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The IRS's draconian tax-evasion policies can put law-abiding ex-pats at risk. Wes Killingbeck illustration/NewsCom (Wes Killingbeck/KRT)
The IRS's draconian tax-evasion policies can put law-abiding ex-pats at risk. Wes Killingbeck illustration/NewsCom (Wes Killingbeck/KRT)

BARRIE McKENNA

IRS tars law-abiding expats with same brush as tax cheats Add to ...

Federal Finance Minister Jim Flaherty calls it an unjustified attack on law-abiding Canadians.

U.S. Internal Revenue Service commissioner Doug Shulman insists he’s waging a successful crackdown on Americans who stash money offshore.

It’s hard to imagine the two men are talking about the same people. But they are.

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The United States believes $100-billion (U.S.) a year in taxes may be leaking from the Treasury through illegal offshore accounts. Determined to repatriate that cash, the IRS has deployed the toughest global tax enforcement regime any government has ever attempted.

The effort is multi-pronged. The United States has long required all of its citizens and residents to report their global income to the IRS, regardless of where they live and work, or whatever other citizenships they may have adopted.

Now, the IRS is demanding that these individuals also annually report all bank, brokerage or retirement accounts worth more than $10,000 (U.S.) that they hold anywhere in the world.

Then, starting in 2014, the United States will strong-arm foreign financial institutions into identifying and reporting their U.S. account holders. The move will enable the IRS to reconcile what individuals declare and the accounts they actually own.

The penalties for defying the IRS are steep. Individuals could face civil or criminal charges in the United States, or perhaps both.

Twice since 2009, the United States has offered amnesties to people who have fallen behind on their tax-filing obligations. The most recent reprieve expired earlier this month. Come clean, file old reports and you faced a flat penalty of up to 25 per cent on all your accounts.

That might sound like a pretty good deal if you’ve been stashing away millions in the Cayman Islands for years. You pay a penalty and avoid a worse fate, such as jail.

Roughly 12,000 people around the world accepted the IRS offer, paying $500-million in back taxes and interest. The total is expected to grow once penalties are assessed.

But imagine you’re one of the roughly one million Americans who now call Canada home. Far from stashing anything away, you’ve been paying hefty taxes in Canada – more than you would living in the U.S.

Many of these people – perhaps a majority – stopped filing U.S. taxes years ago when they became Canadian citizens. Many were oblivious to the new foreign account reporting requirements, having long ago severed all ties to the United States.

A few accidental Americans – born in the U.S. or born to American parents – may not even be aware they remain citizens with tax obligations.

Intentionally or not, the IRS sweep has turned all of these people into criminals.

And the amnesty? Imagine giving up a quarter of everything you’ve acquired in a lifetime of hard work to a government you no longer consider yours. Not very appealing, for sure.

The IRS won’t say how many Canadians are among the 12,000 amnesty-seekers. But accountants with dual Canadian-American clients say most have opted to stay in the shadows.

The existence of so many un-American Americans right next door has clearly unsettled the IRS. Not enough, however, to offer a sensible way out.

The problem is poor targeting. The IRS is after wealthy Americans who deliberately hide their money offshore to evade taxes. Instead, what they’re dealing with are perhaps millions of Americans who have deliberately hid themselves offshore to get away from the United States.

These two sets of Americans couldn’t be more different.

If the IRS were truly interested in tax compliance, it would design an amnesty program specifically for tax-paying ex-pats who desperately want to come clean. There should be no penalties for people whose only sin is not filling out paperwork.

Better still, put in place a painless way for Americans to renounce their citizenship – one that doesn’t require handing over a sack of cash to the IRS as a precondition.

Until there is a more reasonable path to amnesty, tens, and perhaps hundreds, of thousands of Canadians will continue to live like fugitives in their own country, worried the U.S. may grab their savings and fearful of traveling to the United States.

The Canadian government and Canadian banks, who are poised to become agents of the IRS, must do more to convince Washington there is a better way to go.

It’s hardly a situation either country can be proud of.

Follow on Twitter: @barriemckenna

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