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Janet Selby never imagined she was anything other than a Canadian.

After all, she has lived in Canada for all of her 47 years. She went to school here, voted in elections, travelled on a Canadian passport and built a successful career as an accountant and corporate recruiter.

But a recent call from her online broker forced her to confront a long-forgotten past. Ms. Selby spent the first four days of her life in the United States, born in 1963 to two Canadians pursuing graduate work at the University of Illinois in Champaign, Ill.

That makes Ms. Selby an accidental American - a reality that comes with sweeping tax and reporting obligations that could now cost her thousands of dollars and a monster headache.

"It's frustrating," Ms. Selby said from Toronto, where she has lived most of her life. "I'm a responsible citizen. I've paid my taxes dutifully since I've been earning money. It makes me feel like it's an overreaching tax grab by the Americans."

Ms. Selby is not alone. Hundreds of thousands of Americans living in Canada may soon run into the increasingly long and muscular arm of the U.S. Internal Revenue Service. Many aren't aware of what is about to hit them as Canadian financial institutions comply with a new law that requires them to identify their U.S. customers to the IRS, tax experts warn. Banks and customers who fail to provide the information would be hit with steep penalties on all their U.S. income.

Unlike almost every country in the world, the United States taxes its citizens based on worldwide income, regardless of where they live.

And now an aggressive campaign to root out tax cheats and tax havens is reaching deep into Canada and other countries. Starting in 2013, the IRS will require foreign financial institutions - banks, brokers, insurers and the like - to disclose all accounts held by U.S. citizens and green-card holders.

But that's not the end of it. Those caught up by the sweep of the U.S. Foreign Account Tax Compliance Act, or FATCA, will likely have to file U.S. tax returns and detailed annual foreign account disclosure statements, going back years. Getting rid of a U.S. citizenship - accidental or not - doesn't eliminate past tax obligations to the IRS.

"There are a lot of people who don't even know they have an issue," warned Beth Webel, a tax partner at PwC Canada in Hamilton, Ont., one of the accounting firm's experts on the new U.S. rules.

"There are people who didn't know, or just didn't file. Those are tough conversations to have with people. There's no easy way to deal with it."

Relatively few of these Americans and dual citizens are the kinds of tax cheats the IRS insists it's hunting for. They're ordinary people who've been paying taxes that are typically higher than in the United States.

They are also children and spouses of Canadians who spent significant chunks of their lives working in the United States as permanent residents, who may not even know they have a lifelong obligation to Uncle Sam by virtue of their family's U.S. ties.

The experience of Anthony Smith of Kelowna, B.C., highlights another group of Canadians at risk: long-term green-card holders. Mr. Smith spent 11 years working as a network designer for Nortel Networks in Dallas. Ending his obligations to the IRS after he surrendered his green card and returned to Canada in 2004 took years and cost him thousands of dollars.

"There's a triangle of security, immigration and accounting, and in there you can get totally lost," Mr. Smith said.

The new U.S. law will ultimately force vast numbers of Canadians to start filing with the IRS, Ms. Webel said. "They're going to be on the radar screen," she said.

It may be driving others further underground. Dave McKay, head of Canadian banking at Royal Bank of Canada, said it's noticed an increase in the number of customers who abandon the online account-opening process when they get to the long list of questions about U.S. citizenship and taxation.

"It's a huge barrier [to new accounts] because of the amount of information the customer has to provide and their willingness to provide it, and not understanding why they need to do this," Mr. McKay said. "It shuts the whole process down."

In the end, many of those affected may not owe any U.S. taxes because they'll get credit for any taxes they've already paid to Canadian authorities under a Canada-U.S. tax treaty.

But they'll still have to file with the IRS.

Under an amnesty program that expires at the end of August, they'll still have to pay a blanket tax of up to 25 per cent on the value of all their foreign accounts, including bank accounts, mutual funds and RRSPs.

Once the amnesty period ends, they could also face fines for the years they haven't filed with the IRS.

As Ms. Shelby found out, Canadian financial institutions are already ramping up for 2013, by identifying customers now who may have ties to the United States. Many institutions have already signed so-called Qualifying Intermediary Agreements with the IRS, a first step toward giving U.S. tax authorities access to client information, including U.S. social security numbers or tax ID numbers.

However, Canadian law doesn't require account holders to report their citizenship. In the case of bank accounts, for example, customers need only show a driver's licence and one other piece of identification, verifying residency, but not necessarily citizenship or immigration status.

Canadian and other foreign financial institutions are lobbying furiously for changes and exemptions that would soften the impact on both themselves and their customers. The banks have complained to Finance Minister Jim Flaherty that the law is an end-run around Canadian tax authorities and an administrative nightmare.

Meanwhile, Ms. Shelby is scrambling to find a tax expert before the August deadline to help her sort out what she needs to do and how much she might owe. Even the best-case scenario will leave her poorer.

"If I can get by without a penalty, I'll be happy," she said. "But no matter what, I'm going to have a financial hit here. To hire an adviser to do this for me is going to cost money."

With files from reporter Grant Robertson in Toronto

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