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What are you going to do when the IRS comes for you?

09/09/2013


Imagine this: Shortly after you were born in some US state, your parents packed up and started a new life together in Canada. You grew up happily in Guelph, Ontario or Victoria, BC, without ever setting foot in the US again. Although you were vaguely aware of being born south of the border, you see Canada as ‘home’. That is, until your American roots come back to haunt you in the form of a proverbial knock on your door from the IRS.

Believe it or not, this situation happens to many Americans in Canada. Some reports peg the Americans-in-Canada population to be at one million, but others have estimated the number is up to seven times higher. Surprisingly to some, having American parents or grandparents can qualify you as a US citizen. While this means access to living and working in the US, it also means you’re beholden to the IRS, along with the CRA.

So how does the IRS find out who you are and where you actually come from? Well, if you take a trip to the US and present your Canadian passport, it may trigger a series of events. If you're like most Canadians, your birthplace is listed in your passport. A border guard noticing your American birthplace may then tell you that you are a US citizen, and you need a US passport to enter (it's actually a felony to enter without one). Later, when you apply for a passport, the clerk is supposed to ask you to provide certain tax information, like your US Social Security Number. The State Department (which issues the passport) will then pass the information on to the IRS. By the way, there's a $500 penalty for refusing to complete the form.

Secondly, by July 1, your bank will likely start asking you whether you are a US citizen. If you answer "yes", they will start reporting information to the IRS. If you answer "no", you'll have committed tax fraud. If you refuse to answer, the bank will politely ask you to take your money and go elsewhere.

Lots of Canadians are snowbirds and others invest in US securities. If you sell or rent real estate, or earn US income, you will need a Social Security Number.

Many Americans in Canada have US relatives. If one of these dies and leave you some money, your name will probably show up when the estate's accountant does the tax reporting.

Let’s say there’s an opportunity for you to get a job in the US or for your child to attend school down south – both of which would be aided by acknowledging your US citizenship. As a general rule of thumb, keep in mind: As soon as you get interested in the US, they’ll get interested in you.

Finally, if you die, your estate will be in the hands of an executor. And that executor will be responsible for the US taxes, penalties and interest that you haven't paid. You may want to ignore US tax, but the executor probably won't want to. And cleaning up the mess then is a lot more difficult than when you're around.

There are programs to get back into the US tax system - often with no tax, penalties or interest. However, it’s still a complex, time-consuming process. Fore more, contact your local MNP tax advisor. We can advise you on what you need to do, in order to protect your interests while still taking advantage of your US citizenship.