This post has been cross posted from RenounceUScitizenship
The costs of U.S. tax and reporting compliance
I have written a number of posts on the problem of compliance with U.S. tax and reporting requirements . Most people want to be and remain in compliance. My previous posts have opined that: the IRS and lawyer fear mongering coupled with complexity have made compliance difficult. The simple fact is that most people don’t know what to do. Taxpayers do NOT trust the IRS. Furthermore, the “not knowing what to do” is having a terrible effect on people’s lives (to the extent that they still have one). These views are echoed by the Taxpayer Advocate Report to Congress.
Interestingly, I realize that none of my posts has focused on what may be the single biggest obstacle to compliance.
It’s the cost stupid!!
I was alerted to this rather obvious point in a blog comment by Calgary lawyer, Roy Berg. He commented that:
“Perhaps this is worthy of a separate entry on your blog, though it is apropos to the high cost (in terms of professional fees) to particiapte in the OVDI and to bring unfiled returns current:
The Taxpayer Advocate Service report to the US Congress (released on January 11, 2012) is critical of the complexity and punative nature of US tax law as it applies to US citizens residing abroad. Page 154 of the report compares the average cost to prepare returns for taxpayers residing in the US and those residing abroad.
For taxpayers residing abroad return preparation can cost $1,000 to $2,000 PER RETURN (the report cites two separate studies). For taxpayers residing in the US return preparation ranges from $173 and $373 per return.
This means that participants in the OVDI (which requires filings for 8 years) should expect to incur preparation fees of between $8,000 – $16,000 for INDIVIDUAL RETURNS ONLY. If the taxpayer has a TFSA, trust, private company, private partnership, etc. these require additonal returns, which would multiply the return preparation cost accordingly.”
At this point, given the complexity of U.S. tax filings, the IRS requirement that paid preparers must be registered with the IRS, and the shortage of people willing to take this on (one CA told me that he simply will no longer accept American clients), I suspect that this $1000 – $2000 will be for the most simple returns. (For those who are either an employee or unemployed.) If you are carrying on a business (particularly if it is a corporation) it will cost much more. What does this mean in terms of the costs of cleaning up past non-compliance? What will be the accounting and legal fees? The simple reality is that most U.S. citizens do not have the money to bring themselves into compliance. Do the arithmetic and see what the minimum cost will be. The IRS has recently reopened OVDI. There are many U.S. citizens who simply cannot afford the financial cost of entering this program. What are they to do? They will simply drop out of the system and never return to the U.S. They will never apply for a U.S. passport. Those who do not currently have another citizenship will become citizens of another country. In other words, they will vanish.
Furthermore, once you pay the costs of coming into compliance, these financial costs must be incurred on an ongoing basis. The fear of IRS terrorism and anxiety will continue for life. Let’s consider this cost on an annual basis. Assume an annual cost of $2000. Tax preparation fees are not deductible under Canadian law. This means that the $2000 must be paid with after tax funds. Income tax rates are high in Canada. Assuming a combined federal/provincial rate of 33% this would mean that $3000 of your annual income is required to fund your U.S. citizenship. What does this mean? It is the cost of a vacation. It could be the cost of your car insurance. It is money that can go into your child’s RESP. It is $3000 that most people simply don’t have. Where does the $3000 go? For the most part to fill out forms which demonstrate that you owe no tax. In addition to the $3000 there is the tremendous cost of LCUs (Life Credit Units) and the tremendous wear and tear of U.S. tax and IRS anxiety.
Can you afford the financial cost filling out forms for the U.S. government? Can you afford the cost of not being able to do proper retirement planning in your country of residence? Can you afford the emotional cost and worry? Can you afford the time it takes to complete U.S. tax forms? Are you prepared to deal with the possible effects of U.S. citizenship on your marriage (if you are married to a non-U.S. citizen)? Can you afford to be discriminated against in the employment market because you are a U.S. citizen? Can you afford to deal with U.S. taxes on unearned investment income?
Only the wealthy can afford this cost. That said, the wealthy probably see far greater risks to their wealth. For the wealthy the U.S. estate tax is a huge problem. It is quite understandable that more and more people are renouncing their U.S. citizenship. It is no longer an issue of patriotism and it may be patriotic to renounce U.S. citizenship. It is no longer an issue of having emotional ties to the U.S. It is an issue of protecting yourself. U.S. citizenship is a very serious and dangerous “life liability”.
And we haven’t even considered the effects of FATCA …
FATCA – the neutron bomb of the financial system – will turn U.S. citizens into “untouchables” outside of the United States. U.S. citizens will have trouble getting basic banking services. Non-U.S. citizens will not want U.S. citizens as business partners or shareholders. The cost of IRS compliance is too great and too risky. In other words, if you think things are bad now – just wait until January 1, 2013.
U.S. citizens are being driven to renounce U.S. citizenship.
But, even this comes at great cost.
The Possible Costs of Renouncing Your U.S. Citizenship
When it comes to renunciation: if you have a net worth of under $2,000,000 you can make the break cleanly (assuming your tax filings are up to date). If your net worth is more than two million you are subjected to the exit tax. Those of you who:
– have a net worth of less than two million dollars
– who are unwilling to continue paying the ongoing costs of U.S. citizenship (including the estate tax)
– do not want to inflict the problems of U.S. citizenship on a non-U.S. spouse
– do not want to inflict U.S. citizenship on your children
– who see no other offsetting value to U.S. citizenship
should consider renouncing at the earliest opportunity.
Remember that the effects of inflation will increase the value of your assets to the two million mark. In Toronto and Vancouver a nice but unspectacular house could cost two million dollars!
Renunciation is not for everyone – Who are the people who are unlikely to renounce?
Renunciation is a very personal decision. It is clear that the IRS is “hunting” U.S. citizens living outside the U.S.
Therefore, my guess is that:
– those who have little or nothing too lose and who don’t mind paying the future compliance costs will be less likely to renounce (those who are employees or are unemployed and few assets)
– those with something to lose (everybody else) will be putting a “renunciation plan” into effect while it is still possible
I recently solicited reasons to remain a U.S. citizen. Admittedly this question was posted on the blog of the Isaac Brock Society. That said, few people were able to articulate any clear benefits to U.S. citizenship. I predict that renouncing U.S. citizenship will be a growth industry
There are few benefits to U.S. citizenship.
There are substantial costs to U.S. citizenship.
This is all because of citizenship-based taxation
All of these problems are rooted in the fact that the U.S. has a system of citizenship-based taxation. Why? Nobody knows. Certainly the U.S. doesn’t know. In fact, citizenship-based taxation is harmful to the U.S. economy. Citizenship-based taxation is eroding U.S. capital. Citizenship based taxation hurts the economy of the United States of America.
My advice: Stop citizenship-based taxation and repeal FATCA.
But rather than listening, I fear that they will pass laws to make renouncing even more difficult. I also genuinely fear that people like Petros could be targeted.
@Mona, I think that’s almost a given on renunciations getting more difficult.
I really feel sorry for any Americans that only have a blue passport overseas and has over 50k in accounts. After this FATCA goes through, these people WILL BE trapped and the IRS will confiscate half their money, even though they paid taxes on it.
Good comprehensive post again. You sure do some good work Renounce!!
I just posted this over at your blog, and will add here…
Just received a jello-shot (his term) from Phil Hodgen who has been silent for quite a while. He is headed overseas, and so guess he has time in airports to put something out…. Glad to see him back, as I always enjoy his colorful comments.
Thought you would be interested to hear what is working. Yup, expatriation! Way to go Shulman, creating new jobs and opportunities for attorneys. However, Phil is one of my favorites, so I am glad he has the business. Is this a Great Country or what??
I am sure he won’t mind if I post here, what he had to say…
But expatriation? Yes. Our office is doing a startlingly large volume of business in helping people terminate their U.S. citizenship or green cards.
People are voting with their feet.
The process is complex — not only do you log out of the citizenship/residence system, but you also have to log out of the U.S. tax system properly. That can get expensive. The IRS behaves somewhat like a lover scorned, wanting to land one last kick in your derriere as you’re walking out the door.
When I go to the Middle East (and I go a lot) people grumble about U.S. foreign policy. But people don’t terminate their U.S. citizenship for that reason, in my experience. They cite U.S. tax policies.
Reflexively you think, aha! They don’t want to pay income tax. Well, not exactly. Our best salesman is IRS Commission Shulman and his holy war on U.S. taxpayers who have foreign bank accounts. Bluntly, it is the prospect of facing dozens of required tax forms — sometimes obscure — with monster penalties if you screw things up. This has been the pattern since 2008 when the IRS started gearing up to pursue offshore bank accounts held by U.S. persons.
Living a normal life and unintentionally subjecting yourself to gigantic (as in hundreds of thousands of dollars) penalties for a paperwork foot fault strikes most people as unfair.
The second tax reason given is the estate tax. For multinational families with assets abroad, with some family members U.S. citizens and some not, the U.S. estate tax can eviscerate the family firm, or the family real estate holdings. If the wealth was created outside the U.S. with significant non-U.S. inputs (human or capital) it strikes many as unfair to sacrifice 35% to the United States Treasury.
The U.S. passport is too expensive. What you get for what you pay is out of balance.
That’s why people give up citizenship and permanent resident status.
And the people who are doing this are precisely the people you’d want as productive, contributing members of the U.S. society.
End of rant.
…….”Our firm, Moodys Tax Advisors, has proactively proposed legislation
in Canada that will allow a deduction against Canadian tax for the vast
amount of professional fees paid to participate in the Internal Revenue
Service’s (“IRS’s”) 2011 Offshore Voluntary Disclosure Initiative
(“OVDI”), the 2012 Offshore Voluntary Disclosure Program (“OVDP”), or
the (traditional) Voluntary Disclosure procedure. For most Canadian
taxpayers these fees are not deductible in Canada and we understand the
Canada Revenue Agency (“CRA”) has denied these deductions. Recently our
firm submitted a proposal, and accompanying legislation, to the
Department of Finance to amend the Canadian Income Tax Act to allow for such deductibility (you can read our submission here).
The Department of Finance has been very supportive of the plight of
these individuals and their need to become compliant under US tax law in
order to avoid potentially ruinous US penalties. In particular,
Minister Flaherty has been very vocal of his support. We are hopeful
that our proposal will result in additional relief for those unfortunate
taxpayers who have been affected.”…….
……”Most of these participants paid tens of thousands of dollars in
professional and accounting fees to participate, even though they were
fully compliant with their tax and reporting obligations in Canada and
owed little or no additional US tax. For most taxpayers the professional
fees incurred are deductible against US income tax, however they are
generally not deductible against Canadian income taxes.”…….
I am confused about how those who did qualify to deduct the fees (what proportion?) from their US returns would manage to use this credit – unless there was a large sum of US tax owed to apply the credit against. If an individual had very little taxable income and didn’t owe any US tax, I presume the ‘credit’ wouldn’t do them any good whatsoever – unless it could be carried forward? So, for those ‘minnows’ or those of modest income and means who got panicked and got caught up in the OVD and VD programs, deducting the fees (in the thousands or tens of thousands) from their US tax owed wouldn’t have any effect? Or, for the years 2009 and 2010, if it resulted in a refund, as it stands now (because of US stimulus funding), the ‘streamlined compliance’ questionnaire asks if the taxpayer is requesting a refund – presumably to disqualify anyone who is.
And would this apply to people not in the VD/OVD programs, who filed under the terms of the December 2011 factsheet? Many may have paid substantial fees to prepare 6 years of returns (plus forms like 3520/A, 5471, etc.) + 6 FBARs – but weren’t enrolled in the VD processes.
I can’t see Canada and the CRA agreeing to allow an offset to Canadian taxes assessed, in recognition of fees that subsidize US extraterritorial taxation imposed on duals and other Canadian residents. Much as that might help some inside Canada, wouldn’t that work to lower Canadian tax revenue assessed and collected? Unless, the very existence of the Canada-US tax treaty, and it’s recognition of US taxation of US ‘persons’ in Canada means that Canada has an obligation to assist duals and others inside it’s borders, whom the treaty affects? Would there be an argument that the ‘compliance burden’ constitutes a kind of double taxation that the treaty was meant to prevent? Particularly for the costs of the purely reporting forms like the FBAR? Which isn’t a ‘tax’ per se, but which functions like one in that it can generate revenues for the IRS through penalty structures. Or the FATCA form, which is also information reporting, but seems designed to get around the limitations of the FBAR?
I liked the portion of the submission that notes that the US ‘taxable person’ citizens in Canada are not on an equal footing with their non-US citizen brethren, since one has an additional burden that the other is not heir to.
In addition, Canada and Minister Flaherty knows full well that we can’t get rid of the burden of US citizenship-based taxation and reporting without getting rid of US citizenship – and they also know by now that we can’t rid ourselves of unwanted US status without the 5 years IRS compliance (and whatever additional barriers and chains the US, Congress, Treasury and IRS have planned to continue to enslave us in future). So, unless it is made easier and less costly and less fraught with life-altering pitfalls, Canada is then full of many many duals who cannot renounce or relinquish, and thus is stuck with the IRS and US continuing to assert and enforce claims to Canadian earned, generated and held assets – sucking those assets out of Canada to the benefit of the US. Particularly if FATCA comes in.
And if FATCA is enacted in Canada, does the CRA want to issue credits for the huge fees that will be spent to settle the inevitable disputes over errors in applying FATCA provisions – including 30% witholdings, or damages from errors?
Good try to recoup some of the fees on our behalf. Thanks Moodys LLP.
If this were to fly, could Canada some way be reimbursed by the US for such CRA tax credits?
Surely, neither US Persons in Canada nor the IRS would be popular with other Canadians who pay taxes with this as a cost to Canada coming from their pockets (similar to the costs of FATCA to every Canadian, not just US Persons here).
Could any resultant controversy put on the front page of Canadian media the subject of FATCA, with the cost to all Canadian financial institutions to be borne by all Canadians, and the cost of compliance to the IRS of US Persons in Canada to be reimbursed by CRA / all Canadian taxpayer dollars? If it were me and if I were “just a Canadian,” I probably wouldn’t want my Canadian tax dollars so spent.
Would that make Canadians sit up and take notice of all we are discussing here? Would that make Canada more forceful in their FATCA discussions with the US in trying to protect Canada’s US Person citizens and residents?
Overseas Exile (blog): “US expat evacuations: not what people think”
An excellent article that points out the baloney behind the argument commonly used to justify citizenship-based taxation, “if shit hits the fan the US will send the Marines to come to your rescue.”
From the blog:
“If commercial carriers are operating, the Embassy will recommend that you depart on your own and at your own expense. If you don’t have money to pay the fare, the Embassy can help you contact family and friends and assist in transferring money from them. In extreme circumstances, a destitute American wishing to return to the U.S. may qualify for a repatriation loan. The conditions for making such loans are stringent, and your passport will be limited until you repay the loan.”