We recently reported that several high profile poker pros were eyeing a move to Canada where online poker is legal. In a bid to enjoy the freedom to play online that the USA currently denies its citizens, many players think Canada is the closest answer. While there are many things to consider before moving to another country, poker players making the move to Canada could face another obstacle - the IRS following them.
Americans (including poker players) living in Canada who have failed to file a tax return with the Internal Revenue Service (IRS) in the USA could be facing big penalties amounting to thousands of dollars. While the tax law has been on the books for many years, there is a new IRS enforcement policy that starts next month and the tax man is pushing to enforce this provision with more vengeance than in the past. Come next month, there will be a large number of Americans who will be caught by surprise because they failed to file.
Gordon Lee, a Windsor accountant who specializes in Canada-U.S. tax issues said "As far as I'm concerned, they've gone on a witch hunt to find average citizens who have really done nothing wrong. They're not seeking to avoid tax liabilities because there rarely are any. Many are simply not aware of the rules."
For the estimated 600,000 to one million U.S. citizens living in Canada, an August 31st deadline is at hand and if they haven’t filed, they could be facing massive penalties from the IRS. Even if Americans in Canada have no U.S. income to report, owe no back taxes and haven't lived in the United States for years, they could still be at risk for penalties. This applies to both Americans living in Canada and Canadian-born individuals with dual citizenship.
When it comes to Uncle Sam taking his due, ignorance of the IRS requirement saying all U.S. citizens living abroad have to file annual tax returns is no excuse and will not keep the tax man from slamming you with penalties. One of the IRS requirements that surprise many Americans living in Canada is the rule that they must disclose their foreign bank accounts and other holdings even if they have no American tax liability.
The August 31st deadline is for an Offshore Voluntary Disclosure Initiative which was introduced last winter to encourage non-resident Americans to make the required disclosures and file. All of those who meet the deadline will be eligible for reduced but still costly penalties. There is also a slight chance for those who meet the deadline that their penalties could be waived. Lee has been advising his clients for years to make the information available to the IRS on an annual basis but he said, "Many find it repugnant to do so. Most hate filling out these forms but it's becoming more and more onerous not to do so."
The bad news for Americans who have not filed in the past is that they could be hit with penalties of up to 25 per cent of the higher amount of their financial holdings between 2003 and 2011. Those who have complied and filed every year however face no penalties. "Now, for those who have never filed, they can be hit with penalties dating back to 2003 just for complying with the deadline and coming clean with their bank account and investment information," said Lee.
Cyndee Todgham-Cherniak, a tax and trade lawyer and instructor at the University of Windsor's law school, said "as with any compliance issue, when a government needs money, it often grants incentives to encourage people to come forward or it conducts an audit and assesses you anyway.
"U.S. citizens, regardless of where they live, are still subject to the same taxation regulations as any other U.S. citizen," said Todgham-Cherniak. "This deadline is designed to encourage them to come forward and comply voluntarily."
The Offshore Voluntary Disclosure Initiative could reduce the penalties by as much as 90 percent, but it comes with three conditions: American citizens must establish that they lived outside the U.S. from 2003 to 2010, that they made a good-faith effort to comply with tax laws in the country or countries where they've been residing, and that they had less than $10,000 of U.S.-source income. Those who meet those criteria may be able to apply for an extension to get all the paperwork done. Penalties for willful non-compliance could be as high as $10,000 for every year a person has failed to file.
Since the USA is trillions of dollars in debt, it should come as no surprise that the IRS is busy trying to squeeze blood from every rock they can find, even if those native rocks are in other countries. In a statement on the IRS website, commissioner Doug Shulman said "the time has come to get back into compliance with the U.S. tax system because the risks of hiding money offshore keeps going up. "Our goal is to get people back into the system," added Shulman "The voluntary initiative gives people a fair way to resolve their tax problems."
Tax rates are higher in Canada than in the U.S. and American’s living there don’t have to pay tax to the IRS on Canadian derived income if they follow the disclosure rules. There would be tax owed however on capital gains and lottery winnings which are treated differently on each side of the border. A question that poker players looking to relocate to Canada should be asking is; just how would the tax laws pertain to poker winnings?
A clear definition of how poker winnings are categorized would be an important thing to know for players looking to relocate. Would poker income be considered non-US income or come under the same heading as lottery winnings? If it is the same as lottery winnings, poker players would owe tax to the IRS on money they earn playing poker online.
You may be sitting at a computer in Canada, but if you are playing at a poker site based in Malta and win $10,000 in a tournament, is that Canadian income or US income? Even though you are in Canada, you technically won money from Malta but you are an American citizen and the internet is worldwide - but there is that lottery clause. Then again, maybe since online poker is not legal in the US, that means the IRS can’t tax something that Americans are banned from doing in the first place - but don’t count on it.
In case you are thinking of heading to Canada and taking your chances, two years from now the U.S. Foreign Account Tax Compliance Act comes into effect. That means Canadian banks will be required to inform the IRS about any of their clients who are U.S. citizens.
*Photo courtesy of spiritusfinancial.com