Due Diligence

by Brian Mahany

The title of this post, The Accidental Kenyan, comes from an editorial in the Vancouver Sun earlier this week. It is destined to become a classic among the tax bar so we have posted a link to the original article. Don Whiteley at the Sun does a much better job of telling the story, so we will stick to the lessons learned.

FATCA, for those non familiar with the term, stands for the Foreign Account Tax Compliance Act.  The law requires foreign banks to identify and report all U.S. taxpayers with accounts to the IRS. This means if you are an American but living in Canada and you have a bank account at Bank of Montreal, the bank must disclose your account to the IRS.

What’s the big deal about reporting your bank account? Plenty!

The penalty for failure to report foreign accounts can be as high as the greater of $100,000 per year or 50% of the high balance for each year the account is unreported. That means that a $100,000 account could generate penalties of a half million dollars or more. Why so much? Because the IRS can go back in time – no 3 year statute of limitations!

Most people that have unreported foreign accounts are not tax evaders. Congress may treat them that way (it’s easy to pick on the IRS but they are simply doing what Congress tells them to do), but most folks with foreign accounts are dual nationals, foreign born Americans sending money “home” to India or China or Americans living abroad. According to the Sun, there are about a million Americans living in Canada.

The U.S. is unique in wanting to tax people wherever they live. For most of the world, people pay taxes where they live. The U.S. wants to tax people living here and Americans living elsewhere. That’s the big deal behind the Sun editorial. I could be an American living in Montreal. I work there, bank there and pay taxes there. Because I am an American, however, the U.S. Treasury could claim all or most of my money there even though I paid taxes –  just because I didn’t know that I had to report my foreign accounts.

I will let you read Don Whiteley’s piece in the Sun. If you haven’t figured out why it’s called the “accidental Kenyan,” just know that the president’s father was born in Kenya and under Kenyan law the president could be a citizen there just like children of foreigners that are born on U.S. soil can claim American citizenship. With a million Americans living in Canada, the story is very appropriate.

If you are an American living outside the U.S. or a U.S. taxpayer with overseas brokerage or financial accounts, you may have significant tax liabilities to the IRS. Once the FATCA rules kick in for banks next year, the chance of getting caught increases dramatically. There is amnesty program – called the Offshore Voluntary Disclosure Program or “OVDI” – that may help many taxpayers. Those who were truly unaware of the reporting requirements may benefit from a traditional disclosure. Either way, taxpayers should do something before the IRS catches you. Amnesty isn’t available if the IRS finds you first.

The tax lawyers at Mahany & Ertl have helped many taxpayers with international reporting issues, OVDI and FBARS – the Report of Foreign Bank and Financial Accounts. For more information, contact attorney Bethany Kroes at (414) 223-0464 or by email at bckroes@mahanyertl.com. The author may be reached at brian@mahanyertl.com. All inquiries are protected by the attorney client privilege and kept in strict confidence.

Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine & Minneapolis, Minnesota. IRS services available worldwide.