Monty Pelerin kindly sent me a link toMark Nestmann’s article, Growing Numbers of Tax Refugees Exit USA – Permanently. Nestmann tells the story of man from Northern Mexico, whose mother gave birth to him in a border hospital on the United States side of the border. In his retirement, he bought a condo in San Diego to have a cooler place in the summer (I am going to quote a little too much for fair usage and yet I hope that Mr. Nestmann won’t mind–this story is too important for Isaac Brock):
At closing, he encountered a strange anomaly. The closing documents listed him as a U.S. citizen. He tried to correct what he believed to be a mistake, but the broker assured him the documents were correct. Since he was born in the United States, he was indeed a U.S. citizen.
Our hero thought that was the end of it, but when he arrived in San Diego for the summer, he received a notice from the Internal Revenue Service. The notice informed him that he was obligated to file U.S. tax returns. And there was no record of him filing a U.S. tax return for the preceding three years. The notice invited him to respond immediately.
A few days later, he drove over to the local IRS office to see if he could resolve the situation. After a brief conversation, he was shocked to learn that the IRS had already commenced an examination. The agent started using terms such as “willful failure to file,” “criminal penalties,” and “jeopardy assessment.”
At this point, our hero hired a criminal tax defense attorney. He spent about $100,000 in legal fees, and eventually received a notice from the IRS informing him that he wouldn’t face criminal penalties. Still, he had to pay 25% of the peak value of his unreported non-U.S. accounts for the period 2003-2010. Unfortunately for him, the value of these accounts fell about 35% in the global economic turmoil of 2008-2009. The accounts that were once worth $2 million are now worth about $1.3 million. Nonetheless, he paid a $500,000 penalty to avoid criminal prosecution.
In addition, he had to file six years of past due tax returns and information returns disclosing his interests in Mexican corporations and other Mexican entities. These returns had to be prepared according to U.S. Generally Accepted Accounting Procedures (GAAP), which means that the Mexican financial statements for each year had to be converted to U.S. GAAP. That expense cost him an additional $50,000.
To tally things up: our hero’s total cost of accidental U.S. citizenship: $650,000. Total benefit of U.S. citizenship: none.
Needless to say, this Mexican gentleman filed a formal petition with the State Department to surrender his U.S. citizenship and expatriate. That eliminates any future U.S. tax or reporting obligations on non-U.S. income or property, but doesn’t affect his past obligations.
I have some questions:
- Why didn’t this man just tell the US to take a hike?
- Why would he comply if he was just going to renounce his citizenship in the end?
- I don’t understand why he was afraid of criminal prosecution. Why didn’t he just go back to Mexico?