Can the IRS sieze money from a Canadian bank?

Factual Questions
1

Our sysop was telling me yesterday that his wife was born in the US, left at age 12 and has never filed US tax returns. She has no money in the US. He was telling me that under a new law coming into effect in 2013, the IRS can demand that a Canadian bank turn over her money to them. Is this actually true? Suppose she renounces her citizenship? He is still afraid that they will come for back taxes. Is this true?

Since I have always filed US tax returns I know perfectly well that credits for Canadian tax returns always reduce US tax liability to 0. Americans are probably the lowest taxed people in the developed world, but certainly lower than Canadians.

2

The law was designed to find money from rich Americans being hidden overseas. A side-effect is that the IRS, unlike civilized countries of the first world, demands that Americans pay taxes no matter where they live. In Canada, for example, if you have left the country and have no financial ties, you can remain a Canadian citizen without paying any taxes on foreign money.

Your friend’s wife is an example of the “collateral damage” the law provides. IIRC it says you must file tax returns every year, even if the deduction for Canadian taxes means you pay no American taxes. You must also (on the tax return?) declare any foreign assets over a certain amount, and failure to do so results in a fine of $10,000. IIRC the amount was $100,000; which is not an unusual amount for a person with home equity or an RRSP (equivalent of IRA or 401K).

This leads to a dilemma. If you ask the IRS for clarification or time to file, you simply alert the IRS to your existance. The number of tax lawyers and accountants capable of handling tax returns for Canadians wishing to file in the USA is very limited (and oddly, they are very busy now) and so very expensive, too. So Joe Schmoe, or Josephine Schmoe, must come up with thousands of dollars to pay a tax lawyer to file their returns, or take the chance that the US does not care. IIRC the deadline to file has come and gone.

The USA says those who left as children and have no financial ties are not the target. But then, this is the country that routinely labels 16yo’s as sex offenders and puts them on a list, destroys their future, for having sex with their girlfriend - simply because this pads the numbers for some DA’s resume and that’s the letter of the law. Would you trust them?

One risk is that you could be arrested and detained if you tried to cross the border to visit Disneyland or do some shopping. Another risk is that the IRS will issue a judgement and if you fail to fight it, or lose, then you owe the money. They biggest fear is the $10,000 fine for failing to report large foreign assets. It’s a fine - no matter why or what your intentions or whether you owe taxes or not, if you failed to declare the asset, you can be fined.

Can the IRS seize money from Canadian banks? Theoretically, no. Theoretically, they can not even demand information about Canadian customers, it’s private under Canadian law. But… as the Swiss banks, Iranians, and Palestinians, and everyone else the US wants to target, have found out - most banks have a choice - cooperate or get shunned by the US financial syste, The “big 5” Canadian banks are most vulnerable because they have assets in the US. Typically, they have bought US banks to exand their business. Fail to cooperate, and those assets are at risk. Considering the US managed to make Swiss banks give up their data on US depositors, it’s no surprise if they have Canadian banks by the short and curlies. Best case, they have the info on file but can’t get the money, and as long as you do not visit the USA, you are safe.

Not sure what the legal status is for a foreign government seizing an RRSP, typically they are immune from even bankruptcy proceedings.

Perhaps her best bet is to put her money into a local Credit Union, which has no connections outside Canada, and cannot be served in the USA with a warrant, and has no assets in the US to be threatened, and no reason to disclose her assets to the IRS.

Perhaps a lawyer can chime in on whether a fine levied in the USA can be enforced by an order against a purely Canadian financial institution in Canada. Is it considered valid debt in Canada? Can the IRS then get an order or garnishee or whatever to make you pay?

Mind you her choice if she is arrested or questioned when she visits the USA is - do I lie, exposing myself to further charges if they can check, or tell the truth about my assets, effectively giving them the ammo they need to go further…??

Wose yet, is the question of the status of jointly held assets; and whether spouse of an American is also legally obliated to file tax returns to the USA.

3

I can’t see how the spouse of an American would be so obligated. The Americans cannot force foreign citizens to get a Social Security number, which is required to file taxes. And what about the gays? My spouse, for instance, is not only not American, but same-sex, and therefore unrecognized as a spouse in US federal tax law. This situation means that when I file Canadian taxes, I am married, and when I turn around and report the same information to the US, I am single.

4

But marriage assets are considered jointly owned, therefore I assume in the eye of the US law, you must report your (non-US) spouse’s assets even if they are not willing to share that information with US authorities. Of course, if you are not married in the eyes of US law, irrelevant. I recall in the news about this law some American woman in Europe complaining that her husband refused to give her any details of his business holdings, claiming that was none of the IRS’s business.

I suppose the question is, can US authorites enforce a court fine imposed in the US in Canadian courts? Is it a legal debt they can take to Canadian courts? Can US authorities order a Canadian account in a Canadian bank frozen during the duration of the dispute? They have the leverage, but if someone contested it in Canada, could they force the bank to honour its Canadian obligations first?

I have heard that in Canada, you have the right to send your income and tax paid details and receipts etc. to the CRA and say “you figure out how much tax I owe”. (Not sure this is the best strategy, however) Can you do the same thing in the USA?

5

Honestly, the core of the OP’s question isn’t related to the IRS or about taxes.

The question is: can a court order in country X be enforced on a bank account governed by county Y?

I don’t know the answer to that one.

As for what needs to be filed: a US citizen needs to report their worldwide income. Many will not owe taxes after various exclusions and credits, but they are generally required to file to prove this. A US citizen must also report ownership of foreign assets if they meet various tests, one of which asks if more than $10,000 is in foreign accounts owned or controlled by the person.

Finding a tax preparer who can handle this is actually quite easy, but you’ll rarely find someone who does both the Canadian and the US return. The best solution is often to find a preparer in Canada to do the Canadian return and a preparer in the US for the US return. The two preparers can compare notes when necessary, but each is able to deal with their own specialty.

6

Probably not. But I doubt that the IRS (or any US government agency) would try to enforce a US order in Canada; rather, it would get an order from a Canadian court. Canadian caselaw has a fair number of cases where the United States of America is named as a plaintiff.

As for the OP, I am unsure, but I am leaning towards “no” as an answer; at least, not without a court order demanding that the Canadian bank turn a depositor’s money over to the IRS. In civil garnishment matters (for example, to collect a debt from wages or bank accounts), a court order is required.

But I also think that perhaps the OP’s sysop is misinformed. As I understand the media stories on this, the issue does not involve Canadian banks surrendering American depositors’ funds to the IRS on demand; but rather, it involves how much (if any) information must Canadian banks turn over to the IRS if it comes calling. In other words, can the IRS say to (say) the Bank of Montreal, “We understand that Joe Blow is one of your depositors. He’s originally from Chicago, and an American citizen, though he’s lived in Toronto for thirty years. So, give us copies of all his financial records held by your bank”? And must the Bank of Montreal comply?

7

There is actually no way for a legally married american citizen to file taxes without including their spouse, I had made a thread about it awhile back.

8

Filing taxes (IRS form 1040, et al) and there is filing FBAR and/or FATCA disclosures. Slightly different things but all the information goes the the IRS.

We have quite a few “accidental Americans” in Cayman. These are people who were born in Miami because that is where his/her mother was medically evacuated to when complications of pregnancy arose.

Now in adulthood they are finding that the accidents of their birth come with a high price tag. The US allows you to file foreign income exclusion up to a certain limit and offset income tax with income tax paid to a foreign country. What you cannot do is offset your US income tax obligation against taxes paid which are not income taxes. So Caymanians with US citizenship pay high import duties, stamp duties, and various fees which fund the Cayman government but none of that counts for US income tax purposes.

Yes, you must file FBAR disclosures if you have more than US$10,000 in total in all accounts over which you have control. That includes accounts where the assets are not yours! Say you have power of attorney and handle your elderly in-laws’ bills. You must disclose the in-laws’ assets to the IRS, even if the in-laws are not Americans.

And the US can come after you overseas. If the US has a Tax Information Exchange Agreement then the procedures are already in place. A US court order would be sufficient to obtain information on foreign held accounts in agreement countries.

The US uses coercion against foreign financial institutions to gain compliance in obtaining information. FATCA forces foreign banks to report American account holders. Some foreign banks have simply closed accounts of Americans to avoid dealing with the IRS menace. See Forbes article for more details.

9

So if I understand this correctly, the Canadian banks can be forced to provide the information but not cough up any money.

Also as long as our sysop refuses to get a US SS number, his wife simply cannot file a US tax return, even if she were so inclined. That would seem to be an impregnable defense against any prosecution.

10

You ascribe some mighty generous behavior to the IRS. The law is simple - file or get prosecuted. The big deal is that failure to disclose is now punishable by a hefty fine, and IIRC the deadline to file is now past.

Thus the question… Is a fine levied in the USA an enforceable debt in Canada?

11

Getting back to the question in the OP, the general rule is that courts in one country will only recognise and enforce court orders from other countries that are civil in nature (e.g. - contracts, torts, property). They won’t enforce foreign court orders that are penal in nature.

Criminal laws are the best example of this, but traditionally tax court orders are also considered penal and are not enforceable.

The common thread is that courts are more willing to enforce foreign court orders that are between citizens, but are not willing to enforce court orders that are between the government and the individual, because of the potential for abuse by governments.

However, that general rule can be changed by legislation. Canada and the US have a tax treaty, which Hari Seldon mentioned. I don’t know if that treaty gives the revenue agencies of the two countries the power to enforce tax claims in the other country; I would be surprised if they did.

But that’s not the sole issue here. If a Canadian bank operates in the US, it is clearly subject to US law. If the US says that the Canadian banks must provide information about their US clients in Canada, as a condition of the right of foreign banks to operate in the US, then that is a powerful legal hammer. There then is the question whether the Canadian banks can comply with that sort of order, without being in breach of federal privacy laws in Canada.

In short, I don’t think there is a short answer here.

12

If USA taxes or related penalties are owed, they can be collected by Revenue Canada on behalf of the IRS.

If Canada taxes or related penalties are owed, they can be collected by the IRS on behalf of Revenue Canada.

The nationality of the taxpayer is not relevant to this process.

The Convention between Canada and the United States of America, as amended by the protocols signed on June 14, 1983, March 28, 1984, March 17, 1995 and July 29, 1997:

In Canada, collections are made by way of asset seizure and wage garnishment. Do not assume that creditor protection laws apply to Revenue Canada.

13

That makes sense - doesn’t allow for direct seizures by the foreign tax authority, but does allow for reciprocal assistance.

[QUOTE=Muffin]
In Canada, collections are made by way of asset seizure and wage garnishment. Do not assume that creditor protection laws apply to Revenue Canada.
[/QUOTE]

Truer words never spoken! Rev Can introduced the term “super-priority” into the debt collection lexicon; it’s as painful as it sounds. (Not speaking from personal experience, fortunately.)

14

Here’s a Manulife handout on Limitations on Creditor Protection and Life Insurance that toward the bottom gets into how the CRA gets around various creditor protection laws.

15

And if you are barred by their own rules from filing? There is no way they can oblige the husband to get a SS number.

16

This brings up an interesting question, though a bit of a tangent. If DOMA is repealed, when will the US government date my marriage from? Will I be able to claim back taxes from years when I was married, but the US would not recognize it? Or will they just say “in America, you have been married since date-of-repeal-of-DOMA; file taxes accordingly.”

17

Nitpick: while the non-citizen spouse can’t get a SSN, he/she can get a taxpayer identification number (TIN) instead, which the U.S. citizen spouse can use to file. See here, and also the thread that grude started on this subject some months back. The question remains, though, of how the U.S. has a legal right to require a non-citizen to perform an action like acquiring a TIN.

18

It’s likely to depend on how it is repealed. If done by an act of Congress, then I’d expect it to be effective only for future dates. If it’s done by a Supreme Court ruling, then it’s likely to be retroactive since the SC would likely rule that DOMA (or certain elements of it) were never Constitutional. It’s even possible someone will make a vague decision and kick it down to the IRS to decide what periods the repeal would affect.

When the IRS allowed community property splitting for Registered Domestic Partnerships in CA, WA and NV, they made it retroactive back to the dates when state laws met the IRS’s legal standards. So a 2010 announcement could have been applied retroactively back to 2006 in the case of a CA RDP.

19

I heard that in Canada, the government can simply file a net worth assessment or some such. “Based on the information we have at hand, here is what we calculate you owe.” Then they freeze your assets to ensure that enough money to pay that assesment is available. If you disagree with their numbers, you can file or go to court to settle the dispute - meanwhile they have you by the short and curlies.

What are the odds the IRS has similar power? If your spouse refuses to cooperate, then freeze what assets they can and consider necessary, until you and he see the light.

20

But all their assets are in Canada. Yes, Revenue Canada can freeze his assets, but the IRS? Freeze assets in Canada?

The irony about the requirement for an SS (or TIN, whatever), is that they still cannot file a joint return. I still do not see how the IRS can require a non-resident non-citizen to do anything at all.