Credit: Bay Ismoyo

TORONTO, Canada — Meet Michael, the accidental American.

Born in the U.S. to Canadian parents, he’s never lived or worked there, or benefited from his status as a dual citizen.

He’s also never filed a U.S. tax return.

It’s an oversight that’s put him squarely in the crosshairs of a major and growing effort by the U.S. Internal Revenue Service to hunt down tax evaders around the world.

Hundreds of thousands of Canadians — estimates run as high as a million — hold dual citizenship, a legacy of the relative ease with which citizens of both nations have historically been able to live, work or attend school on either side of the border.

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The vast majority identify as Canadians, pay their taxes here, and have been largely unaware that the U.S. — unlike virtually any other country in the world — has for years required its citizens living and working abroad to report income to the IRS.

But in recent weeks, the issue has taken on a much higher profile. Dual-passport holders have come to the creeping realization that they’re caught in the same broad net meant for drug lords, money launderers and wealthy tax evaders hiding assets in Swiss bank accounts.

Comment sections on newspaper websites have denounced the U.S. efforts as “insane and arrogant” and a “tax grab,” labeled the IRS “vultures,” and urged dual citizens to renounce their American citizenship.

“It’s completely intrusive and feels like a money grab,” said Jessica, a Toronto resident with dual status, who didn’t want her real name used. “Why would they be doing that if I’m not using any of their services in any way?”

Others, like Michael, are outraged by what they see as the reasons for the crackdown: a U.S. economy bankrupted by misguided foreign wars and lax banking rules, and desperate for revenues.

“Americans with their imperial reach have made themselves go broke, and now they’re trying to shake down little guys living overseas,” he said.

Even Canada’s ruling Conservative Party, a lock-step ally that is rarely critical of America’s global interventions, felt compelled to denounce the “far-reaching extra-territorial implications” of the IRS crackdown.

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“Canada is not a tax haven,” said Finance Minister Jim Flaherty. “People do not flock to Canada to avoid paying taxes.”

Dual citizens, he said, “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.”

At issue are two specific pieces of U.S. legislation that reach beyond its borders.

The Report of Foreign Banks and Financial Accounts, known as FBAR, has required U.S. citizens abroad to file tax returns to the IRS since the early 1970s. Though it comes with stiff penalties, most Americans living in Canada have been largely unaware of its implications.

That’s changing because of FATCA, the Foreign Account Tax Compliance Act. Recently enacted by President Barack Obama’s administration, FATCA requires all those with American citizenship to file U.S. tax returns and detailed annual foreign account disclosure statements, going back to 2003.

Canadians must declare any accounts over $10,000, including government-registered retirement and education savings plans. Penalties are severe — up to $10,000 per offense per year, even if the disclosure is willful. Anyone actually trying to hide from the legislation would risk much higher penalties, up to $100,000 per offense.

More important, and ominously, by 2014, FATCA would force foreign banks to identify all accounts held by U.S. citizens and impose a 30 percent tax on those who refuse to come forward. If the banks refuse to comply, they risk severe penalties on income from their U.S. investments.

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One of Canada’s largest banks, the Toronto Dominion, has huge assets in the U.S. and would find itself particularly exposed to IRS penalties. Even without penalties, the bank has estimated it will cost $100 million to comply with FATCA.

Expatriate members of Obama’s own party have expressed concerns about the implications of pending rules. “Congress should carefully consider the damage of this kind of legislative and fiscal irresponsibility in dealing with the financial institutions of sovereign nations,” said Joe Green, a senior official with the Canadian branch of Democrats Abroad, an official party organization for the millions of Americans living outside the United States.

Green’s group organizes expat American citizens to vote in the only election they legally can participate in: the federal election for president.

That vestigial right is what prompted a letter to Obama from Maurice Williams, a history professor who teaches at the University of British Columbia and who has lived in Canada since 1973.

“Although I have not voted in a federal election since 1968, the fact that I could vote for the President makes you the only elected representative in the US government that I can contact,” he wrote. “Consequently, I am turning to you for assistance and I call upon you to act as my elected representative.”

What Williams said he finds “particularly disturbing” is the position of the children of U.S. citizens who reside in Canada, but who are automatically considered U.S. citizens.

“These children, however, are Canadian; they were born in Canada; they have never lived or worked in the United States; in many cases they have never set foot south of the border; and they have no affiliation with the U.S. government,” said Williams.

“They should not be subject to U.S. taxes and disclosures, and the substantial IRS penalties for non-disclosure.”

The growing uproar in Canada may have prompted a slight thaw. The IRS, which has limited its recent public statements to gloating at how much their crackdown has netted — $2.7 billion so far from offshore account holders — issued a statement last week acknowledging the concerns in Canada.

“The IRS recognizes that many Canadians face complex tax situations because of dual citizenship,” said chief spokesperson Terry Lemons in the statement. Recent media attention has “spotlighted a number of areas that the IRS will consider as we continue our effort to strike the right balance in administering the U.S. tax laws.”

That’s still not much comfort to Americans living in Canada, who worry they’ll face fines and other punitive actions when crossing into the U.S. on business, vacation or to visit family.

“I’ll never visit my folks in Florida again,” said Michael, whose parents are among thousands of “snowbirds,” or Canadian retirees who winter in Florida.

Nor does renouncing their U.S. citizenship get non-residents off the hook. Before that can happen, U.S. law requires all citizens to be “tax-compliant.”

Not everyone, however, is empathetic.

One Canadian, commenting on a newspaper website, said he’s “never known a Canadian-U.S. 'dual citizen' to not brag and rub Canadian single-passport owners noses in the fact that they can work both sides of the border, cross the border easily and their kids have all the advantages of the USA, while single-passport Canadians have fewer opportunities.

“Now the price for this privilege is being challenged.” 

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