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.
Here are some miscellaneous comments on the responses to Petros’s post about the letter from the IRS.
IS THIS A BATTLE THE IRS WANTS? The way returns are selected for audit and the way the IRS approaches audits and the impact of the way the IRS pursues collection of an assessed tax (one which is entered on the books of the IRS as debt due and owing from the taxpayer) is done with complete disregard to the collateral damage or unintended consequences to other family members, employees or friends. It just doesn’t work that way. One exception which may pertain to the final resolution of a tax matter is when Collections is involved and it is necessary to determine what other members of a household contribute. At that point it may become necessary for the IRS to explore the assets of the other members of the household. But even in employment tax cases where an employer does not pay over the withheld amounts from its employees, if the target makes the IRS mad enough, they will shut that business down once they go through all the protocols even if it puts hundreds of people out of work. That is not the IRS’s problem.
A LATE RETURN WITH ZERO TAX: Always remember, the word “compliance” to the IRS means timely filing when a tax return is due and timely payment. A person’s factual situation may be such that there was no filing requirement for a particular period. Assuming there is a filing requirement for whatever reason, the fact that there was a zero balance due is separate and apart from the issue of whether the filing was timely and MOST IMPORTANTLY, whether what was filed was actually what the IRS considers a tax return.
A tax return is defined as a document on an IRS approved form which contains enough information for the IRS to figure out the tax. A return with zeros marked in all the spaces is not considered a tax return by the IRS. Neither do they consider a tax return something with a bunch of what they consider to be wild protest screeds attached. The tax return is no place to figure out if the IRS can take a joke. It is a very, very serious matter. This does not detract in any way to my previous statements about the IRS being easy to fight, easy to push back and stand your ground. In order to do so, you have to play their game by the rules, almost all of which by the way, have been reviewed, commented upon and approved at some time, by an independent federal court.
THE IRS IS NOT ABOVE THE LAW AND PEOPLE WHO DO WHAT I DO IN DEFENDING PEOPLE IN CONTROVERSIES WITH THE IRS AGREE WITH ME AND ACT ACCORDINGLY.
CRIMINAL TARGET? Again, not being familiar with Petros’ individual factual filing situation, and since he is not my client, there is no way I would opine as to whether anything he has done would be of interest to the IRS criminally. I do know the IRS is trained to distinguish free speech from actionable misconduct on an individual’s tax return. It does not appear to me that the Isaac Brock Society, at least from what I have read on its public blog, is counseling or suborning the avoidance or evasion of US taxes. As far as I can tell, what the IBS is all about is free discourse and a good lively discussion.
ARE CANADIANS UNIQUE WITH THEIR FATCA ISSUES? Roger Conklin raised this couple of time. I am trying to compile a list of factors which I think may make Canadians unique and I would appreciate anyone who might write to me privately or on the blog and tell me what you think are unique to Canadians. I am working with other international organizations on FATCA and this would be very useful to me. What I suspect about Canada and Mexico is that because of the common border there are more “accidental Americans” in Canada and Mexico. I think the problem with Canada right now is you are getting more publicity than those south of the border, because of the shared culture and language with Canada and the higher level of education of Canadians as compared to Mexicans.
@StevenJ.Mopsick- if the IRS considers a return with a bunch of zeros on it to not be a proper tax return then what could they expect to see on a tax return that if filed on behalf of a child who is disabled and whose only income is derieved from non-taxable social assistance payments? Or what about a child who isn’t yet working?
@Steven
I would on your side of the border take a look at this release from the IRS I linked to below. All the information the IRS is giving to CRA is reciprocal in return(I can’t seem to find an written agreement between CAN and the US its just IRS and US Treas have a special information collection requirement on Canadian resident held US non resident alien accounts.. Note the focus on Canadian “resident” vs citizen which applies going in the other direction as I understand it US “resident” vs US “citizen.” I can explain more what Canada requires from its banks on non resident account holders but I assume you are more familiar with how the US goes about it for Canadian residents. (I’ll try to find the actual current Treasury Reg for you but its past dinner time in my time zone)
http://www.irs.gov/irb/2011-08_IRB/ar13.html
Now I believe one key piece of information missing from this agreement is capital gains basis. At this point CRA is still going on the “honor” system even for Canadian residents in terms accurate reporting of “basis” on securities transactions. I believe the IRS though now has a system as of a few years ago which keeps track of when someone buys a security and when someone sells it at and at what price even when it is done through two different brokers.
@ Steven
I agee with you there are probably many more “accidental americans” here in Canada than say European countries. We not only share a common border but also a language. I believe also that back in the 60’s and into the 70’s, that common border and language made it very easy for Americans to come North to receive their post secondary education. I know I chose University of Toronto for that very reason – even back then Canadian universities charged considerably less tuition to attend. It was also a traumatic time for many Americans ie the Viet Nam War and many came to avoid having to go to war, perhaps a war they thought was unjust.
I know for myself, by 1972 when I became a Canadian citizen and swore an oath of “renouncement of my American citizenship”, I did so voluntarily and with intent. My body and soul both belonged to Canada. All of my ties were here; it was the only place I wanted to be.
Could you possibly explain in a post, how any intelligent American could possibly think that it is okay after all of these years of ignoring or not informing Canadian citizens that they have an obligation to file U.S. tax returns – that it is now okay to penalize people who had no idea.
@tiger “Could you possibly explain in a post, how any intelligent American could possibly think that it is okay after all of these years of ignoring or not informing Canadian citizens that they have an obligation to file U.S. tax returns – that it is now okay to penalize people who had no idea.”
Nobody can explain that because it isn’t right.
@Steven Obviously the IRS is above the law. Otherwise they could never have devised the 2009 OVDP program. The Fifth Amendment says:
Now I ask you, what part of the FBAR law actually authorizes the Secretary of the Treasury to assign a fine to person’s principle house of 20%? The IRS created the 2009 OVDP did this to Just Me. The IRS is not only above the law, they make up law.
You say the IRS is not above the law. I say they have no clue what the law is. And this has been going on for a long time in the United States. That’s why Congress has passed numerous laws that violate my fundamental right to expatriate.
Of course the IRS is above the law. Everyone at this blog knows that.
Regarding the IRS not being above the law: Consider this excerpt from my earlier post today:
In a recent comment at the Isaac Brock Society, by 30-yr IRS Vet, who worked in the bowels of the IRS as a litigator, we learned the following rational for FATCA (emphasis mine):
This accurately reflects the mentality of the IRS. The purpose of man is that each pay his fair share of taxes. That is the greater good. In order to achieve that we must sacrifice our working theory of a democratic society, that each individual has inalienable rights, such as the right not to have his castle ransacked by government without a specific warrant–the intent of the Fourth Amendment was to abolish general warrants such as FBAR, which requires citizens to divulge their bank papers to government without the need of a warrant based on probable cause. But why would Congress create an IRS that had the power to levy draconian fines upon a people for refusing to relinquish voluntarily their Fourth Amendment rights? Because the purpose of man has changed from that of seeking his own happiness in a free country–to one of paying his fair share of taxes.
@Steven Mopsick, I totally agree that for all of the resons cited there are undoubtely very many more accidental US dual citizens in Mexico and Canada than anywhere else in the world, but I do personally know some persons in other countries in this same category. For example the now-adult children of US missionaries in Germany who were born and raised in Germany and who have never visited the US. Also the daughter of a Siemens executive friend of mine who was born in Florida when her father was temporarily assigned by his German employer for a term of duty in the US. She went back to Germany when a small child, leaving the US with a US passport and entering Germany with a German passport.She is now a young adult.
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. From my years living in both Brazil and Peru I also knew several who were born in Brazil to US parents who stayed there. Some came to the US for university education but went back to Brazil when they graduated. The chief engineer of the telephone company in Peru who I worked with there was born in Peru to a US father. Some of these were conscripted for US military service and served in Viet Nam, returning back to Brazil or Peru when they were dischaged and where they have resided ever since.
Thanks again for your posts. The are indeed helpful.
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.
@recalcitrantexpat, persons whose income is less than a certain minimum (it was $9,350 in 2009) are not required to file US tax returns. So a child with zero income would not be reqired to file.
@Steve, et al
Tax Attorney Mopsick is being VERY generous with professional advice and insider insight. Typically you would pay >$300 per hr for his kind of information, and be fortunate to get it.
I suggest not looking to him as any kind of apologist or spokesperson for the IRS. He is just “telling it like it is” and what he says is confirmed by other consultations I’ve had and information I’ve read.
The IRS does not have supernatural powers of detection and enforcement, In fact, only 3-4% of IRS staff work directly in enforcement. You can read the IRS operations manual online. The section on “International Collections” is interesting. Basically, they are considered almost impossible, unless the taxpayer has US assets. The immunity of Canadian citizens to “assistance in collection” under the Canada-US tax treaty is noted.
@ Petros
Your leadership, diligence and untold hours hours running this site are a unique and valuable public service. It is a virtual Tahrir Square. None of us would benefit from your martyrdom.
This is all about extra-jurisdictional over-reach. However, if you don’t play by the US’s rules (no matter how wrong or unfair they are), and make public statements to that effect, it may be prudent to avoid their physical jurisdiction. Please be careful.
@Roger Conklinç
where can I find minimum filing requirements?
@rvka88, page 7, Form 1040 instructions. For this season it is $9,500 for a single person under 65 years of age. Here’s the link: http://www.irs.gov/pub/irs-pdf/i1040.pdf.
Slightly more for marrieds and over 65.
@rogerconklin- I agree with your position, that there is absolutely no difference between a Canadian dual or one who is a dual citizen of America and another country.
What is unfair is that the U.S. should treat dual citizens who do not reside in the U.S. as if they do. To have to live your life in your country of residence and citizenship while always having to look over your back is a moral travesty and an unjust burden.
America needs to respect a person’s right to chose his/her citizenship. We should not be forced to live our lives as second class citizens in our own countries of citizenship and residence just because America thinks that we are forever wearing its brand. Are we cattle who have escaped from the U.S. ranch? I don’t know about you but I think that the right to mark people was last associated with Nazi Germany and its tatooing of its Jewish prisoners.
US$ 9500.00
http://www.irs.gov/individuals/article/0,,id=96623,00.html
I’m married filing separately. The filing threshold is ridiculously low. $3700
@Everyone
In terms of special treatment for Canada historically the US has been quite willing to cut “deals” with Canada when they wanted something very tangible that no matter how powerful a country they were and are they could not get on their own. NORAD is a good example of this the US needed access to Canadian territory to install radar stations in the arctic to warn of a Soviet Air Attack thus they were willing unlike any of their other military alliances to let Canada in as an almost equal partner. This new entry exit system being proposed is another example. The US simply put cannot put in place unless they can get data from Canada/CBSA on who is entering Canada from the US. Thus Canada will get a lot of say in how the system is operated ala NORAD. Where it gets more tricky are things such as the St Lawrence Seaway, NAFTA, Auto Pact etc were their were/are domestic constituencies that benefit in the US but they are not necessarily to everyone seen in overwhelming national interest of the US. I think the way to play this whole FBAR/FATCA/Tax mess is whenever possible try to tie it to Canadian tourism/”snowbirdism” to the US.
@tim- I agree with your point. I believe that Canada for too long has under played its power with regards to the U.S. The auto pact was a boon for the American auto industry because it prevented the existence of a non-U.S. based auto industry on America’s door steps. America may be the only Western country that doesn’t have Universal Health Care but Canada is the only Western country that does not have its an indigenous auto industry.
Even with the Keystone pipline I think that Canada should have been working to extract some kind of special privileges for itself rather than just sending unrefined heavy oil south of the border for market prices.
What people in Canada either don’t understand or won’t admit, is that the U.S. has no interests other than its own. When it comes to international relations the U.S. is very pragmatic. In other words every relationship that the U.S. has with another nation is essentially a one night stand. The Americans are always ready to jump out of a relationship when it no longer serves their purpose. Whereas Canada is looking for a commitment the U.S. is just looking to satisfy its immediate needs.
This is fundamentally also why we as “expat” citizens don’t register on the U.S. moral compass. We, by our absence from the U.S., have proven that our interests are not aligned with those of the U.S. government and therefore our rights are ignored.
I remember reading a comment by someone on this site, in which it was said that- this is not the U.S. I know. Well to tell you the truth this is exactly the U.S. that I have always known and it is for that reason that I left and would never go back.
@recalcitrantexpat
Where I think Canada has an advantage is we are viewed more favorably than Mexico which a lot of Americans really mistrust and dislike for somewhat legitimate and illegitimate reason. I do think though the end of the Cold War has probably lessened the need US had for Canada in terms of security. Remember even in 1988 during Brian Mulroney and Free Trade agreement the Berlin Wall was STILL up and you could sell the idea of the agreement in the US from a “western” solidarity standpoint. In fact there was very little opposition to free trade with Canada in 1987/88 in the US even in the context of the poor state of relations that had existed earlier under Trudeau and co.
NAFTA which does come in after the “Wall” fell was basically sold to the American people as ending the small but growing problem of illegal immigration from Mexico by boosting the Mexican economy. However, in that sense it totally failed as Mexican illegal immigration to US raged out of control essentially making NAFTA a dirty word in the US.
I would fast forward even more to something like Helms Burton. During the Cold War when Cuba really was allied with the Soviets there had always been an “understanding” over Canada’s different relatonship with Cuba with the US. But by the mid 1990s you had members of Congress wanting to roughshood over that to please their Cuban American constituents notwithstanding the degree to which the US had historically accepted Canada’s soveriegn interests in this area.
@Mr. Mopsick – Thank you for your counsel. Little by little I’m starting to get a better grip on how this works. Given the lack of understanding on all sides (ours in terms of the requirements) and theirs (not realizing the impact on millions of people all over the world) this is not going to end well for anyone. What is sorely lacking here is any process for negotiation or a way of exchanging with the U.S. person population abroad. Perhaps I’m naive here but I don’t think we can infer design from outcome. I don’t think they had any idea how complex the situation is.
And by saying the above I am not casting aspersions on the fine volunteer organizations like ACA and AARO, for example, that work very hard on our behalf. What I’m saying is that it is clearly not enough. Other channels, other forms of communication need to be created. The current situation is bad for everyone. We’re stressed and frightened trying to make sense of all this. There is an old joke about what phone number do you call for Europe? Well, what phone number do Americans abroad have to call to get heard? The U.S. gov is going to spend enormous amounts of time and money for a questionable benefit. And I think real damage will be done to US interests because of the diplomatic fuss all this is generating and the large numbers of people who I think will renounce their US citizenship. Yes, there are a lot of comments in forums that say “good riddance” but I don’t believe it. I think those numbers are a real kick in the stomach to a nation that is going through very troubled times right now and that is clinging to the idea that there is still something “exceptional” about America. It used to be unheard of for US citizens to renounce. I think the numbers will be even worse next year. A nation that is beginning to bleed citizens is going to have a lot of trouble convincing people that it is still the “best country on earth.”
My .02.
@StevenJ.Mopsick
You say the IRS will go after you if you have not filed your tax form, but what if you have not filed your FBAR? If they contact me, I plan to say I have no intention of filing it, but that I will continue to file my income tax forms with the correct information on them and the correct tax paid (well, that’s 0, but still…)
@Petros, I have never gotten a letter like this when I forgot to file– I didn’t know I had to. I have a feeling that you guys (Candians) are closer, and since Canada is a 1st world country, they know you make money….
Why not give them a call to see what they think you owe them? It could be a simple mistake on their end. If not, then you could always negotiate IF you really are liable for a payment because it occured before your relinquishment date. I know dealing with this stuff sucks, but if it happened to me, I would always want to keep my “travel options” open.
By downright not paying – or *even contacting them* – you risk falling into the typical stereotypical [“tax cheat”] that most of us here are working very hard to disspell. So, for our sake as well, give them a call to see what’s going on.
Petros
re your letter from the IRS. The TAS blog has an interesting post about computer generated IRS letters.
http://www.taxpayeradvocate.irs.gov/Blog/are-irs-correspondence-audits-really-less-burdensome-for-taxpayers
@geeeez I filed the 1040 last week. I have thus done what the computer generated form required. I did not say that I didn’t know I was supposed to file. I said that they have scared the hell out of me with all their threats of fines, with the result that I have relinquished my American citizenship and I was trying to figure out what to do given the new hostile position vis-a-vis Americans Abroad.
@Peter, most of the time, the recommendations I see from “taxpayer professions” on their websites is to phone the IRS. They say the worst thing to do is to ignore them..
Yes, I agree, their choice of words is quite abusive. One of my complaints about their abusive system is that they should have more representation abroad if they expect people to be compliant. Here, there’s an local office in just about every city with a population of over 100k people. When one of my wife’s uncles had a problem, he went to the local office to see what he had to do. The US doesn’t have that, making it even more difficult for people. It’s a little unrealistic if you ask me.