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Finance Minister Jim Flaherty says U.S. authorities are spreading "unnecessary stress and fear" among law-abiding Canadians in their aggressive pursuit of offshore tax cheats.

In his harshest comments yet on the simmering cross-border tax fight, Mr. Flaherty complained that a U.S. Internal Revenue Service crackdown is targeting "large numbers" of dual American-Canadians living in Canada who have unwittingly run afoul of tax filing rules.

"Most of these Canadian citizens, many with only distant links to the United States, have a very limited knowledge of their reporting obligations to the United States," Mr. Flaherty said in a letter sent Friday to the New York Times, Wall Street Journal and Washington Post.

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"These are honest and law-abiding people, including senior citizens now caught up in a nerve-wracking situation. Because they work and pay taxes in Canada, they generally do not owe any taxes in the United States. … They are not high rollers with offshore bank accounts. These are people who have made innocent errors of omission that deserve to be looked upon with leniency."

Most, he said, want "to do the right thing," but prohibitive fines for filing have made coming clean a "frightening prospect."

Unlike most countries, the United States requires all of its citizens to file annual tax returns with the IRS, regardless where they live and work. There are roughly a million Canadian-American citizens living in Canada.

Recent U.S. efforts to identify offshore tax havens has led to new and looming requirements, including an obligation by individuals to report all foreign bank and brokerage accounts every year. To ensure compliance, another law – the Foreign Account Tax Compliance Act, or FATCA – will compel Canadian financial institutions to identify accounts held by U.S. citizens by 2014.

In his letter, Mr. Flaherty characterized FATCA as a "waste of resources" because there is already a bilateral tax treaty to deal with tax evasion.

A deadline passed last week for U.S. citizens who have not been reporting their foreign investments to the IRS. Anyone who came forward had to pay any back taxes owing, plus interest, and a penalty of up to 25 per cent on all of their bank and investment accounts worth more than $10,000 (U.S.). That includes RRSPs, RESPs, pensions and brokerage accounts.

The penalty, which may be lower for accounts totalling less than $75,000, applies to the highest balance between 2003 and 2010.

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