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Potential Tax Penalties Ahead for US Citizens Living in Canada Who Have Failed to File Incom…

October 14, 2011

Potential Tax Penalties Ahead for US Citizens Living in Canada Who Have Failed to File Income Tax Returns

On October 14, 2011, New York Tax Partner Sydney Unger gave a half-hour interview to talk show host Dave Rutherford on Calgary radio station CHQR 770, the top-rated program in Alberta. Unger discussed recent developments in the US affecting American citizens living in Canada who have failed to file US income tax returns.

“Many US citizens living in Canada are surprised to learn that they are required to file annual US tax returns, even if they earn all of their money in Canada,” Unger said on the broadcast. “But what we’re [now] witnessing is an aggressive attack by the IRS against US citizens… the IRS is reaching out across the Canadian border and grabbing them by the wallet.”

The crackdown began “ in late 2009, when one of the large Swiss banks agreed it would release account information with respect to U.S. clients after a carefully negotiated settlement between the US and the Swiss bank,” added Unger. “Initially the IRS only subpoenaed approximately 4,500 US clients records until investigators discovered that those accounts held more than $18 billion dollars that American citizens had parked overseas to take advantage of Switzerland’s much touted bank secrecy laws and lower tax rates for high-income individuals. The bank had another 50,000 accounts established by Americans, and suddenly the IRS said, ‘Whoa, there’s a real source of revenue raisers out there for us.’

The US government needs to tap into all potential sources of revenues, particularly now given the country’s ongoing fiscal challenges. Thus, “the US doesn’t make a distinction between law-abiding citizens living in Canada versus those who sought overseas tax shelters; by law, all American citizens are supposed to file a tax return each year reporting their income, even if that income is not from US sources, even if they live in Canada or other foreign countries,” said Unger.

While it currently is somewhat difficult for the IRS to obtain information about accounts Americans may hold in Canada, the recently enacted Foreign Account Tax Compliance Act, which takes effect in 2014, will put increasing pressure on Canadian banks that do business in the US to provide information about their US citizen account holders.

Concludes Unger, “If you have not filed US returns regularly and live abroad, your best bet is to consult with an experienced tax attorney or accountant familiar with both US and Canadian tax law to determine next steps. Such a professional can advise you regarding voluntary disclosure to the IRS and possibly negotiate a reduced penalty.”

Kaye Scholer Partner Sydney Unger is a tax lawyer (and Certified Public Accountant) concentrating on corporate and joint venture matters, as well as advising high-net-worth individuals on cross-border tax issues. He has considerable experience in working with clients in mergers and acquisitions, corporate restructuring and bankruptcy workouts, leveraged leasing transactions and IRS and New York controversy matters. A member of Kaye Scholer’s Canada practice, Unger serves on the New York State Bar Association’s Tax Section Committee on U.S. Activities of Foreign Taxpayers and the International Fiscal Association, which studies and advances international and comparative fiscal law and the financial and economic aspects of taxation. He previously served as Chair of the Committee on Taxation of Corporations of the Association of the Bar of the City of New York. He can be reached at sunger@kayescholer.com.

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Sydney E. Unger
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