A leading accounting firm is taking the unusual step of urging Canadians to double-check their citizenship status, warning there may still be thousands of accidental Americans in Canada oblivious to their U.S. tax obligations.
PricewaterhouseCoopers LLP plans to issue an alert on the subject Wednesday, less than a month after the United States put in place a sweeping law aimed at enlisting foreign financial institutions in a global crackdown on tax evasion.
In spite of a wave of publicity and controversy over the new U.S. law, PwC officials said they are still getting numerous inquiries from American-born individuals who are confused about their tax and citizenship status. Unlike virtually all other countries, the U.S. imposes taxes based on citizenship, not where people live.
"There hasn't been truly a focus on these accidental Americans – people who don't realize they are actually American," explained Chantal Farrell-Carter, a partner at PwC.
There is a new urgency because of the July 1 implementation of the U.S. Foreign Account Tax Compliance Act. Under a deal struck with the Canadian government, the law will eventually require Canadian banks and other financial institutions to identify all U.S. account holders and remit information to the U.S Internal Revenue Service via the Canada Revenue Agency.
Allison Christians, an international tax law expert and associate law professor at McGill University, said such warnings from accounting firms may be overly alarmist. She said it's not clear the IRS is eager to pursue middle-class "accidental Americans." The problem, she said, is that risk-averse Canadian financial institutions may go beyond what the law requires in their efforts to identify U.S. account holders. "You are going to see banks over-react," she said.
Many financial institutions are already moving now to identify American customers, making it tougher for taxpayers to stay in the shadows.
Most individuals born in the U.S. are automatically Americans, unless their parents were stationed there as diplomats. Many others with at least one U.S.-born parent may also have inadvertently acquired U.S. citizenship, depending on what year they were born and how long their parents lived in the United States.
"We get people who call us all the time who simply aren't aware they are U.S. citizens," said Ife Ashabo, a manager in PwC's immigration practice and a U.S. immigration lawyer. "This is particularly common with older individuals who have lived all their lives in Canada and immigrated when they were very young."
U.S. immigration law is complex and often murky, making it difficult for people to accurately determine their citizenship, Mr. Ashabo said. He cited the example of a PwC client, who left the United States at the age of two, believing he had relinquished his citizenship because he was a dual Canadian-American citizen at the time. But Mr. Ashabo pointed out that U.S. law changed in 1978, recognizing dual nationals. Without obtaining a "certificate of loss of nationality," U.S. authorities may now deem the individual an American, he said.
PwC is urging people who determine if they are American to take advantage of a recently announced IRS amnesty program, which makes it easier for "non-wilful" tax payers to get up to date on their U.S. tax filings without facing steep penalties. Under the amnesty program, individuals must still file three years of back taxes and six years of foreign bank account reports (FBARs).
As times goes by it's going to be increasingly difficult for people to argue their ongoing failure to file is "non-wilful," PwC's Ms. Farrell-Carter said.
Using the services of accountants and lawyers can be steep. PwC said a "plain vanilla" tax filing could cost a minimum of $15,000, even when no tax is owed. Anything more complex, including individuals with registered retirement savings plans and several mutual funds, could cost $20,000 to $30,000. "People are very hesitant when they see how much it's going to cost them," Ms. Farrell-Carter acknowledged.