The IRS battles with Swiss banks have been well publicized, but the IRS is now pursuing IRS tax evaders with more vigor everywhere. Last year, President Obama signed into law the Foreign Account Tax Compliance Act (FATCA). Under this new law, beginning in 2013, all foreign banks must report to the IRS on all accounts held by U.S. citizens. This even includes corporate accounts with substantial U.S. ownership.
If the banks fail to comply the IRS will impose a 30% withholding tax on any U.S. income on any transactions the bank where their customers do.
This law could become a real burden for our neighbors to the north in Canada, because Canadian banks do not require account holders to declare citizenship. In other words, Canadian don’t know the citizenship of their customers and Canadian law does not require them to find out.
This new law has led to protests by organizations such as Canadian Bankers Association and the Canadian Investment Fund Institute. On one hand, if the Canadian banks attempt to comply with this law the cost of continually identifying U.S. customers of all financial institutions would be staggering. The estimated the cost could be close to $250 million for each large Canadian financial institution. On the other hand, not complying with the law could prohibit Canadian financial institutions from operating in the U.S. The IRS already requires all U.S. citizens to declare all income from every source. This law literally requires foreign banks and financial institutions to provide details on their American customers. This would allow the IRS to cross-check the two sources of information and look for discrepancies which would lead to finding tax evaders. It’s worth noting that the Canadian Revenue Agency (Canada’s version of the IRS) already has information sharing agreements with the IRS. How this will all play out remains to be seen.