Long arm of American tax law

Hey there, time traveller!
This article was published 1/9/2011 (3541 days ago), so information in it may no longer be current.

Opinion

It's been an interesting week. Last Friday, we reminded you that U.S. citizens living in Canada are required to file U.S. tax returns and reports on their "foreign" (Canadian) bank and investment accounts.

Although these requirements have been in place for decades, recent publicity and an IRS voluntary disclosure program deadline seemed to suddenly make thousands of people aware of this. We received more emails and phone calls from that article than any in the last 16 years of publishing this column.

Thanks to hurricane Irene, the IRS extended that deadline (which might not be relevant for most Canadian-resident U.S. citizens anyway), but more about that later.

Most interesting for me this week has been seeing people's perceptions and their "financial personalities" at work. For many people, this tax filing revelation represented a potential crisis, and it was fascinating to observe the incredible range of reactions.

Denial was rampant, and the most common reaction I've seen over the years, when telling U.S. citizens in Canada that they have to file U.S. returns. They deny that this law exists, question the logic or constitutionality of it, and say it can't apply to them.

Many people try to find ways to deny they are U.S. citizens. "But I left there 30 years ago"; "My parents moved to Canada when I was three years old"; "When I became a Canadian citizen, I must have stopped being a U.S. citizen... " These are all common themes, but not accurate arguments. Virtually all people in these situations remain U.S. citizens, and have the tax return and FBAR (Foreign Bank and financial Accounts Reporting) requirements.

There were a few examples of anger and defiance, as in, "this law is BS; I'm not filing and they'll never find me." These were all variations of the Edward G. Robinson movie quote, "Come and get me, copper!", shortly before he was gunned down.

The fact is that the computer systems of the U.S. Border Service and the IRS are getting better at talking to each other, and in 2012 FATCA (the Foreign Account Tax Compliance Act) has all Canadian banks and financial institutions reporting to the IRS on the existence of any accounts held by U.S. persons at their Canadian institutions.

Hiding is going to be more difficult.

At the other extreme, there were many people who showed that they are borderline pathological rule followers and prone to panic when faced with stress. For example, people called me because, even though they had been filing their tax returns and foreign financial account reports each year, they had been late this year. In their minds, this meant they were in violation and therefore had to confess to the IRS through the voluntary disclosure program and pay the 25 per cent of maximum account balance penalty built into that program. (These penalties may be reduced to 12.5 per cent or five per cent.)

This is like throwing yourself on your sword because you have somehow dishonoured your family, even though your family has no idea what you're talking about.

In other words, if you've been trying on a best-efforts basis to fulfil your filing requirements and have come close, don't panic. Above all, don't participate in a voluntary disclosure program that is designed to allow purposeful tax evaders -- Americans who have hidden money in foreign bank and investment accounts to evade taxes -- to avoid criminal prosecution by paying voluntary fines and penalties. You're not in that category.

Very disturbing to me this week was to hear so many U.S. citizens living in Canada tell me that tax advisers and accountants have wrongly told them that they have no filing requirement in the United States. A lesson to all of us who provided advice: Don't give advice in an area where you are clearly ignorant.

Thanks to hurricane Irene, the IRS 2011 Offshore Voluntary Disclosure Initiative filing deadline was extended to Sept. 9. I am posting the addresses and rules for extension application on my blog, at www.davidchristianson.com.

You and your well-informed U.S. tax adviser will have to decide if it's best for you to throw yourself on your sword through this program, or simply file three to five years of missing tax returns and FBAR reports, with a cover letter explaining that you were unaware of the filing requirements and want to comply.

Do one or the other; don't continue to deny and try to hide.

As a bonus, try to objectively evaluate your reaction to all of this and what it reveals about your money personality. That self-awareness should help you make more effective decisions.

 

David Christianson is a fee-for-service financial planner with Wellington West Total Wealth Management Inc., a portfolio manager (restricted).

dchristianson@wellwest.ca