U.S. expats in Canada cower as American tax collectors chase evaders with foreign assets

Americans living in Canada have been in a tizzy lately, worried the taxman back home is coming after them for money they never knew they owed. But U.S. Ambassador David Jacobson is telling them to rest easy.

"My message on this one is to sit tight," he told the Canadian Club in Ottawa this week. "We are not unreasonable. We are not unsympathetic. We are not irresponsible."

Canada has, by some estimates, upwards of 700,000 American expatriates. A lot recently discovered they were supposed to be filing tax returns to the U.S. Internal Revenue Service regardless of whether or not they pay Canadian income taxes.

The Canadian Press reports the United States is one of only a handful of countries requiring its citizens to report their income no matter where they live or work.

"There are two particular problems with the operation of these rules here in Canada," said Jacobson.

"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."

With the U.S. government strapped for cash, the IRS has been pressing to recover billions of dollars from international tax evaders. Last month it reported collecting $2.2 billion from its 2009 voluntary disclosure program. Another $500 million in payments have come from this year's program, it said.

A series of international tax agreements have made it easier for tax collectors to get access to foreign bank-account information. A number of people have been prosecuted and received prison terms and hefty fines, the IRS said.

But the program also snares unwitting expats, said Jacobson, such as a 70-year-old grandmother who left the U.S. as a child, never earned money there and paid all her taxes in Canada.

"She didn't file a U.S. return because she didn't think she had to and because she didn't owe any U.S. taxes.," he said. "Nonetheless, grandma could be theoretically subject to serious penalties. To my knowledge we have never gone after a grandma in those circumstances."

A Sept. 9 deadline for American expats to file tax returns for the last seven years in return for decreased penalties passed with little clarity on who needed to file what. The obligation reportedly applies even to Canadian-born children of American parents.

Tax accountant Warren Dueck of the Vancouver suburb of Richmond says he and colleagues have been swamped with requests for help avoid potentially ruinous financial penalties for failing to disclose things like Canadian bank accounts or retirement funds.

Renouncing American citizenship apparently doesn't solve the problem. The U.S. government won't recognize the renunciation until back taxes are paid.

Finance Minister Jim Flaherty has weighed in, saying most American-Canadians dutifully pay their taxes in Canada and are guilty only of overlooking their obligation to file IRS paperwork.

"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.

Jacobson said expats in Canada are not the main target of the tax-recovery program. It's those who've squirreled their money away in tax havens such as the Cayman Islands.

"Given our budgetary problems, the United States wants to make sure we are paid all the taxes we are owed," the ambassador said. "American citizens shouldn't be able to avoid their tax obligations by establishing a residence in a tax haven."