There’s been a flurry of information in the media in the past month regarding US citizens living in Canada and the filing of US taxes. It’s because of this buzz that I found out that it’s a criminal offence for US citizens not to file their tax returns every year, regardless of where they live. So why is this happening now?
The answer is that the IRS is cracking down on “offshore” incomes and bank accounts.
The US has what is called a “citizen-based” taxation system, which means that individuals are taxed based on their citizenship, rather than their residence. Under this system, US citizens who live and work abroad, filing taxes with their country of residence, also must file their income taxes with the IRS. The US is the only industrialized nation that taxes in this way. In the entire world, only the US and Eritrea tax their citizens in this way.
Think of it like this: Imagine that someone was born in Ontario, but moved to Alberta as a child. He’s lived his entire adult life in Alberta, married an Albertan native, earns his income in Alberta, and pays his provincial taxes to Alberta. But because he was born in Ontario, he must also pay Ontario taxes!
The IRS has recently started cracking down on US citizens living abroad without filing US taxes, as well as any US citizens with bank accounts in other countries. As part of the overall campaign, they instituted the 2011 Offshore Voluntary Disclosure Initiative, an “amnesty” for US citizens with non-US bank accounts willing to come forward. The initial deadline was August 26, 2011, later extended to September 9 of the same year.
This amnesty wasn’t as good as it sounds. The well-meaning citizen who didn’t know about the laws and now wants to do right could still face a penalty of $100,000USD, or up to 50% of all assets. The amnesty was only from criminal prosecution.
For retired citizens, or citizens close to retirement, even this offer is potentially ruinous.
There has been a lot of speculation as to why the IRS is targeting expats and citizens with “offshore” bank accounts now, after ~150 years of essentially looking the other way for middle and low income families who are clearly not breaking the law intentionally. Many are calling it a money grab from an impoverished US.