These numbers are sourced at Quick Facts at USxCanada InfoShop. If you have a favorite number, toss in some more speculation!
Extraterritorial U.S. citizens number up into the millions. Say 6 to 7 million. Maybe more, and likely not less.
On the compliance side, Taxpayer Advocate Service says all FBAR filing added up to 218,840 for 2008.
For 1990 a total of 180,087 IRS Form 2555 were filed from outside the United States.
The 2009 and 2011 voluntary disclosure programs reported around 33,000 disclosures by January 2012.
At a generous guess, current full compliance likely totals no more than 300,000 persons worldwide. Stay generous, go low with a pool of 6 million, and that yields a ratio of 1 in 20 compliant, or 5%.
Assume that the reported figure of 30,067 U.S. citizens reporting Canadian-earned income to the IRS in 2006 is based on something real. Multiply by 20 and that provides a common lower estimate for U.S. citizens in Canada, which is 600,000.
Then take another look at the crude Globe and Mail poll of U.S. citizen status/intention, that over half of 3233 responders intend to do nothing, and only 1 out of 5 are doing something.
A vague picture emerges. Maybe 5% of U.S. extraterritorials are OK with the IRS. Maybe 15% are worrying and/or taking specific steps. Maybe 80% just truck along in the same old limbo.
Now from the other side. The IRS says it has extracted $4.4 billion from 33,000 persons, for an average of $133,000 per person. Stay conservative, chop the potential harvest in half to 3 million, and cut the take per person to $50,000.
If this series of conjectures holds together, the IRS smells at least $150 billion more lying around out there beyond the borders — over 30 times what they have already raked in.
Even minnows can be tasty for a hungry bear?
What are the odds that this will go away?
Meanwhile, a lot of the serious money is being offshored by persons still resident in the United States.
To close with a good anecdote. A brokerage employee recently told me of a Fortune 500 CEO hoping to diversify to holdings outside the United States … a service that the Canadian financial industry is constrained to not provide.
You know, I wonder if the press against the US worldwide will so horrendous next year once they start to “root out” the other 80% that they might have to give up? Think about it: People around the world will be reporting to their local newspapers that they are facing financial ruin from a country to whom they might not have even known they were still a citizen of or, at the very least, had no idea that they had any lifelong financial ties to.
It will look like exactly what it is: a woefully debt-ridden country scrambling to find funds from every avenue possible. On that note, I bet that the US government is happy to have the Eurozone debt crisis drag on and on and on, because once its over (and it will eventually end, for better or worse), the world will again turn its attention to its biggest debtor!
That’s easy enough to say, Don, but FATCA will be able to root non-compliants out far more easily with modern technology. At least in the five cooperating European countries including the UK. Call me cautious but concluded I needed to become fully compliant pronto.
@Mona
Yes, that’s exactly my point – Everyone will be rooted out and I predict a massive wave of negative publicity as a result! We are talking about millions of people being financially ruined, which will be picked up by every major news outlet and politician in the world.
True. But it could also cause other countries to see the potential revenue brought in by citizenship-based taxation, God help me 😛
@Mona
Quite right! It could go either way I suppose, which is really scary. One thing is sure though: After next year there won’t be very many people left who will have never have heard of US citizenship-based taxation or FATCA! I suppose that every despot in the world will grin with glee at the prospect of taxing the diaspora along the lines of Eritrea. Horrifying.
At least within the EU itself dual EU nationals or EU nationals in another member state are protected from dual taxation from other member states, so if France were to actually enact a “solidarity tax” on all of the French expats in the world those in London and Brussels would not be affected. I am guessing that this would apply to Switzerland as well, but all of the French expats in Silicon Valley would be in for a surprise! We’ll have to wait and see I suppose.
I was quite surprised by Europe’s degree of cooperation. All I can think is that expat tax preparation will be a growing field for those considering a career change…I don’t like whwt’s happening but technology is going to make sharing information far easier as well as make everyone more accountable for knowing the rules. It will become more and more difficult to argue reasonable cause.
If I can’t change things, at least I could consider training up to do expat tax preparation…the world is going mad though. 🙁
The Renunciation Guide makes a very similar argument here:http://renunciationguide.com/FAQ.html#TaxRelatedIssues
They say:
“Recent IRS efforts to reduce this international tax gap have primarily been directed at U.S. residents who “hide” money in foreign accounts. Examples include the targeting of offshore credit card companies in the early aughts and the UBS/Switzerland prosecutions starting in 2007.
We understand the motivation behind these efforts, but we think the focus is wrong. The revenue lost to these schemes is utterly dwarfed by the amount of money lost through non-compliance by U.S. citizens overseas. Rather than focus on U.S. residents who have financial transactions overseas, we think the U.S. could more efficiently and more significantly reduce the international tax gap by focusing on U.S. citizens overseas.”
Read the entire section. It is illuminating.
Stop worrying. Stay low.
1. Do not renew US Passport!
2. Do not tell them where you are.
3. Visit the safe, rather gun-free nations of Europe, rather than the increasingly dangerous USA.
4. Have relatives visit where you are. Pay thweir way.
5. Do not vote in the US election!
6. Sleep well.
7. and move all accounts to Alterna Credit Union.
@Victoria, I don’t actually think it’s really worth it for the US to aggressively pursue us abroad because the vast majority owe nothing or low amounts when they do owe. I’d have thought that the costs of IRS enforcement plus the detriment to US business abroad would cancel out any potential advantage…
CLN numbers : I only know personally about 4 people who received their CLNs back in the 70s: 1. My husband who received his two years after relinquishing. 2. The person I mentioned recently who just found his about a week ago. His came three years after relinquishing. 3. TomOn who received his four years after relinquishing. 4. Schubert who got his about 14 months after relinquishing. It almost seems like Schubert was fast tracked compared to the other three. 😉
While those of you who have been waiting for several months to over a year for your CLN to arrive after your relinquishment/renunciation may be wondering if this long wait is cruel and unusual punishment, it would appear from the 70s experience that this may just be business as usual. In fact, the current wait may be longer since there are more people relinquishing/renouncing now.
It does bring up the question of where those documentation packages the consulates send to the DOS sit for years while waiting to be processed and why. It looks like patience is required for those who wait . . . and wait . . .
FYI, the Vancouver US Consulate treats you like airport security and it takes 45 minutes to get in the building.
I just wanted to pickup the “forms” for Renouncing and also to speak to a real person as I couldn’t navigate their website. I was lucky that by fluke I ended up having my first of two appts. by accident. What a stupid procedure! They are making it a hassle and a chore on purpose and yes, I do recent it! I can hardly wait until I’m all done.
@Joe, I hear you but it’s not as easy as all that. My parents are now in their 70s so I still need to be able to visit them. I can’t expect them to have to travel vast distances to visit me. I chose to move to the UK so I have to take all this on the chin.
I was pleasantly surprised to learn that they would be quite understanding if I renounced but I can’t be waiting two or three years to get a CLN because I would probably not be able to visit until I recieved it. I would also be heavily taxed on my inhertance if I renounced so will have to wait till after they die before I can realistically consider it.
@Mona: “I would also be heavily taxed on my inhertance if I renounced…”
Please explain your thinking here. I don’t know of any way this could occur (and believe me, I’m becoming an expert when it comes to US tax traps!). You may have got the wrong end of some stick or another.
@Watcher
I’ve heard/read the same thing as Mona and I tried to find a source to back it up. Supposedly the US taxes inheritances that go to non-US inheritors at a much higher rate than if it goes to a US citizen. I imagine that they do this because they know that they won’t be able to tax the person in question again later on, so it is thought up as a sort of “assets leaving the US tax net tax”.
I don’t believe that there is any specific penalty attached to renouncing and the estate tax – Its just that as a now non-US citizen you would get taxed higher.
If someone has a source with more info and the tax rubrics for US vs. non-US heirs please post as I would like to know this too!
@Don
The whole US estate tax thing is a dreadful can of worms, but it’s not as bad as either you or Mona suspect. Or more accurately, it sort-of is, but it’s mostly no worse if you’re foreign than if not.
The MAJOR place where citizenship comes into play is inheritance between spouses. If the inheriting spouse is a non-citizen then the estate doesn’t get the unlimited marital exemption available to citizen spouses. That’s the “not leaving the tax net” part you’ve read about.
However, that’s only for spouses (and most couples try to work around this by gifting, so that the US citizen ends up with effectively no assets left for the US to tax!). For non-spouse beneficiaries the ESTATE pays the tax, and then what’s left is distributed. It doesn’t matter where, who, or what the other beneficiaries are — US citizens or not, there’s no extra tax punishment above the usual estate tax.
[ Okay, one extra wrinkle, but this is a real niche case. If the deceased was a “covered expat” under section 877a — that is, renounced US citizenship and got hit by the exit tax — then anything they give or bequeath to US citizens is taxable to those US citizens at a punitively high rate, section 2801. So… if you’re coming in to money in this case you’re strongly motivated to rid yourself of US citizenship FIRST, not afterwards! ]
@Watcher
Well, I certainly hope that what you are saying is true! My US-based parents (who don’t look to be leaving the US anytime soon…grr) said that they would disinherit me if I renounced because they thought that the US would tax the inheritance at such a high rate as to make it pointless to give to me. I didn’t blame them because the inheritance rate if they were resident in Belgium the inheritance tax rate would be a truly painful 3% 😛
Could you maybe point me in the direction of the estate tax code that I should be looking at so that I and others can learn more about this issue? I also think that this is the perfect topic for a blog post if you’re willing, since I imagine that lots of people in our position are being put off renouncing due to this issue.
I understand that because I have some money still over in the states that my non-USC spouse would face US estate taxes on any US-sourced assets of mine over $60,000. I don’t know if this just means assets held in my US brokerage account or even US-based stocks held within my UK brokerage account which makes it all murky.
I also believe that if I renounced that this would thus mean that my inheritance from my parents would be taxed at any amount over $60,000.
@Mona
On your first paragraph, if you renounce then have the poor judgement to die while holding stocks, property and so on (but oddly, not deposits in a bank/savings account), then your — more accurately your estate’s, so indirectly your husband’s — US estate tax might start after just $60,000 of US assets, rather than the millions afforded to citizens. And yes, this applies to US-based stocks, mutual funds, and so on.
There is however somewhat of a get-out. The US/UK estate and gift tax treaty 1980 (yes, this really is the latest one!). This says in general that UK citizens are taxed only on US real estate holdings and business interests. Once you stop being a US citizen, that clause may cover you, depending on what you own in the US.
And if you don’t trust the treaty, or want belt-and-braces, why not just keep less than $60,000 in the US after renouncing? Unless it’s real estate, liquidate your US assets and bring over the proceeds. You can sell US based mutual funds, bring over the cash, and buy EU based ones, perhaps even ones investing in the same things — S&P 500, say. It seems that an EU based fund holding US stocks is not a US sited asset, but a US based fund holding the same stuff is. It’s not the stuff, it’s the fund’s domicile that counts. And you can use that to insulate your portfolio from US estate tax while still investing in US stocks, if you want.
On your second paragraph, paying tax on inheritance from your parents, I’m pretty sure you’re hiding from shadows here. The US estate tax falls on…, well, the estate (the clue is in the name!). That is, whoever is winding up the deceased’s affairs sends any estate tax off with the Form 706, and the rest of the money passes to beneficiaries. At that stage they can be anyone, anywhere. Farmer in France, goat herder in Guyana. Doesn’t matter. The money is now post-tax, and that’s that.
This is all a bit complicated to shrink into in a blog, but I hope you get the idea. You’ll want to carefully check the details of what I’ve set out, of course, and do your own research. The bottom line though seems to be that with a bit of planning and care you should be able to drop your US citizenship without any of the financial drawbacks you seem to fear. At least, that’s how I read things from here.
@watcher, hope you’re right! But for now am stilled too scared to renounce because I’d be worried that I’d not be able to visit my folks if they delayed issuing the CLN, as my US passport would have been cancelled. Don’t think I’d be allowed in on my UK passport with my US birthplace.
Mona, I think you must be getting bad advice.
The exemption on estate texas is currently $5 million . It is due to go down to 1 million IF the Bush tax cuts are allowed to expire.
There is a large difference between 60 thou and 1 or 5 million. Above these thresholds, any tax is paid by the estate. The threshold could change but is extremely unlikely ever to be less than 1 million. It could stay at 5 or even go up. The ‘death tax’ in the US is a political football.
On the US source assets in your estate , should it pass to your husband, you are correct. 60,000 is the threshold. HOWEVER, if your worldwide assets are 5miilion or less, there is no US estate tax payable regardless of the value of your US situs assets.
2 caveats. The 5 million could go up or down.and the filing ,should your executor choose to file, is onerous even if no taxes are due.
You have mentioned putting things like prepaid phone cards on FUBARS. Either you are messing with our heads or your intention is to real piss them off- never a good idea.
So far, only a very very few people have been denied entry to the US because of a US place of birth and a non US passport. I know there have been 1 or 2 but they are rare.
@KalC
I do agree that Mona may be getting… um… suboptimal advice from somewhere. What you describe is mostly what happens if Mona stays a citizen.
If she renounces, then her estate tax exemption drops to $60k. Nothing to do with spouses. It’s just majorly lowered for non-citizens. BUT at the same time it also applies ONLY to US situated assets. So simply making sure you have few if any or those means US estate tax issues go away completely. Mission accomplished.
@Mona
What evidence do you have that you won’t be allowed in to the US on your EU passport once you’ve renounced? Scaremongering lawyers and bloggers don’t count as evidence!
Perversely, the exit tax encourages renunciation. If you think you’re coming in to money soon and it might push you over the exit tax asset test of $2mm, then it’s really a good idea to renounce now, before you get the money. Because it’ll be a royal pain, and perhaps also expensive, to renounce afterwards. Ridiculous? Certainly. But then, that’s congress for you these days.
I AGREE that if one renounces and becomes a non resident alien the threshold for US situs assets drops to $60,000. However, if one’s worldwide asset are 5 million or less, there is no tax owing. Filing the return, however, is a right royal pain and best avoided.
@KalC
I see what you’re saying now. And yes, I’m with you.
Worth noting for any other readers, though, that the extension of the $5mm (or whatever) to non-citizens is a feature of the US/Can tax treaty. As it happens, it’s also in the US/UK estate tax treaty, so should cover Mona if she becomes UK only.
Folks in countries without a US estate tax treaty, however, might find themselves with a mere $60k and NO further exemption. For them, staying under $60k saves both hassle AND significant cash.