Taxation of Canadians in America. David Levine

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      For the 2011 tax year, individuals are subject to federal graduated tax rates from 10 to 35 percent; the 35 percent tax rate applies to taxable income of more than $379,150 for couples filing jointly and single individuals. Also for 2011, corporations are subject to federal graduated rates of tax from 15 to 35 percent; the 35 percent tax rate applies to corporate taxable income of more than $18,333,333. State income tax rates vary from 0 to 11 percent. State and local taxes are generally deductible in computing federal taxable income.

      The Federation of Tax Administrators website www.taxadmin.org/fta/rate/ has information on the latest tax rates, surveys, and rankings.

      3. Dealing with the IRS

      While the IRS is not the demonic organization it is frequently made out to be, it’s an organization you do not want to get on the bad side of. Fortunately, staying in the IRS’s good graces is relatively easy to do; file your taxes on time and pay the taxes you are legally required to pay.

      In the US you are typically not contacted by the IRS unless it wants something such as additional information. Neither ignore nor panic when you receive a letter or notice; instead, we suggest that you contact a professional and have them assist you with the process. Just because the IRS asserts something, does not mean that it is correct.

      Do not pay additional amounts of tax without making sure you owe it. Over the years, we have seen many taxpayers pay additional amounts without checking with us or otherwise confirming that the amount being asked for was legitimate. We guess that based on our experience, greater than 50 percent of the notices sent by the IRS asking for additional money are incorrect in part or in whole.

      This is what the IRS says about a notice. “If you receive a letter or notice from the IRS, it will explain the reason for the correspondence and provide instructions. Many of these letters and notices can be dealt with simply without having to call or visit an IRS office. The notice you receive covers a very specific issue about your account or tax return. Generally, the IRS will send a notice if it believes you owe additional tax, are due a larger refund, if there is a question about your tax return, or it needs additional information.”

      Here is a copy of IRS Summertime Tax Tip 2011-22, August 24, 2011.

       Every year the Internal Revenue Service sends millions of letters and notices to taxpayers, but that doesn’t mean you need to worry. Here are eight things every taxpayer should know about IRS notices — just in case one shows up in your mailbox:

       1. Don’t panic. Many of these letters can be dealt with simply and painlessly.

       2. There are number of reasons the IRS sends notices to taxpayers. The notice may request payment of taxes, notify you of a change to your account, or request additional information. The notice you receive normally covers a very specific issue about your account or tax return.

       3. Each letter and notice offers specific instructions on what you need to do to satisfy the inquiry.

       4. If you receive a correction notice, you should review the correspondence and compare it with the information on your return.

       5. If you agree with the correction to your account, usually no reply is necessary unless a payment is due.

       6. If you do not agree with the correction the IRS made, it is important that you respond as requested. Write to explain why you disagree. Include any documents and information you wish the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the lower left part of the notice. Allow at least 30 days for a response.

       7. Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right corner of the notice. Have a copy of your tax return and the correspondence available when you call.

       8. It’s important that you keep copies of any correspondence with your records.

       For more information about IRS notices and bills, see Publication 594, “The IRS Collection Process.” Information about penalties and interest charges are available in Publication 17, “Your Federal Income Tax for Individuals.” Both publications are available at www.IRS.gov.

      Caution: One thing to point out is that Canadians seem to be much more likely to call Canada Revenue Agency (CRA) or the IRS to ask questions about the law, than Americans. We suggest that you do not call the IRS for advice for a number of reasons. First and most importantly is that the IRS is not bound by the advice the employees provide on the phone. In the best of cases, you are flipping a coin as to whether you will get an answer that is correct. Given that you will have a number of cross-border issues, this will increase the complexity and therefore decreases the likelihood of receiving an answer you can rely on. We hope the following analogy makes the problem clear:

      We provide you a hat full of possible answers, 40 percent of them will be correct answers and 60 percent will be incorrect answers. You are to blindly pull one answer from the hat, then bet thousands of dollars on the fact you have one of the correct answers — that is not a bet we would want to take. Also, when talking to the IRS agent, you may either not accurately convey the issue or you may not understand the answer due to the fact that you do not understand the law or the tax lexicon. Lastly, you may inadvertently tell the IRS agent something you should not be telling him or her.

      4. The IRS Examination (Audit) Process

      The IRS examines (audits) tax returns to verify that the tax reported is correct. Selecting a return for examination does not always suggest that the taxpayer has either made an error or been dishonest. In fact, some examinations result in a refund to the taxpayer or acceptance of the return without change.

      The IRS selects returns for examination using a variety of methods, including:

      • Potential participants in abusive tax-avoidance transactions: Some returns are selected based on information obtained by the IRS through efforts to identify promoters and participants of abusive tax-avoidance transactions. Examples include information received from “John Doe” summonses issued to credit card companies and businesses and participant lists from promoters ordered by the courts to be turned over to the IRS.

      • Computer scoring: Some returns are selected for examination on the basis of computer scoring, which means computer programs give each return numeric “scores.” The Discriminant Function System (DIF) score rates the potential for change, based on past IRS experience with similar returns. The Unreported Income (UI) DIF score rates the return for the potential of unreported income. IRS personnel screen the highest-scoring returns, selecting some for audit and identifying the items on these returns that are most likely to need review.

      • Information matching: Some returns are examined because payer reports (i.e., tax slips), such as Forms W-2 from employers or Miscellaneous Income (Form 1099) statements from banks and brokerage firms, do not match the income reported on the tax return.

      • Related examinations: Returns may be selected for audit when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for examination.

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