— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) September 4, 2014
Reflecting on my day I realized that there are really four kinds of U.S. Taxable
Persons abroad. Each one of them has his own set of problems. Interestingly, my day included discussions with a member of each group.
They can be grouped as follows:
File U.S. tax returns? U.S. tax compliant? What is their problem?
Yes Yes Inability to live normal life*
Yes No Subject to penalties for mistakes**
No Yes Don’t have any income***
No No OMG moment is coming****
The letter from Marilyn to President Obama makes clear, there is almost no possibility of living as a U.S. taxable person outside the United States. Because nobody is expecting a response from the President, Andy Sirkis penned a hypothetical response from the President. U.S. lawyer Robert Wood has documented the fact that renunciations of U.S. citizenship are increasing. There is no evidence that the massive increase in the fee to renounce U.S. citizenship will slow the trend toward relinquishing citizenship.
Some thoughts on each of the four groups:
* Filing U.S. Tax Returns and are U.S. Tax Compliant:
This group meets all the requirements of the U.S. laws as they apply to U.S. citizens abroad. They have willingly entered the “prison of citizenship-based taxation“. They have thrown away the key. The result is that their investment and retirement planning is restricted (unless they want to avoid anything except U.S. investments) to dividends of individual stocks and interest. Okay, if they meet the 8891 requirements they can invest in an RRSP. It is difficult to both be a tax compliant American abroad and to engage in reasonable financial planning. This reality is well expressed in the following comment:
In all honesty, I don’t see how anyone with even a moderately normal middle class life outside of the US can possibly fit themselves into the compliance regime without very material cost. Even if no actual tax dollars are paid over, the cost of having to forego proper financial planning due to conflicting tax regimes, the restricted career choices due to concerns of infecting an employer with your “dual-ness” and the continual risk of financial ruin for innocent filing errors and omissions make the costs enormous for just about anyone. Add to this all the miscelanneous types of income that might come the way of a typical middle class person: income and gains generated in a registered account, severance payments that might put them in another tax bracket for a year, employment insurance payments: the prospects for double taxation are constant. The uber rich have accountants and lawyers plotting their way through fiscal mine fields all day long anyway – I don’t wish them any greater misfortune in shedding their unwanted life passenger than anyone else, but the inability to “tax optimize” one’s financial affairs is not a material concern for them since registered accounts, pension plans, mutual funds: all of these are rounding errors for them. The poor and indigent can be threatened, but the blood from a stone adage works for them. All of this web of restrictions may not be intended to oppress and ensnare the middle class, but they are the overwhelming majority of the victims of it. Bottom line – registering ones’ children with the embassy or even retaining citizenship one day longer than necessary is an act of fiscal suicide for anyone but those with definite plans to move back behind the “Wall”. Oh what a brave new world that has such people in it.
More and more of these people are using the fact of their tax compliance as an opportunity to renounce U.S. citizenship.
** Filing U.S. tax returns but are not tax compliant:
This group is filing taxes but is likely missing a number of information returns. Since they are in the U.S. tax system and have made mistakes they may be headed for severe problems. The “clean up” of U.S. problems is expensive and fraught with uncertainty. Some of these unfortunate souls are entering the new “streamlined program”. Their U.S. tax “clean up” will move them into the first category. They will use the fact of “cleaning up their problems” in the “streamlined program” as an opportunity to renounce their citizenship.
*** Not filing U.S. tax returns but are tax compliant
This group is likely populated by the “stay at home” spouse. In any case, these people do NOT make enough to meet the U.S. filing threshold. They may however have FBAR obligations. They may have not filed the FBAR. Those who have become citizens of another country are quick to argue for a relinquishment based on the date they became naturalized citizens of Canada. Alternatively many of them wish to renounce U.S. citizenship because they do not want to report their “alien spouse’s” bank accounts to the IRS. Yes, U.S. citizenship is an interference in the “FBAR Marriage” (marriage between a U.S. person and an “alien”).
**** Not filing U.S. tax returns and are not tax complian
This group is not in the U.S. tax system. They therefore do NOT have tax problems yet. They will first have their OMG moment. (Those experiencing the OMG should need to understand what to do before calling a lawyer or accountant.) The highest percentage of “border babies” are in this group. They do not regard themselves as Americans anyway. They may perform what Phil Hodgen recently referred to as a “Do it yourself relinquishment“.
In any case, existing as a U.S. citizen abroad is somewhere between difficult and impossible.
I have heard it said that there are two groups of Americans abroad with problems.
Group 1 – Those who are in or who have made attempts at being U.S. tax compliant.
Group 2 – Those who have made no attempt at tax compliance.
It’s very sad.
But, the U.S. really doesn’t care. As expat financial planner David Kuenzi notes, “The FATCA rules as applied to Americans abroad are absurd“. Perhaps it is simply a matter of “growing the U.S. tax base”. As one blogger noted, the U.S. can always get more citizens or “there’s plenty more where those came from“. But, really, does the fact that U.S. citizens abroad are replaceable, justify the punitive and unfair treatment of Americans abroad? What if citizens were dogs. What if if there were “dogs at a pound” waiting to become U.S. citizens? One blogger recently explored this issue by suggesting:
Or maybe that’s not true. Perhaps the treatment of Americans abroad is not a moral principle at all. Perhaps the issue is the whether Americans should be discouraged from leaving the country at all.
But, perhaps as a recent blogger wrote, the question is:
Is America Trying To Stop Americans From Working Abroad?
Maybe. Of course if Americans can’t work abroad, then they really can’t leave America at all. But maybe, that’s not so bad. As blogger Victoria Ferauge comments:
I would add one more and that is an domestic reaction against all things “foreign”. The world outside the US looks really scary and hostile to the homelanders. They don’t understand why any American would be so foolish to live out there where “everyone hates us.” They also have some very strange ideas about the protection that the US government affords it’s citizens abroad. Telling them that in a lot of places it doesn’t exist (or is really limited) just freaks them out. I just finished The Foreign Circus which was written by a former Foreign Service Officer and he says that US embassy security (those Marines) are NOT there to protect Americans inside or outside. They are there to ensure INTERNAL security at the embassies. That’s it.