For those of you thinking about filing US income taxes for the first time, I suggest you read the following letter that I received from the IRS in the mail today. I sent my zero return for 2009 last week with a letter explaining why it was late (evidently it did not arrive on time to prevent this mail out). I am on the IRS radar, because I was compliant for about the previous ten years. Moreover, they are apparently aware of certain securities I traded in the US. But I didn’t owe anything on my income tax return. So this is the trouble that they will go to harass Canadian residents who are late filing.
CanuckDoc, Thank for posting the TSA link concerning audits by mail. This is exactly what I went through about 3 years ago when I got a letter advising my charitable contributions were being audited and to either send a check for so much (several thousand dollars) or copies of both sides of checks and receipts for everything by a certain date. So I laboriously made copies of everything and mailed it so it arrived several days before the IRS deadline. Then months went by during which I keep getting nasty letters, finally including one which stated that my docuentation had been received and would be reviewed by a specific date. That date came and went with no such review having taken place, meanwhile the nasty letters kept coming, along with threats to sieze my bank account. That was when, in deseration I contacted TAS which requested I send them copies of EVERYTHING I had sent ro and received from the IRS. That I did and after a couple more weeks TAS was successful in straigtening it out. It was living hell for about 7 months before my tax return was accepted almost filed. They argued that one item was disallowed although it was totally allowable according to the published IRS instructions, but rather than argue I sent them a check for the $6 the IRS insisted I still owed, just to get them off my back. I had asked the TAS to get me an explanation, but decided it was just not worth any more of the prolonged agony, so sent the check to close it out.
And mine was an easy case. I live in the US, all my contirbutions were to charities organized in the US and I had documentation for everything I had claimed. I can’t imagine what it is like if you live in Zimbabwe on Easter Island or even Prince Edward Island and get an audit notice like this.
@ Roger That is a very interesting and a very sad story. The level of documentation is absurd–both the receipt from the charitable organization and both sides of the cheque? Incredible.
Well here you touch on a subject that makes me extremely angry. Canadian charities, of course, don’t count towards any kind claim in US tax. So what if I give money to my church (my church, believe it or not, is actually in Canada, not the US). My charitable deduction on my US taxes would be zero. Why? Because Canadian churches are obviously not eligible–but why? This is just one more reason that the United States extra-territorial tax is unconstitutional. You, my friend, get a deduction for charitable gifts to your local charities. I do not. I am not receiving Equal Protection.
But if you are a very generous person, your Canadian taxes are reduced and this could leave you exposed to US taxes because the deduction is not eligible in the US. Thus, what you save in Canada you’d have to pay in the United States. This means that you cannot be an American in Canada and a philanthropist. The two are incompatible because Canada and US have incompatible tax regimes. The United States is so greedy that they would stop Americans abroad from giving to charities in other countries. This is atrocious.
I just noticed that I may be wrong about the above, at least with regard to Canada:
@Petros, This is exactly correct. US tax laws disallow charitable contributions to non-US organized charities among many other things. What Canada urges you to do and provides tax incentives for doing thus saving you dollars on your Canadian taxes results in your having to pay the US exactly the same number of tax dollars you have saved, and vice versa. This makes it impossible to take advantage of tax incentives in either country. It is nothing short of brutality. What you do to legally reduce your foreign tax obligation only serves to increase the gap between your foreign tax credits and your US tax obligation so you are required to pay the IRS for having taken advantage of the foreign tax incentive. Another example is personal property taxes. They are deductible in the US but they are not deductible if paid to a foreign government. The inescapable conclusion is the primary pupose of the US taxation of its citizens living in a different country is “fiscal punishment” for the “crime” of exercising your personal liberty of living in a different country. If your foreign taxes are higher than the US tax then foreign tax credits totally fulfill your US tax obligation so you generate zero revenue for the US Treasury. So the purpose of citizenship based taxation clearly is not to generate US tax revenue. It is to punish the US citizen for living in a foreign country with a tax system that does not mirror that of the US, by requiring that whatever amount you do not pay in foreign income taxes you will pay to the IRS.
Nobody has ever been able to expain to me why this makes any sense at all. Sin taxes are created to tax undesirable activities thus encouraging people to avoid such activities. The inescapable conclusion is that the US citizenship-based tax system is a Sin tax, the purpose of which is to discourage Amercans from living abroad and to punish those with the audacy to do so.
@Roger, given what I found on the IRS website (mentioned above), I suppose some Canadian charitable contributions would be allowed in theory, but only because of the treaty. Which means that there are no other countries where people are allowed to even give a penny to their church without potentially negative consequences.
In any case, people have learned that the TFSA, RESP, RDSP have negative tax consequences for Canadian residents who must file US taxes, even if the charitable contributions are sometimes allowed.
Pingback: What facts will NOT support reasonable cause arguments for FBAR? | The Isaac Brock Society
Roger: “I just can’t think of anything in their situations that would be different from those of US-Canadian dual citizens that would constitute a special case for Canadians but not Germans.”
I wonder if there is anything in the Canada US Tax Treaty that can be used to protect us or allow us to renegotiate when a newer law (like filing of FBARs) puts us in a negative position.
I have decided that what I need to do, until I can renounce, to keep from having IRS liability is to MAXIMIZE my Canadian tax. No charitable donations, no RRSP contributions, no TFSA. No claims for any expense that in any way could possibly be questioned by anyone anywhere, even if explicately allowed by Canada. It annoys my husband (non US person) who is still trying to reduce our taxes. But I would rather pay the CRA than have any dealings with the IRS.
@omg FBAR is an old law, dusted off the shelf to snag unsuspecting Americans. It is the OVD programs and the elevated draconian fine structure that are new.
But wasn’t FBAR designed for money launderers but now is being used against innocent citizens? The penalty structure screams criminal penalties not civil penalties that’s why they can’t be collected through the government of Canada.
If the Americans tried to collect them from an ordinary Canadian citizen in a Canadian court, I bet they’d get slapped back.
The punishment has to equal the crime. If you’re a money launderer with millions of dollars a $10,000 penalty may be peanuts to you but if you’re a Grandma with $50,000 in an RRSP it’s overkill.
@omg Bank secrecy Act aims at terrorists, money launderers, criminal tax evaders. The Obama administration has applied it to grandpas and grandmas and hard working Canadians who pay taxes in Canada.
Over three thousand Americans died on 9-11; so now grandmas and grandpas are stripped search and groped in airports.
This is called reciprocity.
@omghe’sstillanamerican- the nature of the penalty- civil or criminal- is not the reason why the Canadian government will not collect them. The Tax Treaty does not require the Canadian government to collect any penalties that are incurred after residency in Canada. The penalties must have arisen from a tax issue that was extant prior to immigration.
These penalties would be intolerable even if they were only civil penalties. Remember the amount of the penalty does not have to be reflective of the nomenclature that is used to categorize it. There should be absolutely no penalty for living one’s life. The IRS should be obligated to prove wrong doing and not to presume it and the proof must rely upon establishing a pattern of criminal behaviour. Instead of resting on some arbitrary statute.
Don’t shoot yourself in the foot. Find a decent accountant/tax preparer and issue as number one instruction: Minimize tax payable on all fronts as possible, but always prefer to pay tax in Canada, even a greater amount, in order to pay no tax to the United States. This is legal. Also, RRSP is no problem as long as you file the simple annual declaration. And you don’t have to abandon charity either.
Let me add that there may well be fewer dual citizens in Mexico than Canada because, until fairly recently, Mexico did not have a procedure by which foreign citizens could become naturalized Mexican citizens. Before this change in its nationality laws only those born in Mexico and those born outside of Mexico to a Mexican father (but not mother) were Mexican citizens. I knew well when I used to travel there regularly a “Mexican” who was born in Arizona to a Mexican mother and an American father. All of his siblings were born in Mexico and were Mexican citzens, but he was a registered foreign citizen resident of Mexico who enterd and left Mexico with a US passport.
The only exception used to be the granting of Mexican citizenship foreign residents who had done something outstanding and were awaded Mexican citizenship by presidential decre. There were, as I recall, only about 6 of these per year. The Mexican technical director of Telmex, the telephone company, was married to a Armenian refugee who had been brought to Mexico as a child from Turkey at the time of conflict with its Armenian population. Turkey did not recognize her as a citizen of that country and so for many years she could not travel outside of Mexico because she had no rights to a passport from any country. In 1979, by presidential decree, she was bestowed with Mexican citizenship so after some 40 years of marriage for the first time she was issued a Mexican passport and could accompany her husband on a business trip to Sweden.
@petros, One of the ironic truths about US Citizenship-based taxation is that it encourages the US citizen living abroad to maximize his income tax payments to his foreign country of residence because, in so doing,this creates more foreign tax credits which can be used to offset your US tax obligation. I say this ironic because the result is to reduce what you owe to the US Treasury. In fact US tax law encourages you to pay more taxes to the foreign government so you will generate less tax revenue for the US Treasury. This confirms the overriding principal purpose of citizenship-based taxation: It is first and foremost a Sin Tax.
And maximizing local tax to minimize the US tax is very important to the US citizen in a country, like Venezuela today, where you can only convert your local currency to dollars to pay the IRS tax on the black market where, if you get caught, you can not only be subject to stiff fines but end up in a Venezuelan prison for the rest of your life.
The fact that US tax law may force you to violate the currency control regulations of you country of residence is not an excuse acceptable to the IRS. It is the taxpayer’s problem and the IRS expects that you will “do what ever is neccesary” to obtain the dollars to pay your US tax on foreign currency income. I know because I have gone through this face to face with the IRS.
With regard to contribtions to foreign charities, yes you can deduct contributions to such charities which act as the administrative arm of the US charity in that country. But you cannot claim a charitable contribution to your church or synagogue in the foreign country where you live, nor can you claim a deduction to organizations like the International Red Cross because it is truly a foreign charity and not an administrative arm of the American Red Cross.
And by the way, the reason many US banks have closed down accounts of US citizens living abroad is the results of the “know your client” provisions of the Patriot Act. Such accounts are not illegal, but it is so costly for the banks to know all they need to know about the sources and destinies of funds flowing through such accounts and US banks today, so I understand, limit such accounts to account holders who agree to maintain a specified substantial minimum balance and thus make such accounts worthwhile for the bank. If you have a US relative or friend to which your bank statements are sent, then the bank may not be aware that you reside outside of the US. I know 2 American retirees who this. Their retirement income is deposited in their US accounts and they withdraw funds abroad on which to live, using an ATM.
recalcitrant (February 7, 2012 at 12:00 pm) said: The Tax Treaty does not require the Canadian government to collect any penalties that are incurred after residency in Canada. The penalties must have arisen from a tax issue that was extant prior to immigration.
As I understand it, what you say here is too loose. It’s not residency in or immigration to Canada that saves. It is Canadian citizenship. So, no enforcement of FBAR on anyone. But, protection from U.S. tax scavenging only for Canadian citizens.
Too bad we can’t – as far as I know – get any statistics on take-up of Canadian citizenship by U.S. residents after 1991. The last few available years of that data show a sharp uptrend, close to a doubling from 1990 to 1991.
Alertpay has effectively shut down because of this I think. PayPal will be a lot less useful soon, too, unless dealing with other people in the USA. Meh, what a pain!
These laws are poison for the economy. They’ve forgotten the golden rule of tax systems: “You can’t tax what doesn’t exist anymore!”
Pingback: The Isaac Brock Society - What facts will NOT support reasonable cause arguments for FBAR?