Cross-posted from the Flophouse. Probably the closest I’ve come to losing my temper over this whole business. And thank you for the comments and the encouragement you left chez moi – as always it’s wonderful to see familiar names and to read your words.
U.S. citizens and Green Card holders living abroad are waking up to the fact that their status and connections to the “Land of the Free” brings with it certain obligations. If you’ve ever read The Moon is a Harsh Mistress, one of the great science-fiction classics by Robert Heinlein, you’ll be familiar with the acronym “TANSTAAFL” which stands for “There ain’t no such thing as a free lunch.”
Citizenship is never a “free lunch.” All countries require certain things of their citizens and where there are rights, there are also duties and responsibilities. American citizenship is turning to be a very expensive lunch indeed (a four course meal with wine AND cheese AND dessert) because the United States practices something that is often called “citizenship-based taxation.” That term is a bit misleading and should probably be renamed “worldwide taxation” because its scope includes people who are not citizens of the United States of America: U.S. residents and immigrants like Green Card holders living in the U.S. or abroad. Very briefly what the U.S. tax system requires is that all U.S. persons (wherever they live) report their personal financial information to the U.S. government, file tax returns and pay U.S. taxes on income or investments earned outside of the U.S. every single year. No other country in the world besides Eritrea does this and it brings new meaning to the old term, “American Exceptionalism.”
Most homeland Americans are blissfully unaware of these requirements which is probably normal since they have absolutely no impact on them. What is more disturbing is that until very recently most U.S. Persons (American citizens abroad, Green Card holders and U.S. residents) were also completely in the dark. Overseas Exile has an excellent post about “Expat Alice.” This is a very typical story and I know people here in similar situations. Even with the news reports I am still meeting people in Paris like the two American au pairs I encountered a few months ago who have been here for a couple of years working for French families. They went sheet white when I explained it to them. Yes, both should have been filing tax returns and FBAR’s since they earned a yearly salary that was over the filing threshold and their parents had set them up with bank accounts here with sufficient money to rent studios and pay their tuition for French classes. Even I, someone is more or less clued in, made my own filing error. It had not occurred to me that my daughter who is a U.S. citizen, should have reported her own bank account in Canada. I had to check but it was indeed over the reporting limit because we set her up (like the parents of the au pairs) with enough money to pay her tuition and living expenses. I had to search our bank records from last year, convert the amounts from Euros to U.S. dollars, and then send all that information to my daughter so she could fill out her own FBAR thus adding yet one more piece of paper that the U.S. Treasury must process in 2012.
So, as you can see, this matter is of more than academic interest to me and it is a topic that I write about often. Am I angry about it? Absolutely. Here I am working on a tax return with my accountant that is so thick I could use it to line my cat box even though not one dime of my income or my investments came from or was earned in the U.S. I have an extension to file late but I still had to pay a few thousand dollars to the IRS earlier this year and now I’m paying for someone to help me navigate the bloated U.S. tax code so I can get the paperwork done. That’s pretty expensive cat litter, mes amis. And just for information I am strictly middle-income and have a career as an IT manager which pays decent money but does not, and never will, put me in the millionaire category.
Yes, homelanders, I pay U.S. taxes though I have not lived in the U.S. for years. But apparently many of you don’t. On top of all of the above, and to really add insult to injury, was some news I had from a family member who lives in the U.S. and has about the same income. He did his U.S. taxes and was pleasantly surprised to discover that not only is he not paying a dime in Federal income taxes, he gets a refund* of around 4000 USD. Imagine my surprise to discover that he is not alone. According to this Huffington Post article around 46% of homeland Americans didn’t pay any Federal income taxes in 2011.
How interesting.
So let me see if I have this straight: someone who lives in the US and has about the same income as me and who benefits from all the government goodies like national parks, Social Security, interstate highways, schools and so on can get away with not paying a dime even for the troops whereas someone like me who lives abroad and uses none of the benefits homeland citizens take for granted ends up with a hefty bill.
I understand that life is not necessarily fair and I am not someone who is against the idea of contributing to the well-being of my country of citizenship. I am also aware that the reason many of these homeland Americans do not pay is because they are too damned poor to do so. You have no idea how much I hate that and how ashamed it makes me to have to admit to it.
But at some point over the past 10 years homelanders ordered themselves up a four course meal at a fancy restaurant and put the bill on a Chinese credit card. In retrospect this wasn’t such a hot idea but at the time it was politically very popular to order up a filet mignon for some and to order a bottle of wine for those nice folks at the table on the other side of the restaurant who turned out to be non-drinkers and sent it back. But it’s a done deal and arguing over bad past decisions is a fruitless pastime. In fact the national debate in this issue would be vastly improved if every American just accepted that everyone has some responsibility for how things shook out and that the most important thing now is to do the Next Right Thing.
To that end Americans abroad should be given a seat at the national table. We may all be reduced to eating at Mickey D’s but I’m cool with that. Representative Carolyn B. Maloney of New York has put forward a very modest proposal for a commission that would start a dialogue between us. It would cost around 3 million dollars a year, a mere drop in the bucket compared to the overall federal budget – though I suppose if we asked a U.S. military contractor to cater it, it might cost quite a bit more than that. The ACA and AARO are ready with some well researched material about how citizenship-based taxation and other homeland legislation effects us and does no good whatsoever for the homeland.
But don’t you dare walk out of that restaurant and stiff us for the bill while mouthing platitudes about duty and responsibility and how we are all in this together. Clearly that is not the case and one of these days if that doesn’t change, we may be the ones walking and leaving you to do the dishes.
*In my original post I called the money my friend got back from the Federal government a “refund” and a reader asked for clarification. To be precise, it was not a refund of taxes paid but rather a subsidy based on that person’s deductions for children and mortgage interest. It wasn’t much of one but it still represented a kind of social assistance – a bit like an indirect “les allocations familiales” in France.
*Thank you. Excellent poster. It reflects well what I have been feeling and thinking as a dual citizen abroad. To be short: I really can´t cope with the demands every year and I have to pay a lot for an USA CPA who especializes in Americans Abroad to do my tax return. All you said is true. I have been walking in a quick sand for years now, afraid, not knowing what to do. You failed to mention to penalties where are subjected to, much higher than the ones for Americans living in the USA. And the statute oif limitations also are not the same. In short we are being treated as criminals until proved othertwise. My question is: why? It is wrong to live and work in another country as an US citizen?…Are we breaking the law? You are right that these demands now apply no only for Americans and Dual Citizens Living Abroad but also to Dual Citizens and Green Carders living in the USA. But the worse part is that we have NO representation even though we are taxed. This is not American. Something needs to be done to protect us. I think we all must become members of ACA and AARO, and support their work.
Thanks repeating this excellent post here at Isaac Brock! I really like the analogy of the expensive restaurant meal that the US wants to charge on someone’s else’s account, whether it is the Chinese credit card (deficits which devalue the dollar is a tax on US’s foreign creditors). So the spoiled Americans are charging their meals to foreigners (SNAP) and Americans abroad. Too true. Here is what I wrote about SNAP and our ineligibility because we don’t live in the homeland:
@Victoria, you are right that the citizenship-based taxation of the US is not only based on citizenship because it includes immigrants. In my view, the basic idea behind it is that you have to file and pay income taxes for merely having the right to live in the US (either through citizenship or a green card), regardless if you use that right. However, one of the requirements to keep a green card is that the person must use this right and maintain a real residence in the US. Also, with a few exceptions, the person loses the green card if being physically outside the US for more than one year. I have heard of people who live abroad and travel to the US once a year just to maintain their green cards, but I don’t think it makes much sense to do that in the long term if they don’t intend to eventually reside in the US.
Still, the Internal Revenue Code does treat US citizens and foreigners, even those with green cards, differently in some situations. For example, to benefit from the exemption on estate taxes, the spouse must be a US citizen, it’s not enought to have a green card.
I was very surprised that you have to pay US income tax, because I had the impression that income taxes in Frace were much higher than in the US. So I looked up the French income tax rates and realized that although the tax rates are higher, it makes a BIG difference if you have dependents. Unlike the US, where dependents only allow a fixed deduction, in France the whole brackets of tax rates are increased depending on the number of dependents. Is that why your French income tax is not enough to compensate for the US tax?
As I mentioned before, France has a miniature version of citizenship-based taxation: it taxes its citizens living in Monaco as residents of France. Some of them have challenged this in court and have been successful. Their arguments are very similar to the ones from Americans abroad, you may be interested in reading this: http://www.impots-francais-de-monaco.com.
By the way, the Eritrean tax form for its citizens abroad is just one page and very simple. There is no requirement to report financial information because Eritrea only taxes wages and rental income. So the US is really the only country in the world that asks for something like an FBAR from its citizens abroad.
I also wonder if other countries have a similar requirement of their residents. If you have a foreign bank account (in the US, for example), do any of you have to report its balance to your country of residence, or just pay tax on the interest from it? I remember Roger Conklin mentioned that Brazil requires a list of all assets, domestic and abroad, with the income tax forms, but I’d like to know if other countries have something similar.
*Canadian tax “residents” are required to fill out this form if needed.
http://www.cra-arc.gc.ca/E/pbg/tf/t1135/t1135-07e.pdf
@Tim, Thanks. This form is much less intrusive than the FBAR, and the threshold is much higher. The penalties for not filing the form or filing late are also unrelated to the tax due: $25 per day, up to a maximum of $2500. I think this is too high for just not filing a form, but it’s orders of magnitude lower than the FBAR penalties. Still, Canadians have gone to court over this issue many times. Why haven’t Americans ever challenged FBAR penalties in court? And unlike the US, Canada cancels ALL penalties if the taxpayer makes a voluntary disclosure.
http://www.prweb.com/releases/2012/5/prweb9506902.htm
http://www.kustomdesign.ca/article-list/180-foreign-income-reporting.html
http://www.jamiegolombek.com/articledetail.php?article_id=1163
http://taxruminations.blogspot.com/2012/06/should-there-be-judicially-created-due.html
http://taxruminations.blogspot.com/2012/04/100000-or-more-in-assets-outside-of.html
@Shadow Raider
> I have heard of people who live abroad and travel to the US once a year just to maintain their green cards…
http://immigrationworkvisa.wordpress.com/2011/03/22/green-card-holders-who-stay-out-of-u-s-more-than-6-months-at-risk/
By the way, combine this with the US exit tax and you get a pretty toxic combination. Unable to remain in the US due to family issues? Too bad. First the US will take away your green card since they don’t consider you as living in the US any longer, then it will hit you up for exit taxes on your retirement savings, value of your home, and so on now that you have “expatriated”. Also note that there are several other ways in which one can inadvertently lose a green card. One author drily comments (emphasis mine):
> If you have a foreign bank account (in the US, for example), do any of you have to report its balance to your country of residence, or just pay tax on the interest from it?
The latter. So far at least, the UK govt has shown no interest in the balance of accounts held offshore. Only a requirement that you declare and pay tax on any income from them. For non-UK retirement accounts held by immigrants into the UK or former emigrant returnees, that translates into no tax or reporting requirement whatsoever until withdrawal.
@ShadowRaider
“I also wonder if other countries have a similar requirement of their
residents. If you have a foreign bank account (in the US, for example),
do any of you have to report its balance to your country of residence,
or just pay tax on the interest from it?”
Japan is instituting from next year a requirement to report foreign accounts if they exceed about $625,000 in total. Otherwise, one only has to report interest earned from them (and even then only if the interest earned exceeds about $2,500).
@Watcher, Thanks. So the UK trusts its taxpayers and does not burden them with reports and unreasonable penalties. For this and other reasons, I’m starting to think that the UK is the true “land of the free”.
@foo, Thanks for the information. That threshold is also much higher than the FBAR.
*The UK taxes on worldwide income but doesn’t insist on our listing out every account we have overseas and its value each year. Though wonder if this could eventually change in the future because it appears that Parliament want to emulate FATCA and ideally introduce similar regulations as a means of stamping out tax evasion, though we’re taxed here based on residence rather than citizenship. We do have to declare all our worldwide income though, plus have recently learned that I will also have to pay higher capital gains taxes to the UK on US mutual funds I recently sold and remitted here. Not as awful as PFIC taxation, but unlike ordinary stocks, foreign-based mutual funds have no annual capital gains exclusion and when sold, their gains are taxed as ordinary income rather than capital gains.
@Victoria, I completely agree how unfair it all is. I resent that I’d been been completely acceptably investing in UK mutual funds for sixteen years and had made various plans on being able to retire well before 60, if not even 55. But, alas, I will now have to work till my late 60s or even 70s, like most everyone else…I feel bitter that I was trying to be prudent and plan ahead so I could escape the rat race. Things were going well and was building up a steady dividend stream that was free from UK capital gains taxes because they were in similar types of accounts to IRAs. And then, lo and behold, I learned to my horror early last year about all the problems as a US citizen living abroad. I had been oblivious to the onerous conditions that my US passport was giving me.
I wound up owing a five figure sum to the IRS because of the horrible PFIC rules, plus had to will have had to pay around $xx,xxx in total for all the accounting fees plus another $xxxx to set up a relationship with a dual-compliant UK/US financial planner. I wound up having to move all my holdings out of PFICs into a US-compliant brokerage portfolio with much higher administrative charges so that my income has essentially halved. The adviser also skims an annual charge of 0.5% of the value of the assets she’d invested for me.
I am angry, both because the investment magazine I largely relied on didn’t give any inkling to the anomalous treatment of US Persons investing abroad, nor even from the mutual funds themselves. (They probably mentioned something in the small print but had erroneously assumed it only meant that US citizens not resident in the UK). All very confusing.
But to be fair, when I look back, I feel that we were both naive to not have sought professional advice from the start. I was stupid to have been a DIY investor and filer. So I’d created quite a mess for myself which is still ongoing though will be hopefully resolved. It’s going to, however, take at least another four years before the statute’s of limitations have run due to the previously under-reported income. With FATCA, I know I could easily have a six year SOL to wait out. Also the FBAR SOL’s. It’s why I feel stuck and far too scared to even consider renouncing right now because I understand that it would increase the risk of the IRS closely scrutinizing all my still open returns plus 2011 still to come, which will be over 200 pages, most likely!
It will automatically raise red flags, just by the very nature of its complexity. I envy those of you who saw an escape route but then again, you had much simpler situations. As Renounce as said, I had already been filing all along, albeit incorrectly, so had to clear it up as I was already in the system. Frozen in the headlights, no escape, whatsoever. I’m just so grateful and relieved that my accountant was willing to put me through a disclosure process different from the horrendous OVDI programme which would have wiped me out, not only in its horrendous penalties but also all the even more expensive accounting fees and especially attorney fees. I’m guessing I would have faced taxes close and accuracy penalties of an upper five figure sum, from having to go all the way back to 2003 (plus accounting fees of around $40,000 and attorney fees of perhaps $75,000. My 25% penalty would have also probably included our real estate so would have probably had to pay out a six figure sum on the FBAR penalty alone!!: so a mid six figure sum for everything would have COMPLETELY wiped me out. Bankrupt…probably divorced taboot. Would have probably jumped off Tower Bridge, I kid you not!!!
So to have lost a mid-five figure sum in total for everything seems relatively light, when I compare what I could have faced, not to mention several years of stressful ping pong with the IRS. But I was never a tax evader, had simply gone native and has naively assumed I could invest like a Brit, having both a US and UK passport, married to a Brit and having spent all my adult life in the UK, just trying to save and invest like my other fellow Brits. Nothing dodgy, had simply been completely unaware of all the anomalies.
I blame myself though for not having kept better abreast of the US tax laws but I agree with others here that no one at the Embassy or even on the IRS website ever made it crystal clear about FBAR or about all the horrible rules about buying foreign mutual funds. As I’m not wealthy, it seemed to make sense to buy mutual funds rather than risk buying individual stocks, especially as I’d had bad luck with various bank shares and BP after the oil accident incident. It’s as though the IRS are deliberately punishing the little man. The rich can always find a way around things. I could so easily have been virtually wiped out by all these draconian laws due to citizenship-based taxation.
I don’t want to give up my passport but if the ongoing compliance costs start costing me more than, say, $5000 in annual accounting fees then I am going to also have to probably renounce like many others here once I feel safe enough to do so, something between 2016 and the end of this decade. I feel innocently caught up in all this and it had been completely unintentional. I am an honest, upright person, certainly not a CHEAT. I feel betrayed and dismayed, to say the least. No one will be able to ever put a value on all the LCU’s and stress and fear that all this has caused me.
I’ve told people that it’s in many ways like having a cancer diagnosis in that I still have no idea how it’s ultimately going to turn out. I believe it takes five years of remission before a cancer patient is given the all clear. And speaking of Victoria, I sympathize with what you’re going through with that on top of all this!! Though I’m optimistic for you that you will get better! 🙂
People are sympathetic to me but still do not completely empathize because it’s not affecting them directly. My family are sorry for me but keep tell me that they would have forbade me from leaving America and marrying my spouse had they done it over again, knowing all the mess I’d be creating. They want me to be happy and do what’s best for me though I’m still convinced that they will still be very disappointed and upset if I did go ahead and renounce. I was brought up that money is not everything, that honour is more important….it’s why I decided to be honest and sort all this out as best I can even if it ultimately costs me everything.
It’s my spouse who I feel sorry for because it was only through him that I could have afforded to invest like I did. He has had a stroke and was simply trying to protect me in case he ever has to go into long-term care, by which the local authority could use up all his assets (apart from our flat) to pay for nursing home fees. We thus, in spite of the IRS threats, deemed it the safest hedge to keep our assets split roughly 50/50 in our separate names going forward.
He is dismayed and angered about all this and would be relieved if I renounced though I feel family and tribal loyalties so am in conflict here. It’s such a convoluted and complex situation. I hate how the US has created all this angst in my life, it’s sucked much of the joy out of my life. And I haven’t even lived there for over 24 years!!
@monalisa, It is because of people like you, good and honest people who just want to do everything right, who seek righteousness, love and happiness over money, that I am doing whatever I can to help end this mess.
*@Shadow Raider, God Bless you!! 😀 You brought a lump to my throat 😉
The ironic thing about my family was that one of my grandfathers had been a Judge of the US Tax Court and had been a thoroughly honorable man. He was even more of a role model for me than my own parents! I know he would have felt terribly for me but would have expected me to do the honest thing even if it cost me everything.
I had another grandfather who had been an important lobbyist in Washington; had he still been alive, he might have even been able to have been of some influence in all this. Such a pity that neither of them are here any longer.
Some of my forbears had been movers and shakers in Washington but for various reasons, my parents broke away from all that I was brought up in an ordinary, non-privileged way. So I don’t personally have any important contacts the way that they once did.
@foo
Investigate that Japanese requirement more. I think you will find it only applies to those Japanese who are resident in Japan, but if they are living and resident in California, it would not be required. I could be wrong, so need to look into it, but it would be consistent with their territorial tax system. And… there-in is the BIG difference. A lot of countries require its residents to report offshore income, but only the U.S. makes Victoria (an non U.S. resident) do what she has to go through.
@Just Me, I wouldn’t call the Japanese system “territorial”, as it taxes worldwide income of its residents, but I understand what you mean. Taiwan, on the other hand, has a truly territorial system as it does not tax foreign income at all.
Shaddow Raider…
I guess my point is, that it does the same thing that NZ and Australia do. They limit their territorial tax reach once a Citizen moves and becomes Tax Resident in another country. So, by my definition, that is a territorial system as related to its Citizens.
I am not sure the count, but many countries now are applying taxes to earning of their ‘resident’ citizens so called ‘offshore’ earnings. Now, I would reckon, that they came to that by the “follow the leader” style of legislation. Every country, except America, looks to what other countries are doing, and so copy cats taxation policy. I am sure it is only a matter of time, until others start copying U.S. Citizenship Taxation and FATCA rules, as it brings to the legislators the ‘hope’ for new revenue. Works for America, they think, so it will work for us.
Thank you, Victoria, for reposting this from your blog.
This is a brilliant analogy, down to sending a bottle of wine to a table that doesn’t drink! Your words have helped me transition in how I have been responding to my treatment by the US government, that is from a defensive position and despair to outright indignation and outrage at how USP’s are offered only slim pickin’s (by everyone) in exchange for our gymnastical efforts to be US tax compliant. Does the word ‘sucker’ come to mind?
What more would it take for you to actually lose your temper? 🙂
@Mona
You have done nothing wrong. I repeat nothing wrong. And you have done a lot of things right. You have been penalized by an extremely unjust nation and you had no way out precisely because you had done your best to be tax compliant.
The truth of the matter is that nobody (with the exception of a very small number of tax professionals who specialized in international tax) knew anything about PFICs. Who could have imagined that mutual funds in your country of residence could have been characterized in such a punative way. So, stop beating yourself up on this. What you are not seeing is the complete and utter corruption of the U.S. tax system and you are a victim of it. It’s nothing personal, you are being treated just like any other U.S. citizen abroad who made an effort to be tax compliant. Those who are in the system are in big trouble. Those who are not in the system may or may not end up with troubles.
The U.S. tax system (at least in relation to U.S. citizens abroad) operates on the following principles:
1. If something is “foreign” it should be punished.
2. The “principle of penalty” – There is no way that somebody can clean up innocent mistakes without paying penalties or the threat of penalties.
3. “No good deed goes unpunished” – Those who have filed (and are in the system) will have greater problems than those who have never filed. (Look at the new Streamlined compliance procedures for evidence of this – those who have filed cannot use the procedure to amend returns)
4. U.S. citizens abroad are tax cheats.
Those four principles sum it up.
In my opinion, you made exactly the right decision in cleaning these problems up. The only other option that you might have considered would have been compliance on a going forward basis. But, I think you did the right thing on “taking the hit on those mutual funds” now. The longer you held them the worse it would be. So, again, I think you did the right thing. Now, I know that a lot of people would say – you shouldn’t have done what you did, etc. But, I bet those who are people who had made no effort to be tax compliant.
Thank God you didn’t enter OVDI – that would have been a disaster (unless you had done an “opt out”). Although, you would have gotten different treatment on the mutual funds, …
You have been severely victimized by an incredibly unjust and corrupt system and you have paid a massive, massive fine for trying to invest in your retirement. What kind of nation could do this to its citizens?
But, look at this way – the financial hit may not be as bad as you think (given the context of citizenship-based taxation) for the following reasons:
1. By getting rid of the mutual funds you are also getting rid of the management fees associated with them (which over time are substantial);
2. By getting rid of them earlier your accounting fees are less – the longer those go on the worse it is.
3. By getting rid of them earlier, it reduces your holding period, which reduces the interest charge when they are sold.
4. By cleaning up the tax problem voluntarily (you essentially did a “voluntary disclosure”) you did it on YOUR terms and TIMETABLE and not on the IRS timetable.
5. By cleaning this up voluntarily you (in my opinion) have protected yourself from FBAR penalties.
I really feel for you. Not this is any consolation, but I am aware of people with facts similar to yours who have paid much, much, more than you have to solve this problem.
Hope this gives you some additional perspective on why I believe you did the right thing.
PFICs = American Exceptionalism at its finest!
P.S. I have tried to explain the situation of foreign mutual funds to Homelanders. Even they see it as incredibly unjust.
@All, Thanks so much for the kind comments
@Shadow Raider, I got caught in the capital gains trap. 🙂 To make a long story short the French government has a very nice deal for people who invest in rental property. There is a real dearth in some cities of apartments to rent and the government wants to improve that. The deal is a good one but a bit constraining. The property must be rented (can’t live in it) and you must hold onto it for a little under ten years. We bought two little one-bedroom apartments in a small French city and we sold them in 2010 and 2011. We made money on the deal and I ended up paying US taxes on my half which meant that it didn’t turn out to be much of an investment. To be clear the down payment on these aparts came from money made in France and the purchase was financed by a French bank. Yes, French income taxes are generally higher than the US but as you point out there are very good tax rates here for people with more than 2 children. (Slap palm to forehead – I shoulda had more kids 🙂 But it should be noted that the US does not consider all French taxes to be “taxes.” I can’t deduct, for example, the CSG.
@monalisa, I am so damned sorry. What a nightmare. I can tell you that after what happened with our apartments my husband and I were looking around trying to figure out just how in heck we are going to keep saving for retirement. No more rental property, that’s for sure. Max out those savings accounts? I think we are going to get some expert advice because at this point, other than the house we are buying, I am out of ideas.
@bubblebustin, Ah, I’m glad you caught the crack about the non-drinkers. Speaking of that event, I was reading (but do not know if it’s true) that many of the contractors in Irak did not have to pay US income taxes on money earned there. Be interesting to research that and find out if it’s true. The book said these folks were making from 500 to 1000 USD a day.
*@Renounce, I agree that I was most fortunate to have found a firm who were willing to put me through a disclosure that was different from the OVDI. They are not cheap by any means but from what I understand, it was the PFICs that would have cost me a fortune with, say, one of the big Four firms to sort out. I still have concerns though about a personal pension plan that my spouse had set up for me which I was able to have transferred over into my employer’s group pension scheme. It’s a defined contribution rather than defined benefit scheme though so is technically probably not considered approved by the IRS; but it’s a grey area and because, at least in the UK, it’s going to soon become mandatory for all workers to be signed up to a form of employer’s pension scheme, I simply can’t see how the IRS is going to practically come after hundreds of thousands of expats who are participating in what are domestically government-approved pension schemes.
It is a gray area though because the IRS could argue that this is a foreign grantor trust or even a PFIC but my accountant is arguing that we can invoke the US/UK tax treaty and that it’s safer not that it’s all being done via the Employer’s scheme rather than as a personal private stakeholder fund. It’s worth that much though; only a mid five figure sum. The problem though is that if I had to file 3520 and 3520A that I would be facing higher accounting charges for those two forms than I would even be paying into the fund each year which is around $2000 because I am not even a full-time employee. I earn about $27,000 per year is which is below average!
I believe the annual filing charge for the 3520/3520A would come to about $3000 per annum in addition to my ongoing accounting fees which will be around $2000-2500 (plus extra for 8938) even after my investments have been consolidated and made compliant. They are not the most expensive but they are certainly not cheap. I’d guess that they are mid-range in price.
The only reason I had assets to invest was through a small inheritance and also via my husband is not even a US person. I file married separately rather than joint so he doesn’t have to be embroiled with all this nonsense.
Because I like their arguments plus will always be grateful that they saved me from OVDI, I feel loyal to them and will probably stick with them as long as I retain my US citizenship. I still don’t know yet whether I’m going to keep it long-term or renounce. I’m still frightened that if I did renounce right now that I could greatly increase my chances of an aggressive audit, plus am worried that it could make it much more difficult to continue visiting my parents.
As I’m already in my late 40s and have no children, I will probably continue to file with this firm each year even if it costs me up to $3000 per year. I will learn to absorb the costs and can forego things like fancy holidays; it’s certainly not the be-all to have luxuries though I agree it’s onerous that I have this burden put upon me when I’ve made my life in the UK and don’t even have but $1000 still in the USA. (The accountant believes that I am safer to have all my assets here in the UK so that I’m less of a low hanging fruit. Far easier for them to seize assets directly within their jurisdiction, obviously.
I think what also concerns me is that if I were to eventually inherit from my parents, that I might face further problems and hassles if I renounced because who knows what sorts of nasty retroactive laws might be passed to punish those who had the gall to give up the ‘most desirable citizenship on the earth’. Plus, I also have to consider that I will want to be able to leave some money to my niece and nephews in the states without them being hit with heavy taxes even if it didn’t effect me directly.
I just hope that things will improve and that they will reform the tax system as it’s badly in need of an overhaul. In the meantime, I feel resigned to have to pay ‘protection’ money to my accountant and adviser so that if I’m ever in future hassled with audits or questions about the 3520 that they will be able to get the penalties waived.
I feel dismayed because I had assumed that the treaties meant that I would be protected from double taxation and that it was enough to declare my UK investment income on my UK tax returns, especially as there are information sharing agreements between the two countries. Thought it was sufficient to file a nominal return showing my US-source investment income along with my earned income that fell way below the FEIE. Little did I realize that this would be looked up far more harshly than not filing at all. Looks almost like they could argue that I had committed fraud, whereas those who simply hadn’t filed could feign complete ignorance of their filing obligations. What a stinker!!
This is why I want to wait out the statutes of limitations before doing anything drastic. It’s been over a year and two months, so far, so good. I believe I will probably be OK but realize I would really have been in the sh*t had I waited till this year with the new guidelines…
I trust my accounting firm and believe them when they say that they believe I still have a strong argument for reasonable cause. At least they had the common sense and decency to offer me realistic options and reassurance instead of being blindly rail-roaded. But they have also pointed out to me that my case is a bit closer to the wind than average so it’s still touch and go especially for he next couple years…but as each year passes, things look safer.
It’s still early days though…I’d imagine that they could still easily audit 2009, 2010 and 2011 even if they didn’t go any further back than that. After all, as I sold my funds in 2011, they could still insist on a close scrutiny of ALL my records dating back to when I actually purchased the funds, some of what were bought as far back as 1995..that’s an awful lot of records to have to keep hold of… so even with a three year SOL, we’re talking Dec 2015 at the earliest!!
And because my FBARs listed over 25 accounts, they were sent as the shortened version, so I could imagine they could easily want to ask more questions about what exactly my accounts contained…but, hopefully, that’s what 8938 will have provided…43 accounts including things even as intricate as travel cards, overpaid credit cards with positive cash balances, pre-paid phone sim card balances, Alertpay, Paypal, store cards, even gift cards from Amazon! Even spent CD’s that I had forgotten to technically close that produced interest of, say, one or two pence, LOL. All positive cash balances, all have to be reported if one wants to be technically correct. To feel like I’m being strip-searched is an understatement.
The one thing that gives me hope and optimism is that both my accounting firm and adviser have inside contacts with the IRS at our embassy here in London and believe that they will see that I’ve been genuinely sorry about the misunderstanding and am putting everything right. They said that thought we are caught up in the net of all these draconian laws that they are at least currently happy that I’m getting compliant and are not going to waste valuable resources ruthlessly punishing people like me who are essentially still minnows.
This NYT article ‘Evaluating the Expat Factor’ by Brian Knowlton, published: August 27, 2012 ” starts to challenge some of the convenient mischaracterizations of us as wealthy ne’er do wells who left town to avoid paying for that expensive multi-course US lunch. See the references to Amanda Klekowski von Koppenfels, whose survey of expats I think some may have participated in earlier this year.
“In surveys of nearly 1,000 Americans living primarily in Western Europe, Amanda Klekowski von Koppenfels, director of migration studies for the University of Kent in Brussels, found that the largest single group — nearly one-quarter — were overseas because of marriage to foreigners. Only 10 to 15 percent had been sent abroad by their company or had accompanied a transferred spouse.
For her Ph.D. in politics at the University of Newcastle, in England, Judith Murray surveyed more than 800 American overseas “participators” — those who vote in U.S. elections. She found they tended to be highly educated (89 percent with at least a Bachelor’s degree), married (60 percent), white (90 percent) and older. But they were not, largely, the leisurely, disaffected rich. The largest single professional group were those in education (22 percent).”
from http://www.nytimes.com/2012/08/27/us/politics/votes-from-expatriates-could-play-crucial-role-in-election.html
The article also addresses the eternal questions about the weight and importance of the vote from us abroad, and confirms what we already know – that there are no actual robust statistics to count the numbers of us with US citizenship abroad, or the larger group of those deemed ‘US taxable persons’, (and thus, again refutes that oft-cited, but entirely unsupported calculation for the ‘US tax gap’ we’re being scapegoated for).
“Trying to divine expats’ electoral impact is not simple. Even their numbers are subject to wild disagreement, generally put somewhere between three million and six million. Congress considered an overseas headcount, partly because Utah had sued to ensure that Mormon missionaries be counted. Lawmakers dropped the plan when they learned it would cost some $1,450 per person, nearly 30 times the per-head cost at home, said Sheila Croucher, an immigration specialist at Miami University in Ohio”
Correction: I just found out that Taiwan began to tax foreign income in 2010, under an alternative minimum tax. Foreign income of residents above TWD 1 million (USD 33,710) is taxed, but not of nonresidents. Essentially, Taiwan switched to a residence-based system with a limited exclusion for foreign income.
@Just Me, According to my survey of all 244 countries and territories in the world, 23 don’t tax income, 34 tax income only from inside the country, 185 tax worldwide income of residents, and 2 tax worldwide income of residents and nonresident citizens. I added a table to the Wikipedia article on international taxation.
@Victoria, Thanks for the explanation. It’s awful to be taxed by two countries because the tax-favored items are not the same for both. I remember my French teacher said that in France the government pays for people to have more children, because of the decreasing population (opposite policy of China). I guess it does that through tax breaks.
*@Victoria, I also feel a lot of sympathy for you. You have been through far more than me, especially with your cancer diagnosis, I’m sure!! I agree that many expats and US persons could indeed be caught out for capital gains from selling real estate. This is why I unfortunately don’t believe that the US will ever end it’s citizenship-based taxation. I especially feel that this is unjust for accidental Americans who have never even lived in the country, who only inherited their US person status via a parent or from having been born in the US, like many Canadians…It would seem that many of them are going to be royally screwed, especially as they would have done their financial planning completely oblivious to the US double taxation on gains in real estate and things like PFICs, which I’m sure many will also have invested in local mutual funds.
I hope that I will be pleasantly surprised though. In some ways, I partially blame myself for the problems I created because I met and married a Brit whilst studying History of Art in the UK…I chose to start a new life in England so, as it was by my own choice, I feel in retrospect that I should have sought out expert advice before taking the plunge and investing over here. On the other hand, people like many Canadians and children of US citizens are being completely thrown off kilter, as it’s only been fairly recently that the IRS has had all this crackdown for those of us abroad (and also some immigrants and Green Card holders). It can even effect NRA spouses who have unwittingly decided to start filing joint returns with their US spouses and thus, getting themselves also embroiled.
It seems that the only realistic options are to stay below the radar, which could become increasingly risky assuming FATCA does indeed come into full effect; or to do as I’ve done and become completely compliant. Or renounce/relinquish (if possible).
I still will always be fond of the land of my birth and because of my strong family bonds, don’t think I will renounce, myself, but can fully understand why other have and will to simplify their lives. It’s just that I would find it very hard to come to terms with the notion of being effectively permanently barred from ever going back to live there. Even though I doubt I will do, it’s still comforting to know that still could, especially as I get older. Still, though, it’s early days and I will have a clearer idea of about my plans towards the end of this decade…plus, I will have given the US ample time to hopefully work out a better solution for this mess we’re all in. If not, then I will feel a lot more decisive (assuming they haven’t done anything ludicrous like introducing, say, a $5000 or even $50,000 exit charge and/or a full mark-to-market exit tax on ALL one’s assets rather than for those above the two million mark.
@Victoria,
Interesting. The only thing I’ve found so far is that some contractors are fraudulently claiming the FEIE when they meet the physical presence test, without actually qualifying for the bonafide foreign residents test.
http://www.tax-power.com/iraq_contractors.htm
*A few points of related interest in Canadian news today:
1. Jason Kenney’s big crackdown on fraudelent citizenship applications. Note: the crackdown does not effect those with sole Canadian nationality in the present even if they obtained it fraudlently because Canada is bound by international treaty not to make people stateless. Also if this is truely a big crackdown the waiting time for Canadian citizenship could drop significantly allowing more US citizens living in Canada the ability to obtain Canadian citizenship and increasing renounciations/relinquishments down the road.
2. More Explanation of the Iranian Embassy closure from Kenney. Basically at least one reason was the fact that Iran refused to recognize dual nationality of Iranian Canadians. Does Iran recognize renounciation? Also Iranian Embassy in Ottawa was engaging in inappriopriate activites.
3. This is only a rumor but I have heard that the Eritrean Embassy might be the “next” country to get kicked out of Canada after Iran over the diaspora tax. If this happens things will get awfuly interesting.
Ah, yes, the Military Industrial Complex, Dick Cheney, Halliburton, KBR. These are older references. I know of one US person who has played the private contractor game for years and is no better ahead. Exploitation of those who want to make a fast buck. And we, US Persons Abroad, are subsidizing whether we like it or not.
http://contractortaxation.com/iraq/taxation
http://www.corpwatch.org/article.php?id=14962
and http://www.corpwatch.org/article.php?id=12561
http://www.corpwatch.org/article.php?id=15646
Testimony Before the Commission on Wartime Contracting in Iraq and Afghanistan, by Pratap Chatterjee, Center for American Progress, May 5th, 2011
http://www.corpwatch.org/article.php?list=type&type=15
monalisa1776 & victoria, I’m at a loss and words and don’t know what to say, fearing that I might say something wrong. But, I greatly appreciate it that you both shared your situation with us, helping us to better understand the situation we are in.