TORONTO - Dave, a bewildered American living in Canada, turns to an anonymous forum to ask whether — even though he has "nothing more to do with the USA other than my citizenship" — he should be filing taxes to Uncle Sam.
The answer is yes. But it's a question most of the one million or so Americans living in Canada appear to have ignored until now.
There are a number of people who fall into this category: green card holders unaware they are considered citizens; those who came as very young children and some who believe since their Canadian taxes offset their U.S. taxes, they are not required to file.
But times have changed and 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.
"The days of not being informed or not caring about what your tax filings obligations are over," says Peter Aylett, managing partner with Aylett Grant Tax LLP.
"The penalties are just so severe that individual taxpayers need to pay attention to what needs to be filed."
The issue has come to light in recent weeks following the lapse of a Sept. 9 deadline for amnesty under the Offshore Voluntary Disclosure program.
Aylett says he has since received an influx of calls from Americans living in Canada asking for his advice.
"The IRS doesn't fully quite appreciate our culture here in Canada, where people are really compliant. They want to follow the rules. They just want to know how and they're frustrated."
Dual citizens now face a dilemma: be honest and risk getting slapped with as much as a 50 per cent penalty for failing to disclose their bank accounts, or knowingly evade the system.
The U.S. is one of only a handful of countries that requires citizens to file their worldwide income in the U.S. regardless of where they live.
The rule applies to U.S. citizens living in any other country. Among some seven million Americans living abroad, only about 4.6 per cent have been filing returns in the U.S., says Terry Ritchie, an adviser on cross-border tax issues at Transition Financial Advisors Inc.
"Most Americans, particularly those dual citizens in Canada, they're ignorant of these rules because they believe that once they move to Canada and because they don't earn anything in the U.S. or have any assets in the U.S. that they have no longer a U.S. tax filing requirement," he said.
"But that's not true."
Americans in Canada have only one option: coming forward. Giving up their U.S. citizenship leads to complications at border crossings and doesn't wipe out the penalties.
Under U.S. expatriation rules, any American renouncing their citizenship is forced to file their taxes for the past five years.
Either way, U.S. citizens will be required to fill out forms to declare the value of their Canadian assets, some of which are subject to capital gains taxes.
"It's a hoop that people really have to think about jumping through," Ritchie said.
Ignoring the rules isn't an option either. Beginning in 2014, the Foreign Account Tax Compliance Act will compel Canadian financial institutions to report accounts held by U.S. citizens to the IRS.
"It would be a lot more embarrassing and you'd have a lot better chance of getting penalties abated if you got to them before they got to you," Ritchie said.
But Americans who were honestly unaware of the rules stand a chance of being granted leniency — as long as they make a written plea of their ignorance.
There is a risk the IRS could assess penalties, but it is remote.
"In my professional experience, they have been lenient. I've never seen a situation where they have imposed a penalty for people who willingly come forward," Ritchie said.
Aylett said he expects an increase in the number of audits the IRS conducts, but added if a non-compliant taxpayer completely and truthfully complies with the rules, the agency tends to not apply additional penalties or seek criminal prosecution.
Although there is no specific guidance from the IRS following the end of the disclosure program, Aylett said he recommends filing tax and information returns from each year from 2003 to 2010.
Regular filing in the U.S. does not usually result in paying more taxes. The foreign-earned income credit exempts up to US$92,900 of Canadian income. Because taxes are higher in Canada, the foreign tax credit also applies. The process is time-consuming, but necessary.
While filing now carries a risk, Aylett said, the alternative is far worse.
"The worst thing that can happen to a person that continues to be non-compliant is that the IRS discovers them and throws the book at them by assessing greater penalties than those that were available under the (Offshore Voluntary Disclosure) program."
© The Canadian Press, 2011