Thousands of Canadians face IRS scrutiny at border
Eric Beauchesne CanWest News Monday October 15, 2007
OTTAWA -- Shopping or other trips to the U.S., which have surged with the loonie's rise to parity, could be cut short for thousands of Canadians by the IRS.
The approximately 70,000 Canadians living here who have dual U.S. citizenship, plus individuals with U.S. green cards, are for the first time facing tax scrutiny at the border, American tax lawyers are warning.
While it's been known for years that the Canada Revenue Agency and the Internal Revenue Service exchange large amounts of information, it now appears that the IRS is also sharing information with Homeland Security, says Carol Fitzsimmons, with Buffalo-based law firm, Hodgson Russ LLP.
"A border crossing guard may have information readily available in his or her booth computer concerning a traveller's unpaid U.S. tax liabilities and may bar the traveller's entry into the United States," she writes in the latest edition of the Canadian Tax Foundation's publication Tax Highlights.
In addition, anecdotal evidence suggests that Homeland Security agents are becoming more sophisticated about U.S. tax laws and may ask travellers with a green card or non-resident U.S. citizens whether they have been filing U.S. tax returns, she says.
"Even if a non-U.S. passport is used at the U.S. point of entry, most countries' passports list the place of birth, allowing Homeland Security to easily identify a traveller who is a U.S. citizen by reason of his or her birth in the United States," she says.
In fact, the Canada Revenue Agency confirmed to CanWest News Service that it not only shares its tax information with the IRS but also with the Canada Border Services Agency, suggesting border guards could get tax dodgers both coming and going.
"While the U.S. is free to exchange information with their own Border Services ... the use of information provided to the U.S. is restricted to the application of federal taxes and income taxes at the state/provincial level," Canada Revenue Agency said in a response to queries.
Even if individuals escape detection at the border, and throughout their lives, Fitzsimmons, in the article entitled IRS Scrutiny Intensifies, also warns that the IRS could catch them, or at least their heirs, beyond the grave.
"Experience is revealing that it is becoming easier for the IRS to discover neglected filing and tax liability obligations," she says. "And a U.S. citizen who ignores the issues before death leaves the estate's administrators and heirs in an extremely difficult position."
Not only can the IRS go after the deceased person's assets in the U.S., it can also go after the U.S. assets of the heirs, she warns.
"Perhaps the most common situation ... is that of the U.S. citizen Canadian resident - often a person who acquired citizenship by being born in the United States and who lived there only briefly - who has not been filing U.S. income tax returns," Fitzsimmons writes, adding the individual may never have filed a U.S. return and may be unaware of their obligation to do so.
Leslie Kellogg, a partner with Hodgson Russ added in an interview that while U.S. border guards likely have the authority to detain travellers for failing to fulfil any tax obligations, so far "we haven't seen any indication that they are going the next step and trying to do the IRS's job in terms of tax collection efforts."
"Right now what we've been seeing more is that people would be either denied entry or ... are being asked questions that they were never asked before ... which then starts to worry our clients," Kellogg explained. "We've never seen them before asking any types of tax questions at all."
"For a lot of people I think it's just a wake-up call that they have a filing requirement," she said, noting that when border guards see someone with a Canadian passport but who was born in the U.S., they are starting to ask if they've been filing U.S. tax returns as they are required to do.
Fitzsimmons, in her article, notes that U.S. citizens living in Canada remain liable for U.S. income tax on their worldwide income and for U.S. gift, estate, and transfer tax on their worldwide assets.
While U.S. citizens living in Canada are required to file annual U.S. tax returns, because of the tax they've paid in Canada, they often have no actual tax liability to the U.S., Kellogg explained.
However, Fitzsimmons notes that even Canadian citizens, who are not American citizens, but who own assets in the U.S. may be exposed to U.S. income, gift and estate taxes.
"For example, a Canadian who owns stock in a U.S. corporation ... is exposed to U.S. estate tax," Fitzsimmons notes.
But it's not just the IRS that those with U.S. tax obligations need to worry about, she adds.
Many U.S. states have even more sophisticated systems than the IRS to discover information about taxpayers who may be exposed to state income or other tax, she warns.
"For example, if a Canadian resident and citizen dies owning New York real estate, it may be impossible to transfer title without alerting the New York State Department of Taxation and Finance to the state estate tax exposure," she says. "Moreover, New York income tax may be owing if the property was rented during the decedent's lifetime and no related state tax returns were filed."
Eric Beauchesne CanWest News Monday October 15, 2007
OTTAWA -- Shopping or other trips to the U.S., which have surged with the loonie's rise to parity, could be cut short for thousands of Canadians by the IRS.
The approximately 70,000 Canadians living here who have dual U.S. citizenship, plus individuals with U.S. green cards, are for the first time facing tax scrutiny at the border, American tax lawyers are warning.
While it's been known for years that the Canada Revenue Agency and the Internal Revenue Service exchange large amounts of information, it now appears that the IRS is also sharing information with Homeland Security, says Carol Fitzsimmons, with Buffalo-based law firm, Hodgson Russ LLP.
"A border crossing guard may have information readily available in his or her booth computer concerning a traveller's unpaid U.S. tax liabilities and may bar the traveller's entry into the United States," she writes in the latest edition of the Canadian Tax Foundation's publication Tax Highlights.
In addition, anecdotal evidence suggests that Homeland Security agents are becoming more sophisticated about U.S. tax laws and may ask travellers with a green card or non-resident U.S. citizens whether they have been filing U.S. tax returns, she says.
"Even if a non-U.S. passport is used at the U.S. point of entry, most countries' passports list the place of birth, allowing Homeland Security to easily identify a traveller who is a U.S. citizen by reason of his or her birth in the United States," she says.
In fact, the Canada Revenue Agency confirmed to CanWest News Service that it not only shares its tax information with the IRS but also with the Canada Border Services Agency, suggesting border guards could get tax dodgers both coming and going.
"While the U.S. is free to exchange information with their own Border Services ... the use of information provided to the U.S. is restricted to the application of federal taxes and income taxes at the state/provincial level," Canada Revenue Agency said in a response to queries.
Even if individuals escape detection at the border, and throughout their lives, Fitzsimmons, in the article entitled IRS Scrutiny Intensifies, also warns that the IRS could catch them, or at least their heirs, beyond the grave.
"Experience is revealing that it is becoming easier for the IRS to discover neglected filing and tax liability obligations," she says. "And a U.S. citizen who ignores the issues before death leaves the estate's administrators and heirs in an extremely difficult position."
Not only can the IRS go after the deceased person's assets in the U.S., it can also go after the U.S. assets of the heirs, she warns.
"Perhaps the most common situation ... is that of the U.S. citizen Canadian resident - often a person who acquired citizenship by being born in the United States and who lived there only briefly - who has not been filing U.S. income tax returns," Fitzsimmons writes, adding the individual may never have filed a U.S. return and may be unaware of their obligation to do so.
Leslie Kellogg, a partner with Hodgson Russ added in an interview that while U.S. border guards likely have the authority to detain travellers for failing to fulfil any tax obligations, so far "we haven't seen any indication that they are going the next step and trying to do the IRS's job in terms of tax collection efforts."
"Right now what we've been seeing more is that people would be either denied entry or ... are being asked questions that they were never asked before ... which then starts to worry our clients," Kellogg explained. "We've never seen them before asking any types of tax questions at all."
"For a lot of people I think it's just a wake-up call that they have a filing requirement," she said, noting that when border guards see someone with a Canadian passport but who was born in the U.S., they are starting to ask if they've been filing U.S. tax returns as they are required to do.
Fitzsimmons, in her article, notes that U.S. citizens living in Canada remain liable for U.S. income tax on their worldwide income and for U.S. gift, estate, and transfer tax on their worldwide assets.
While U.S. citizens living in Canada are required to file annual U.S. tax returns, because of the tax they've paid in Canada, they often have no actual tax liability to the U.S., Kellogg explained.
However, Fitzsimmons notes that even Canadian citizens, who are not American citizens, but who own assets in the U.S. may be exposed to U.S. income, gift and estate taxes.
"For example, a Canadian who owns stock in a U.S. corporation ... is exposed to U.S. estate tax," Fitzsimmons notes.
But it's not just the IRS that those with U.S. tax obligations need to worry about, she adds.
Many U.S. states have even more sophisticated systems than the IRS to discover information about taxpayers who may be exposed to state income or other tax, she warns.
"For example, if a Canadian resident and citizen dies owning New York real estate, it may be impossible to transfer title without alerting the New York State Department of Taxation and Finance to the state estate tax exposure," she says. "Moreover, New York income tax may be owing if the property was rented during the decedent's lifetime and no related state tax returns were filed."
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