US Tax Overreach: Enforcing Against Expats

by Peter Spiro

The US is one of the few countries in the world to tax nonresident citizens. But enforcement overseas has never been easy, or much of a priority.  That is, until the authorities uncovered some big-time asset offshoring by resident citizens (yes, in Swiss bank accounts) for purposes of tax evasion.

That resulted in legislation directed at foreign holdings of all US citizens, resident and non, in the form of the Foreign Account Tax Compliance Act, FATCA.  A core purpose is to systematize data collection on the earnings and assets of Americans abroad – the estimated 4-6 million of them.

For those of you not studying your NY Times on the day after Christmas, you can find a good description here.  FATCA will pose a huge burden on any foreign financial institution that have US citizen depositors.  For big institutions that will inevitably have US customers, the law represents a big administrative expense.  Smaller ones will just start turning away US customers.  For nonresident citizens, it means lots of extra paperwork (James Fallows collects some vignettes here and here).  It’s also meant to send a clear signal that the IRS is going to get serious about collecting on Amcits abroad (though it apparently will forgive those who have failed to file in the past).

I see two possible endpoints to the FATCA gambit:

1) The US will have to back down.  Read the comments to this WSJ article on FATCA – some very unhappy folks out there, with strong arguments hinging on American competitiveness.  See also this round-up of diaspora efforts to fight back. US citizens overseas are allowed to make campaign contributions, and you can bet this is the kind of issue they care about.  (Presidential candidates now swing through London to do fundraisers.)  Other governments can’t be happy about it, either, as they feel the heat from financial sector constituencies.

2) If the US can make FATCA stick, some nonresident citizens will renounce, especially those with large tax exposures.  But the law will also spawn a new class of secret Americans.  Unwilling to go through the hassle of filing annual tax returns and switching their checking accounts to compliant institutions, they will keep mum about their US citizenship status (at the same time that they hold citizenship in their country of residence).  These individuals won’t go through with formally renunciation, which may be tricky if they haven’t been tax compliant in the past.  These secret Americans will have the passport in a drawer, good for a rainy day and their children’s right to claim the status (on the expectation that FATCA won’t be forever), but they otherwise won’t identify themselves as such.  The IRS doesn’t have a master list of US citizens.  It will collect from some but drive others underground.

This will be interesting to watch but looks like a bad move.  Any extra revenue will be outweighed by all the bad blood.  Another reason not to wave the flag.

http://opiniojuris.org/2012/01/04/us-tax-overreach-enforcing-against-expats/

9 Responses

  1. I would see a slightly different response: most US companies will hire no Americans for senior foreign posts (because if they tax equalize, then every American costs 20-30% more than every non-American).  US corporations never raise this flag – why bother, when there’s lots of Brits, Canucks, French, Germans, etc. who can take a foreign post as a massive tax deduction (effectively, a foreign post for every other nationality is a “raise” – for Americans, it’s “massive opportunity cost.”)

  2. Um… no comment.

  3. If you are an American hired locally at the same pay as everyone else I am not sure this makes a difference.  There use to be the $80 000 Earned Income Exclusion which would cover a great many people.  Now those earning above the $80 000 (and non earned income folks) have tax strategies to address I recognize – but I believe there is deductibility of foreign taxes paid etc.  I am not going to weep for the 1 percent.

    Where it can get gnarly is when an American living in France or someplace is going to be sent somewhere else in the world.  I went through looking at this when the chance was of me being sent by a French firm to open their office in Hong Kong.  When you start adding in the housing allowances, children’s schooling allowance, and the US tax overlay,  that can be a big number for the American as opposed to the similarly situated national of the country or other national.

    This does appear to be an amnesty in disguise for those who did not file in the past, don’t you think?

    As to secret Americans, the tax approaches of the parents should have no bearing on the American nationality of the children – that would be too cruel.  Just like the tax approaches of an American in the United States has no bearing on the children in the United States.

    When we were trying to get the nationality/naturalization laws simplified to take into account Americans living abroad who adopt abroad being able to transmit their nationality, back in the late 90’s one pitch was that it was a revenue enhancing effort!

    Best,
    Ben

  4. The core issue here is the USA’s insane efforts to continue double taxation of their citizens abroad.  It’s amazing as few people renounce as they do…

  5. The U.S. has made it far too uncomfortable to be a U.S. citizen outside the U.S. It is not just the wealthy who are looking at renouncing U.S. citizenship. It is anybody and everybody who lives in terror of the IRS and can’t find the help they need to deal with this situation. Make no mistake “the renunciation of U.S. citizenship” is one of the few “growth industries coming out of the U.S.A.
    Those U.S. expats who have not been filing their tax returns (and obviously not the FBARs) may well be  driven underground. The problem is that with all the fear mongering they just don’t know how to come into compliance. The IRS needs to declare an amnesty to allow U.S. citizens living outside the U.S. to come into compliance.
    Here is an article that attempts to explain this problem:
    http://renounceuscitizenship.wordpress.com/2012/01/05/the-taxpayer-the-irs-and-the-professionals-where-to-go-from-here/
    Finally, my guess is that FATCA will not be implemented. The benefits to the U.S. are practically none and the costs will be high.
     

  6. Thanks for this article.  I am one of the now former US citizens who is fighting this ill-conceived legislation.  The Obama administration has succeed in scaring the hell out of the US expat community; grandmas laying awake at night, marital discord, fear.  Any, a few of us have started our own initiative to fight back, a site called the Isaac Brock Society.

    And in response to Benjamin G. Davis, who seems to think that somehow US extraterritorial taxation is fair because of the exclusions:  frankly, you have no idea what you are talking about.  The problem is that most people in the rest of the world pay a lot of VAT/or GST/HST–the United States doesn’t have a national sales tax.  Most of Europe and Canada does.  Furthermore the earned income exclusion doesn’t count against investment income–including many registered accounts in Canada (RESP, RDSP, TFSA).  Finally, you cannot count taxes paid under the earned income exlusion in the foreign tax credit.  So in many cases of retired folks and the like, whose majority income is not earned, the earned income exclusion doesn’t help.

    Last year I bought a car.  The GST/HST was $5,000.  Does that count as a foreign tax credit?  No.  United States citizenship is not worth a warm bucket of piss to me.  Indeed, it is a liability and worth considerably less than nothing.  I don’t know who the 1% is.  Is it the guy I chatted with who had to get a mortgage on his house to pay his lawyer’s fee–the international tax lawyer that oversaw his OVDI and charged in 14.5x his 5% penalty?  Why did he have to pay 5% penalty in any case.  He’s never lived in the United States, and he has committed no crimes, but the IRS scared him into entering the OVDI.  This is mafia style tax collection has to stop.

  7. I am an EU-US dual citizen struggling with the stress, anxiety, marital discord and depression caused by dealing with this issue over the past 5 years.

    I have an issue with the statement in the article that ” some nonresident citizens will renounce, especially those with large tax exposures”.

    This is absolutely inaccurate.

    Most people who are upset, like me, have been paying high taxes to home countries where they live and are citizens of, and DO NOT OWE US TAXES.  However they are facing life changing penalties (60,000$ minimum, 300% of your life savings maximum) for reporting problems.  They are forced to hire expensive tax lawyers and tax preparers every year to fill in their 1040 which is way more difficult, invasive and complex if you live overseas than the 1040 for the average American.  They are forced to be unable to plan for retirement in any way and now they are being treated as pariahs by their banks.

    However the recent US legislation allows the IRS to plunder, confiscate and terrorize at will amounts up to 300% of your family’s life savings due to reporting errors and omissions.

    We are going to see MASSIVE amounts of renunciations once the people in the street start to realize what is happening, like they are in Canada.  These renunciants are absolutely NOT people who have a high tax bill with the USA.
    They are simply people who want to get their life back and their marriage back, and stop worrying about the next change to US policy that will make even more outrageous confiscations legal, or that will force anyone with a US passport to do their banking exclusively in the US, or that will forbid any US citizen from living abroad.   

    Anyone who is living long term overseas and has been keeping the US passport “just in case” or perhaps out of fear of renouncing before, is going to change their mind in 2012.  I hope they staff up the embassies to deal with the tidal wave of expatriation requests that is going to hit them.

  8. I have to concur with jen.  I am a long-term EU resident (on my third 10-year French residency permit) married to an EU citizen.  Until last year I owed nothing (my 1040’s are mostly zeros).  Then, in 2010,  I paid both French and US taxes on the sale of a jointly-owned studio apartment in France (financed by a French bank, paid for with French income). It was at that time I found out about the FBAR requirement.  I have done my very best since to file them.  Now with FATCA there is yet another form to be filled out, my bank is not amused, and the IRS guidelines are incomprehensible to me.  I have had to turn to a professional accountant and an expat tax preparation service to make it this far.

    For information I am not a stockbroker or an expat businesswoman, I am an IT manager and, for the most part, have drawn a very modest salary in the years I have worked abroad. I have no assets or income in the United States.

    Truly I am at a loss to understand all of this – I have always done my very best to be a loyal American abroad – an unofficial ambassador, if you will, for my home country in all my affairs and in all the countries I have lived in.  My motto has always been, “Love where you are from and bloom where you are planted.” These days I am very unsure if that love is reciprocated and how I should proceed if that is indeed the case.

  9. America’s Founders and Signers of the Declaration of Independence are rolling in their graves over the ignorant hypocrisy of the US Government.

    America would not exist if great men like George Washington, Thomas Jefferson, Benjamin Franklin, Patrick Henry, Thomas Paine, John Hancock, Paul Revere, John and Sam Adams and others had bowed to the tyranny of the British Empire.

    Today’s politicians in the city bearing Washington’s name are a disgrace in taxing Americans abroad who have no representation in US Congress and receive no benefits from the US Government. They are completely ignorant of their own country’s history.

    Americans abroad do not use US highways, bridges, dams, schools, hospitals, fire, police, courts etc. They do not ask for or receive unemployment benefits. They receive NOTHING from the US government other than a travel document, which they pay for.

    The battle cry of the American Revolution was NO TAXATION WITHOUT REPRESENTATION!

    Like the British Stamp Act and other Intolerable Acts, FATCA and all the other legislation coming out of US Congress targeting Americans abroad will inevitably result in tidal wave of Renunciations of US Citizenship.

    Americans abroad are awakening to the true nature of the US government. Like the colonialists in America, some will accept it, but many will not and make their own Declarations of Independence.

    The increase in Renunciations of US Citizenship will be ignored at first, but before long, it will become a major source of embarrassment. Former US Citizens are already comparing themselves to East Germans jumping over the Berlin Wall.

    The politicians in Washington need to study their own country’s history. As George Santayana wrote, “Those who cannot remember the past are condemned to repeat it.”

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