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.