HELP! The IRS Is After ME!

Those of you that have been following our blog for awhile know that I live in Canada.  In fact I have lived in Canada my entire life (save for the first two days of it) and have never earned a penny of income outside of the Great White North.  So how then is the IRS claiming that I owe them a bunch of money in penalties and taxes?  This new focus of the massive government enforcement entity does not just apply to me, but also to my significant other, my immediate and extended family, and many of my friends.  The reasoning comes from a part of American tax law that I was never aware of even though I lived about 2 miles from the Canada-America border my entire life, and even worked for extended periods of time as a Border Services Officer!  The crux of the relevant tax law is that the USA assesses its taxes on the basis of citizenship as opposed to residency (unlike nearly every other country in the world including Canada).  Due to a geographical SNAFU most people from my small hometown were born in the hospital across the border in the USA simply because it was the closest hospital, and at the time we were born our mothers weren’t concerned about future tax implications!  The end result of this weird little circumstance is that I am an American citizen in the eyes of the USA government.  Some people would call me a “dual citizen” since my status in Canada is, “A Canadian Citizen Born Abroad,” and my status in the USA is, “American Citizen Living Abroad.”  My whole life I thought this made me cool and unique… until I found out it also made me a tax cheat.

Just Call Me Al Capone…

You see, the American government is broke (or at least close to it).  It badly needs to collect all the taxes that are owed to it.  Several very wealthy American citizens have found all kinds of tax loopholes where they buy a house in some small country like the Bahamas that has 0% income tax, and claim residency there in order to try and hide from the IRS.  In order to counter this manoeuvre I have recently found out that the government has a long-standing policy of taxing their citizens’ income wherever they live in the world (after all, it is extremely difficult to prove residency requlations).  In the past this law was never really mentioned, but now there is a concerted effort to crack down on offenders.  In the process of trying to catch these big fish, the IRS is scooping up a whole lot of little fish like me!  In theory I owe income tax to two governments due to my status in each country!

So We Owe Thousands Of Dollars, But No Taxes?

The good news is that thanks to a couple of different tax treaties between the USA and Canada, any income I have paid tax on in Canada is exempt in the USA.  Since I’m fairly certain that our “socialist-utopia” of maple syrup and Tim Hortons will always have higher taxes than our free market brethren to the south, this means that I never really owed any taxes to the IRS in the first place (there is also another exemption on the first 92K of income, but it is a little irrelevant to most Canadians because of the law above).  The real kick to the nether regions comes into play when you read the fine print of IRS non-compliance laws.  You see even though the vast majority of American Citizens in Canada are very similar to me, and wouldn’t actually owe any taxes (Canada isn’t much of a tax-haven, unless you’re from a Scandinavian commune I guess), the IRS has labelled us as hardcore tax criminals even though only an extremely small percentage of us even knew these laws existed!  The insane penalties allow the IRS to take 25% of any account over $10,000 that someone in my situation has built up while in Canada.  This includes retirement accounts (our RRSPs are similar to the American 401Ks).

The good news for me is that since I only recently graduated, I have never had an account over $10K (hopefully this will change soon!); consequently, I think that when I file my American taxes next year, I can come clean on all the taxes I didn’t actually owe for the last five years, and I will not be penalized for filling out a mound of useless paperwork (except for the massive amount of my life and will to live that will be siphoned away by these regulations).  The really, really bad news is that a lot of my family and friends who are older and have built up pension account could be on the hook for huge penalties, that would have accumulated on taxes that they never owed in the first place!  Essentially, 25% of their life savings is the penalty for not doing super secret paperwork.

War of 1812 Re-Enactment Anyone?

These penalties are not exactly encouraging people to come clean.  The bad news for those Canucks hoping to hide behind the 49th parallel is that as of 2014 the IRS can look at our banking records to see which of us they can put a bull’s-eye on.  The Canada Revenue Agency has already stated that it will not help enforce American tax law, so I guess if you never wish to travel to the USA again in your life it won’t really matter much to you.  On the other hand, for people like my family who have numerous friends and relatives in the USA (not to mention all the trips we make south to beef up the local North Dakota economy – it’s no coincidence that they were one of six states to post a surplus last year… ok maybe that oil stuff helped a little), simply becoming an IRS most-wanted is not much of an option.

Where I Was Born Does Not Define Me… Or Maybe It Does

I looked into what it would take to renounce my American Citizenship.  I agree that if I’m not paying American taxes I should not be allowed to vote for President (in fact this is the very reason I never exercised the right).  You would not believe the hassle that is involved with simply saying, “Ok guys, although I’m American by a technicality, I no longer wish to hold that title, or the privileges that it confers.”  It costs nearly $500 just to apply, and then I have to present myself in person at the nearest consulate which is 1000km away!  Not to mention the hours of paperwork involved.  To add insult to injury, the IRS has to completely agree that you are all caught up with their paperwork before they allow your application to proceed, and even after you are no longer an American Citizen you are supposed to report to them for the next 10 years anyway!  The final coup-de-gras is that I have heard and read several accounts that claim an almost constant harassment at the border if it pops up that you renounced your American Citizenship… great… “Land of the free… Really?”

Ah, So Amnesty Means Taking Only Some of My Money For Nothing

I think the USA will have to start a period of amnesty (they claim one just passed that only taxed your life savings at 5%… whew there’s leniency) and declare any penalties null if there were no original taxes due to begin with.  It’s ridiculous that the IRS can pluck hundreds of thousands of dollars out of retirement accounts ONLY because paperwork was not filled out for the last 40 years or more.  I actually believe that the result in the interim will be many Canadians who are afraid to travel and spend money in the USA thanks to their newfound fear that they will be labelled as serious criminals.  Anyone want to bet that this development, plus the addition of more IRS collectors will offset any money collected by the increased enforcement?  This is the sort of stuff that pushes me further and further Libertarian/Conservative everyday.  Anyone else out there dealing with this situation, or have any stories that will hopefully shed some light on just how the IRS intends to deal with the 700,000ish people just like me up here?  I say we let some head IRA boys come live for a winter in Winnipeg and take a look at our income taxes.  Once they realize that no one in their right mind would live here simply as a tax shelter maybe they’d go easy on us!

About Teacher Man

TM is a self-professed nerd about all things related to personal finance. He can be found writing for My University Money, Young and Thrifty, and Canadian Personal Finance Blog. TM blogs in order to continue his quest for lifelong learning and hopefully to help others along the way.

23 Responses to HELP! The IRS Is After ME!

  1. Fascinating predicament. Who would have guessed? Sorry the IRS is after you. It is bad enough down here for us regular citizens. Doesn’t government just drive you nuts!

  2. 101 Centavos says:

    Err, we’re not that free-market in the US.

  3. Little House says:

    Wow! That really stinks. I guess the USA is so broke, they’re starting to look at our bordering countries for people who may owe taxes. Hopefully you’ll get your tax stuff sorted out and won’t have to denounce your dual citizenship.

  4. Holy crap! That sucks. Maybe it’s time to move some money to the Bahamas?

  5. Mike Holman says:

    This is completely crazy. The 25% penalty is just ridiculous. But you know that already!

    I’m glad to hear that it might not affect you financially, but anyone a bit older will pay the price one way or the other.

    • Teacher Man says:

      Well I think if it comes to it, my dad will just decide to never go into the USA again. I mean, it will suck, but it’s not worth 75-100K (not sure how much he and my mom have saved in RRSPs, but it’s gotta be up there). How about the leniency at only 5% of your life savings during the grace period? Like my dad says, flights to Cuba and Mexico are cheap (in terms of alternate vacation destinations). With online shopping becoming easier, there is not really a true physical need to go into the States. How many people are there like my parents that will cancel trips south because of this craziness?

  6. stu says:

    Your parents best be aware that a direct Cuba/Mex flight could divert to a US airport for various reasons and then they could be caught. The US has to be the most screwed up/politically corrupt country on the planet. Dr Foth always called them the Excited States of America. Still an accurate description today.

    • Teacher Man says:

      That’s true, I never thought of this! It would be interesting, likely I guess they would be let go with a promise to appear in court, or served notice that they had committed a crime, and then they would just return to Canada and no fly anywhere near our big brother to the south ever again! How unfortunate the whole matter is…

  7. Petros says:

    I have renounced my U.S. Citizenship. I have a list of resources and numerous posts on the subject of renunciation. Thanks for this post. The more people who know about this subject the better.

  8. Petros says:

    Hi Teacherman: I just wanted to call to your attention that we’ve started a new blog called the Isaac Brock Society (http://isaacbrocksociety.com ), to deal with this issue of the US taxation of US persons abroad, FBAR, and FATCA. Please join us. Peter W. Dunn

  9. Arch says:

    To Americans living in Canada. You may want to tell the IRS to shove it as you have no desire to enter the USA but if you are flying over the US to Europe or the Caribbean you may have to change planes at an American airport. Guess who will be waiting for you as Canada must list all passengers flying over American territory.

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