IRS Hunting Snowbirds

The IRS has tightened its nets to catch the big fish hiding their money abroad. More regulations, more control and most of all, more penalties. With its heavy artillery, the IRS fires in all directions, including toward Canadians who owe nothing to the United States.

Taxpayers with dual citizenship are the first in its sights. Those Canadians who also have U.S. citizenship, sometimes without even knowing it, may experience a true nightmare.

You have never reported your income to the United States? You have never revealed your investment accounts? $10,000 penalty! Per account, per year. “Oh my God!”

Roughly 1 million American citizens reside in Canada. Many are in a state of panic. “They are truly in a bad situation,” reckons Robert Chayer, a tax specialist at Richter.

But dyed-in-the-wool Canadians may also be targeted by the IRS. This is the case for those who have previously worked in the United States. Despite the expiration of their green card, they are still considered American residents if the green card was not officially destroyed.

Even the snowbirds* are at risk of being “defeathered” by the IRS. That is the hot topic among tax specialists, according to Marie-Claude Péthel, tax expert and associate of Demers Beaulne.

What’s more, in an announcement given early in the week, the Order of Certified Public Accountants has encouraged residents of Quebec to provide proof of compliance with U.S. tax laws.

The saga goes back to 2008. A former employee of UBS revealed to the IRS that the Swiss bank had helped millions of Americans hide their fortunes. During a serious financial crisis, the affair created a scandal. A Senate committee estimated that the assets hidden in foreign accounts cost the U.S. $100 billion each year. The Obama administration chose to tighten the screw.

In 2010, the United States passed legislation mandating foreign financial institutions, including Canadian banks, to supply the IRS with information on American-held accounts. As a result, many Americans based in Canada who have never shown signs of life to U.S. tax authorities will soon appear on the IRS radar, explain Kevyn Nightingale and David Turchen in the Canadian Tax Review.

The law will be enforced starting January 1, 2014. Tick tock, tick tock … Time to get your papers in order.

Let us review the rules: If you are a U.S. citizen or resident, you must declare your income to the United States. You also must complete a form for each foreign account, therefore all Canadian accounts: IRA, tax-free savings accounts, everything!

By choice or by ignorance, many have never taken the steps that cost $300 to $500 for a professional to assist with. “These laws have existed for a long time, but the IRS didn’t exert very much pressure,” explains Jean-Francois Poulin, tax specialist at Raymond Chabot Grant Thornton. But times have changed …

To avoid problems, taxpayers can make a voluntary declaration by retroactively producing their returns for three years and their forms for six years. This policy update will cost them between $5,000 and $10,000 in fees.

The exercise is even more annoying for those who own a business or trust, because they risk losing tens of millions of dollars in the adventure! So it is not surprising to learn that requests to renounce U.S. citizenship have increased tenfold since 2008.

Which Brings Us to the Snowbirds …

If you stay in the United States more than 182 days out of the year, you will be considered a U.S. resident taxpayer. By demonstrating that you have “closer ties” with Canada, it may be possible to avoid a double imposition. But it will require a ton of paperwork.

It is better not to stay longer than six months in the United States, especially since you risk losing your health insurance from Quebec. Yet the “substantial presence” test may reduce your allotted visiting time to four months.

Out of three years, one must not stay more than 182 days in the U.S., including all the days of the current year, one-third of the days in the previous year and one-sixth of the days in the year before that. Following this formula, you will have exceeded the limit if you spent 122 days a year in the United States for the last three years (122 days in 2013 + 41 days in 2012 + 20 days in 2011 = 183 days). Every fraction of a day counts as an entire day, according to tax expert Natalie Hotte from Banque Nationale Gestion. Customs officials will now record all your comings and goings.

Fortunately, you only need to complete form 8840 to avoid the IRS chasing you. It is nothing complicated, but you only have until June 15 to complete it. If you miss the deadline, the notorious $10,000 penalties await you.

The dumbest part of the affair is that the snowbirds and American citizens who live in Canada often owe no taxes to the United States. Their tax rate is even higher than on the other side of the border. Yet they are treated as fraudulent tax evaders. Ridiculous!

*Editor’s Note: “Snowbirds” is a term used to describe people from the colder parts of the U.S. and Canada who spend a large part of the winter in warmer places such as the American states of California, Texas or Florida, away from their home city. They are often retirees or business owners with flexible businesses.