September 24, 2011. U.S. campaign to catch tax cheats snaring Canadians (Financial Post). As U.S. tax authorities move to crack down on citizens living abroad, many living in Canada have been caught up in fear of massive penalties.
The campaign to catch tax cheats may have been aimed at big players hiding money in offshore bank accounts and those evading U.S. taxes, but it’s snaring Canadians with distant connections to the United States, many of whom likely owe no tax in that country.
Esther Thompson, 70, and her sister Betty, 69, both married to retired farmers living near Prince Albert, Sask., are among those who have come unhappily forward to the U.S. Internal Revenue Service under a voluntary disclosure program.
Esther first heard about the IRS campaign when she read a media report in August. She told her sister and the two, who were born in Minnesota but are long-time Canadian citizens, consulted with an international accountant and decided to “come clean” even though neither owes taxes in the United States.
The sisters have struggled with anxiety over the situation — Betty says she lost five pounds since hearing of the policy — and worry that they will owe tens of thousands of dollars in penalties for failing to disclose their bank accounts sooner.
“When you’re our age and you’ve saved money for your old age and you wanted to be self-supporting, it’s a lot of money. To us it is, maybe to them it’s not, but we think it is. And it’s our money,” Esther says.
Unlike Canada, the United States requires its citizens, not just residents, to file tax returns and report their worldwide income.
Under the Offshore Voluntary Disclosure Initiative (OVDI), U.S. citizens living abroad could file various outstanding returns from 2003 to 2010 as well as disclose any foreign (“non-U.S.”) accounts with more than $10,000. The OVDI, which closed Sept. 9, allowed taxpayers to get up to date with their filing obligations and provided for reduced penalties for not filing a Report of Foreign Bank and Financial Accounts (FBAR).
However, even under the OVDI the FBAR penalties are still harsh, ranging from 5% (for those unaware of the obligation) to 25% (for wilful violators) of the highest balance of foreign financial accounts held between 2003 and 2010.
The IRS says it received 12,000 new applications through the 2011 offshore program and collected US$500-million in taxes and interest as down payments. Through this year’s initiative and a similar 2009 program, it has collected a total of US$2.2-billion. (Julianne Breitbeil, a spokeswoman for the IRS, said country-specific figures are not available.)
Both Thompson sisters share joint accounts with their husbands and worry that penalties will be assessed on the days in which the accounts held significant sums after a big grain sale, for example, despite the fact that they were quickly drained to pay bills.
Cleo Hamel, senior tax analyst with H&R Block Canada in Calgary, Alta., says the tax service company’s offices across the country have been fielding questions from people confused about where they stand, especially those who left the United States when they were children and those with children born in Canada who may be considered American.
“I can’t say that I’ve seen anything like this that’s caused this much concern,” she says, “Even in Canadian tax.”
H&R Block has issued a fact sheet on “lost Americans” and its U.S. tax specialists are working more now than during the regular tax filing season, she says.
“I don’t think the average person should worry, but it’s really important that they take a moment, ask some questions and speak to someone, because people are so panicked and I think we all in general tend to make rash decisions,” Ms. Hamel says.
“We’ve been telling people, ‘Come on in, let’s sit down, take a look at what’s going on and let’s make a decision based on the facts,’” she adds.
Many people are struggling to understand whether the requirements apply to them, how many years of past returns and FBAR forms they should be filing, and whether they can do some or all of the work themselves.
Ms. Hamel notes that Canada has a tax treaty with the United States to avoid double taxation and with foreign tax credits, most of those who file returns will not end up owing tax money.
But they’re still spending thousands on accounting and legal fees. The Thompsons have racked up $6,000 each so far. Other estimates have put the total cost of compliance at $10,000 to $15,000.
What’s more, the U.S. Foreign Account Tax Compliance Act (FATCA) will require Canadian financial institutions to disclose information about U.S. citizens who hold Canadian financial accounts or risk withholding taxes of 30% on all payments out of the United States. The FATCA requirements will kick in in 2014 and mean that many more Canadians will be identified to the U.S. authorities and could face harsh penalties on money they may no longer even have.
On Sept. 16, Jim Flaherty, Canada’s Finance Minister, expressed his concern in a letter for publication in major U.S. newspapers including The Washington Post, New York Times and The Wall Street Journal.
Accusing the United States of scaring “honest and law-abiding” people including many senior citizens, Mr. Flaherty said the crackdown, “would turn Canadian banks into extensions of the IRS and would raise significant privacy concerns for Canadians.”
The “threat of prohibitive fines for simply failing to file a return they were unaware they had to file is a frightening prospect that is causing unnecessary stress and fear,” he said. “These are not high rollers with offshore bank accounts.”
Mr. Flaherty’s letter referenced long-standing co-operation and friendship between the two countries and said Canada supports efforts to rein in “legitimate tax evasion,” but noted the measures the United States is taking “do not achieve that goal.”
The Thompsons have written to their Member of Parliament.
Maurice Williams, a resident of Kelowna, B.C. who has not lived in the United States since 1973 has taken it a few steps further, writing to Barack Obama himself.
In a Sept. 6 letter, Mr. Williams told the president of the United States he is his only elected representative in the country and asked him to waive the penalties and remedy the situation for children of American citizens.
Mr. Williams says he will spend thousands consulting and paying an accountant and estimates he will owe $35,000 in FBAR penalties even if he is assessed at the lower 5% rate.
“I think the nightmare which we are going through is unacceptable,” he says in an email, noting his particular concern for children who may not even know they are American. “This is where the Canadian government must step in and tell the U.S. to back off. These people are our citizens, not the United States.’”
Philippe Brideau, a spokesman for the Canada Revenue Agency, says the CRA would not collect penalties levied on Canadians under FBAR as they would not be covered by a treaty on reciprocal tax collection between Canada and the United States.
Yet, there are many Canadians with connections to the United States. Some estimates say there are 1 million living in the country. More than 316,000 people listed American as their “ethnic origin” in the 2006 census.
If the United States gets the names of Americans with Canadian accounts from the financial institutions under FATCA, there is a fear the IRS will come after them directly.
“For anyone who is knowingly not filing and they should be, they’ll probably get caught up once that requirement comes into play,” says H&R Block’s Ms. Hamel.
For now though, those like Esther and Betty Thompson, who have come forward to the U.S. government are waiting to see what happens.
“I’ve kind of gotten over the fear factor and can function a bit,” Betty says. “Now I just feel like it’s in God’s hands.”
