Americans in Canada Asked Not to Fear the IRS and To Pay Their Taxes

FATCA, the Foreign Account Tax Compliance Act has been recently enacted by the Obama Administration, requiring U.S. citizens living abroad to file U.S. tax returns and detailed annual foreign account disclosure statements going back to 2003.

FATCA, the Foreign Account Tax Compliance Act has been recently enacted by the Obama Administration, requiring U.S. citizens living abroad to file U.S. tax returns and detailed annual foreign account disclosure statements going back to 2003.

However, most Americans living in Canada are unaware of this act that affects Americans with dual citizenship. While they have diligently paid their taxes in Canada, the IRS is pursuing them for disclosure of accounts and annual tax returns, subject to fines of up to $10,000 per year. It should be noted that none of this income is necessarily earned in the United States.

But the U.S. has made assurances that it will not be unreasonable in applying a rule requiring U.S. citizens living abroad to file tax returns every year.

“My message on this one is to sit tight. We are not unreasonable. We are not unsympathetic. We are not irresponsible,” said U.S. ambassador to Canada David Jacobson during a speech to the Canadian Club in Ottawa.

The U.S. is one of only a handful of countries that requires citizens to file their worldwide income in the United States regardless of where they live or where they earn their livings.

“There are two particular problems with the operation of these rules here in Canada,” Jacobson said. “First, there are so many dual citizens, typically by birth, probably more than a million. So this issue is much more common here than in any other country in the world. Second, the penalties — at least in a theoretical sense — can be quite severe.”

Most dual and U.S. citizens do not end up having to pay any tax, as the U.S. grants credits for taxes paid in a foreign country, and rates in Canada are typically higher than those in the United States.

However, U.S. citizens still have to file a return even if they don’t owe tax.

Finance Minister Jim Flaherty said the majority of Canadians affected by the rule have dutifully paid their Canadian taxes and their only transgression has been in failing to file IRS paperwork they were unaware they were required to file.

“Canada is not a tax haven,” Flaherty said. “People do not flock to Canada to avoid paying taxes.” Dual citizens, he added, “are not high rollers with offshore bank accounts. These are people who have made innocent errors of omission that deserve to be looked upon with leniency.”

“We called on the U.S. government to look upon these individuals with leniency, and we are encouraged they appear to be moving in that direction,” Flaherty said.

U.S. President Barack Obama has made it clear combating tax evasion is one of his priorities as the indebted country seeks ways to shore up revenue.