IRS and CRA Penalties for Late Filing: Cross-Border Guide

Cross-border filers face penalties from both the IRS and the CRA, and the penalties for information returns (FBAR, Form 5471, Form 3520, T1135, T1134) are disproportionately larger than the penalties for late tax returns. A late-filed T1 or 1040 generates interest and a percentage-based penalty on the tax owed. A late-filed Form 5471 generates a flat $10,000 penalty per form per year, regardless of whether any tax is owed. The penalty landscape for cross-border filers is larger, more complex, and less forgiving than for domestic filers, because the number of forms is larger and the information return penalties do not scale to the tax liability.

What are the IRS information return penalties?

Form	What it reports	Penalty	Statute
FBAR (FinCEN 114)	Foreign financial accounts over $10,000 aggregate	$10,000 per account per year (non-willful); greater of $100,000 or 50% of account balance per account per year (willful)	31 USC 5321(a)(5)
Form 5471	US shareholders of controlled foreign corporations	$10,000 per form per year; additional $10,000 per month after 90-day notice, up to $50,000	IRC 6038(b)
Form 3520	Transactions with foreign trusts, receipt of foreign gifts over $100,000	35% of gross value of trust distribution; 5% per month (up to 25%) for late Form 3520-A	IRC 6677
Form 8938	Foreign financial assets over threshold	$10,000 for failure to file; additional $10,000 per 30-day period after notice, up to $50,000	IRC 6038D(d)
Form 8865	US persons with interests in foreign partnerships	$10,000 per form per year; additional $10,000 per month after notice, up to $50,000	IRC 6038(b)
Form 5472	Foreign-owned US corporations (including disregarded entities)	$25,000 per form per year	IRC 6038A(d)

The Form 5471 penalty is the one that causes the most damage in practice. A US citizen who owns a Canadian corporation and misses three years of Form 5471 filings faces $30,000 in automatic penalties, even if the corporation had no US tax liability.

What are the IRS penalties for late tax returns?

Penalty	Rate	Maximum	Statute
Failure to file (FTF)	5% of unpaid tax per month	25% of unpaid tax	IRC 6651(a)(1)
Failure to pay (FTP)	0.5% of unpaid tax per month	25% of unpaid tax	IRC 6651(a)(2)
Combined FTF + FTP	FTF reduced by FTP when both apply (net 4.5% + 0.5% = 5% per month)	47.5% of unpaid tax (25% FTF + 22.5% FTP after 5 months)
Accuracy-related	20% of underpayment	No cap	IRC 6662
Fraud	75% of underpayment	No cap	IRC 6663

For cross-border filers who owe no US tax (because the FTC eliminates the US liability), the FTF and FTP penalties are zero (they are calculated on unpaid tax). The information return penalties apply regardless.

What are the CRA penalties?

Form	What it reports	Penalty	Statute
T1 (late filing)	Personal income tax return	5% of balance owing plus 1% per month late, up to 12 months; doubled for repeat offenders	ITA 162(1)
T1135	Foreign property over $100,000 CAD	$25 per day, up to $2,500; $100 per day up to $12,000 for knowing failure (and up to $24,000 for repeat); gross negligence penalty up to $24,000	ITA 162(7), 162(10)
T1134	Foreign affiliates	$25 per day, up to $2,500; same escalation for knowing failure	ITA 162(7)
T1013 (discontinued) / AUT-01	CRA authorization	No penalty for late filing, but delays processing
NR4	Payments to non-residents	$25 per day, up to $2,500	ITA 162(7.01)

The CRA’s penalty structure is generally less severe than the IRS’s for information returns, but the T1135 knowing-failure penalty ($100/day, up to $12,000) is still significant for multi-year non-compliance.

How do the streamlined procedures work?

The IRS offers several programs for cross-border filers who are behind:

Streamlined Filing Compliance Procedures. For taxpayers who can certify that their failure to file was non-willful (due to negligence, inadvertence, or mistake, not willful blindness or intentional). Two tracks:

• Streamlined Domestic Offshore Procedures (SDOP). For US residents. Requires filing 3 years of amended returns and 6 years of FBARs. A 5% miscellaneous offshore penalty applies to the highest aggregate balance of foreign financial assets.
• Streamlined Foreign Offshore Procedures (SFOP). For non-residents (a US citizen living in Canada qualifies if they meet the non-residency requirement). Requires 3 years of returns and 6 years of FBARs. No penalty. This is the most favorable program for US citizens in Canada who have never filed.

Delinquent FBAR Filing Procedures. For taxpayers who missed FBARs but have no unreported income. File the late FBARs with an explanation. No penalty if the IRS has not already contacted you.

Delinquent International Information Return Filing Procedures. For taxpayers who missed Forms 5471, 3520, 8938, etc., but have no unreported income. File the late forms with a reasonable cause statement. The IRS may waive penalties if reasonable cause is established.

Reasonable cause. For any IRS penalty, reasonable cause is a defense. The standard is whether the taxpayer exercised ordinary business care and prudence but was unable to comply. For cross-border filers, common reasonable cause arguments include reliance on a tax professional who did not advise of the filing obligation, lack of knowledge of US filing obligations (for a US citizen who grew up in Canada), and complexity of the cross-border rules. Reasonable cause must be documented in a written statement attached to the late filing.

How does the CRA Voluntary Disclosures Program work?

The CRA VDP allows taxpayers to come forward with unreported income or unfiled information returns without prosecution and with potential relief from penalties and partial interest relief.

Two tracks:

• General Program. For non-willful failures. Penalties are waived. Partial interest relief (interest is waived for years outside a 3-year window). The taxpayer must pay the tax owing.
• Limited Program. For willful failures or situations involving significant non-compliance. Penalties may be reduced (not eliminated). No interest relief. The taxpayer must pay the tax owing.

To qualify for the VDP, the disclosure must be: voluntary (not prompted by a CRA audit or investigation), complete (all unreported income and all unfiled returns), involve a penalty, and include payment of estimated tax owing (or a payment arrangement).

What is the order of operations for catching up?

For a cross-border filer who is behind on filings in both countries:

1. Do not file anything until you understand which program applies. Filing a late return without the right program can foreclose better options (filing under streamlined after filing a regular amended return creates complications).
2. Assess willfulness. If the failure was non-willful, the streamlined procedures (SFOP for non-residents, SDOP for residents) are usually the best option.
3. Calculate the exposure. Run the penalty numbers for each option before choosing a path.
4. File both countries together. The FTC on the US return depends on the Canadian tax, and vice versa. Filing one country without the other can produce incorrect credit calculations.
5. Keep the reasonable cause statement factual. The IRS and CRA both look for specific facts, not generic statements. “I did not know I had to file” is a fact. “I relied on my Canadian accountant who did not mention the US obligation” is a fact with supporting documentation.

What should I do next?

If you are behind on cross-border filings, the first step is an inventory: which forms are missing, for which years, and what is the potential penalty exposure. The second step is choosing the right compliance path (streamlined, delinquent, VDP, or regular filing with reasonable cause). The third step is preparing everything together, both countries, all years, before filing anything.

• FBAR penalties decision tree, choosing the right FBAR compliance path
• Late FBAR: delinquent or streamlined?, the two main options
• Streamlined filing audit risk, what happens after you file under streamlined
• IRS penalty abatement letter, the reasonable cause letter format
• Form 5471 and 5472 penalty abatement, the specific abatement procedures for information returns
• What does streamlined actually cost?, the professional fees for a multi-year catch-up

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.