penalty on the TFSAs and brokerage account).

• Federal. The 1040-Xs add the TFSA earnings, the brokerage income (with 8621s for any Canadian funds), the RRSP treaty position (Form 8833), Forms 3520/3520-A, Form 8938. Penalty: 5% of about $260,000, $13,000.
• California. Amended Form 540s for the three years within six months of the federal amendments: the same TFSA and brokerage income, plus the RRSPs' annual growth (California taxes it): about $30,000 a year of additional California income; California tax and interest; no California credit for any Canadian tax; California penalties requested to be abated on reasonable cause. Basis in the RRSPs for California purposes established for future withdrawals.
• Going forward. The TFSAs are closed and the brokerage account moved to a US broker with US-listed ETFs; the RRSPs are restructured toward growth holdings to reduce the annual California inclusion.

Official sources

The IRS states that eligible taxpayers must "have previously filed a U.S. tax return (if required) for each of the most recent 3 years" and pay a Title 26 miscellaneous offshore penalty equal to "5 percent of the highest aggregate balance/value of the taxpayer's foreign financial assets that are subject to the miscellaneous offshore penalty during the years in the covered tax return period and the covered FBAR period." — Internal Revenue Service, U.S. Taxpayers Residing in the United States, https://www.irs.gov/individuals/international-taxpayers/us-taxpayers-residing-in-the-united-states

Practitioner note

The streamlined program settles the IRS and leaves the state exactly where it was, and California is the state that notices, because the RRSP is taxable there and the federal amendment is shared. We file the state amended returns inside the state's reporting window as part of the same project, and for a Californian we build the RRSP basis schedule at the same time so the growth taxed in the amendment is not taxed again on withdrawal.

See also: If you are a US citizen or green card holder in Canada catching up, start with what you still owe the IRS, and browse every cross-border tax topic guide, organized by situation.

Next step

Fairlight prepares the state amended returns within the reporting window, the state penalty abatement request, and the RRSP basis schedule for California residents. See cross-border pricing or book a call.