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.
@renounceuscitizenship
Perhaps some US tax lawyers and accountants ethics change with their physical proximity to their clients? There’s nothing like having to look a client in the eye. Our lawyer in Canada, as busy as he was, explained all options to us (including doing nothing if we so chose). There is yet another very good reason to use US tax professionals in the country where you live, and it’s ethical for me: I want my Canadian earned money to work for Canadians in Canada. I won’t give an extra dime to a country I feel isn’t deserving of it. For that I have a choice.
Yes, US Citizen, living decades outside of US.
No, no lawsuit. The lawyers delivered on everything they said they would do. They were just not for minnows. I was an anomaly amongst their clients, but it was “just business” to them. The best day I had in the last year was when I fired them.
Instead of being angry, I try to laugh at how ridiculous my situation was. I googled the Special Agent that had my file and he was making a name for himself busting gangsters with fictitious businesses. I was not surprised when my file sat on his desk for about 6 months until OVDI came around. He was probably glad to have a way to get rid of me.
Being rolled over into OVDI was far worse as when I was first entered into it, there was no 5% penalty for people resident overseas. So an even bigger shock for me was when upon my own reading (my lawyers never informed me of the details), I found out I was now in a program that wanted 25% of everything I owned overseas, including house, car, etc. Due to the fact that everything I owned was overseas and I have a mortgage, the penalty that I was expected to pay was more than what I had in cash as the total value of the property was to be used in the penalty calculation. The night I learned about that, I truly thought there was no point to living anymore. I assumed everything I ever had and more would be taken from me just because I had an overseas bank account.
That was the nadir. To get myself out of that pit, I realized that I had to educate myself. 4 months later OVDI came up with the 5% provision. At that time I was thrilled, but as I educated myself more, it became very clear that my facts and circumstances do not merit penalty. Therefore, I will opt out.
I think you are mistaken about VD. In my reading, VD is the longstanding Criminal Investigation (CI) Voluntary Disclosure (VD) practice – as provided by IRM section 9.5.11.9. On the IRS website it is described as: The Voluntary Disclosure Practice is a longstanding practice of IRS Criminal Investigation whereby CI takes timely, accurate, and complete voluntary disclosures into account in deciding whether to recommend to the Department of Justice that a taxpayer be criminally prosecuted. It enables noncompliant taxpayers to resolve their tax liabilities and minimize their chance of criminal prosecution. When a taxpayer truthfully, timely, and completely complies with all provisions of the voluntary disclosure practice, the IRS will not recommend criminal prosecution to the Department of Justice.
So I assume that just as everyone in OVDI had to get an okay from CI, anyone in VD has to go through CI. I agree with you wholeheartedly, it would have been more professional for my lawyers not to market VD as the only way to correct and explain errors.
Getting back to the theme of “What price citizenship?” It was the
intangible value that led me into this situation. I probably should
have focused more on the tangible
*@ renouncecitizenship: I acknowledge that the following statement will sound self- serving, but I agree with your conclusions about finding a US tax professional in your country of residence.
International tax is difficult, and you need a professional who “speaks” not only US tax, but also the tax language of your country of residence as well. For example, the typical US tax professional may be familiar with foreign trusts, but if that individual does not “speak” Canadian tax, he may not be aware that TFSAs, RDSPs, DPSPs, etc. are all foreign trusts for US purposes. In otherwords, knowledge of the nuances of non-US tax law is critical in the correct application of US tax principals.
Jack Townsend has a great list of US tax lawyers located all over the world who are experienced in these matters.
@RoyBerg
Do tax professionals in the country where you reside offer value added services, or is it those within the US are under performing in their service to their clients? It would appear that if a law or accounting firm in the US doesn’t know the ins and outs of the tax system of the country where their client resides, they should be taken to task should there be problems arising from this lack of competency. It appears they aren’t.
@RoyBerg
Yes, you are offering a second reason why it is clearly a good idea for people to consult a US tax professional in their country of residence.
The reality with US tax lawyers and CPAs is that they see the world only in terms of US law. At a minimum, this makes coordinated tax planning for US citizens abroad an impossibility.
So, to summarize (at least so far) there are two arguments for using US tax professionals in ones country of residence.
1. The possible propensity of US lawyers and CPAs to move people in to OVDP without adequately exploring other options; and
2. The problem of having expertise ONLY in the US tax system.
I would like to ask you a question. So, far this discussion has been in the context of compliance issues. What about the issue of just preparing US tax returns – i.e. just number crunching. What are your thoughts on this topic? What would the positives or negatives of using tax prep firms either inside or outside the US? Say, one wants to go into OVDP or do some kind of voluntary disclosure. Where should the accounting work be done?
I have talked to a number of fairly recent immigrants from the US to Canada about US taxation. Several were told by their US accountants (some of whom were CPAs) that they no longer had to file US tax returns. All had enough US income to be over filing thresholds.
After telling one person about citizen based taxation, their US accountant prepared a 1040NR for them instead of a 1040!
I would guess that most US preparers including many CPAs would know little or nothing about PFICs, TFSA, RRSP, FBAR, etc.because it would not be something they would usually come across in their tax practice.
@RoyBerg, I am curious about what practical advice responsible cross-border law and tax firms should give to clients who they become aware have practical limits to their ability to pay for specialized services. After the initial consultations, where a client has provided a number of years of past returns, and asset and account details re the FBARs, and is seeking advice on how to proceed, the practitioner has a pretty good idea of how much the client can actually put up to pay for services. The cost for specialized US tax law and accounting services is beyond the reach of many. When the choice is between putting up 10,000. or more, at rates of more than 500. per hour for a lawyer, and there is no real way to know how many hours it will take to resolve, OR just giving up and giving in to pay the IRS about the same in potential penalties, even where little or no actual US tax is owed? Practically speaking, in some of these situations, there must be real life scenarios where the lawyer knows that the client is looking at losing that same size sum one way or another – either to the law firms or the IRS. Does the lawyer ever say to the would-be client: basically, in a practical sense, it might be cheaper for you to just give up and give in to the IRS because at the rates we charge, you’ll end up paying the same in the end? Especially where there is no risk or evidence of any actual criminal wrongdoing.
When sending a form e-mail is charged at a rate of >500. per hour, a client is looking at several hundred just to ask for an update on their file. Or to ask a question.
This is the kind of real dilemma that many face in trying to become compliant. Some can do the drudgery like Just Me, but not everyone could take that on for themselves, or may have more complicated scenarios. In the world of the IRS rules for the taxable person ‘abroad’, almost everything an ordinary person might do makes coming into compliance expensive and hard to achieve – particularly when the retroactive and broadly defined application of FBARs are thrown into the mix – and apply to accounts that might be debts (ex. mortgages), or belong to others (ex. an employer or work account), or hit a high point 6 years ago, but no longer exist.
@Lisa, Do NOT blame yourself. I was a (often very late) DIY filer myself and no clue about the FBAR’s. The overwhelming majority of US cits I talk to here in the Paris area had no clue either (some still don’t). I was very lucky that when I kinda sorta figured some of this stuff out my dad sent me to the CPA firm his company has worked with for nearly 30 years for advice. He advised against going into one of the amnesty programs and said, “just file the damn things!” That was pure dumb luck on my part and it sounds like I would have received a wildly different answer had I talked to someone else.
@usxcanada, Yep. That’s my take on it too. I thank the deity that Phil Hodgen is around – pretty good advice from a very reputable source and he’s funny too. The latest Jello shot had my cracking up over my morning coffee and reading his emails aloud to my parents.
@bubblebustin and all, That’s a very good point. Yes, I think I’d be much more comfortable with a French tax expert who understood the US system versus a US-based expert. For me it’s all about knowledge and context and point of view:
1. Tax law changes all the time on both sides of the Atlantic but since all our stuff is in France it’s all about French law. Would a US expert be up to date on things like les lois Périssol (1996), Besson (1999), Robien (2003), Robien « recentré » et Borloo (2006). Would he know what the CSG is or the CRDS? Would he need a French/English dictionary for such common terms as “participation?”
2. Bi-national family. I would be seeking advice with my French husband. I suspect that a French lawyer would be more motivated to get the best deal possible for a fellow Frenchman and his foreign wife. I would be concerned that a US expert would consider my foreign husband to be at best an irrelevant annoyance or at worst regrettable but necessary collateral damage.
3. Erroneous assumptions, I just remembered something from my conversation with that Seattle CPA. At one point in our conversation, the CPA was saying how important it was that I get this all straightened out because my assets in the US would be at risk. I replied that I had NO assets and earned no income in the US and hadn’t for years. Dead silence from the American CPA and then he said, “Nothing?” Nope. Oh. A French lawyer would probably start by assuming that anyone who has been a resident of France as long as me probably has most (if not all) of her assets in France.
@badger,
I can’t keep up with everything; I’m falling behind and as one commenter expressed to pacifica “many of us here must be OCD” but she values the information she has gleaned from our Isaac Brock site.
…and I can’t speak for Roy Berg and I know the law and tax firm he is with is coming to a deadline for IRS US tax compliance and reasonable cause arguments for many.
The questions you raise, such good questions, are almost unanswerable.
I am one whose trust is in such a law firm. I am spending retirement savings and, as I’ve said before, I don’t begrudge any of it going to them. It was my decision because, yes, I could not do it myself. Prior to that, I had been referred to a New York tax lawyer by an estate planning lawyer here who deals with families who have family members with disabilities (paid over $1,000 for NO RESULT). I was trying to get all of my planning in order as I am now 69 years old and my husband almost 72. Before that could be accomplished, it was deemed prudent to get my US situation completely in order. Well, still working on that. When I was getting absolutely none of my questions answered by the New York lawyer (and believe me I had questions) and it was getting closer to the first (now rescheduled) date that I had with the Calgary US Consulate for my renunciation and clarification on my son’s situation (finding out that I did not have the right to renounce on his behalf and neither did any other Parent, Guardian or Trustee), fate had me cross paths with Roy Berg on this site. Fate further has me within 20 minutes walking distance to his office.
I go with my gut and who I feel I can trust (trust being in short supply these days). My outcome will dictate how I will live the rest of my life. I want it done. I want my life back. This is such a waste of any person`s valuable life and the valuable things they can be doing for themselves, their families, their communities, their countries. I am getting sorted out all I have to for renunciation and the steps after that. I absolutely know that there is a price to pay the fee commanded for someone’s education and expertise with dealings with the IRS. For my situation, I value that.
Yes, I am angry that I have to dig into my very hard-earned and saved retirement funds to do this and this law firm understands that. I am incensed that someone who does not have the resources to do what I am doing is left hopeless if they cannot figure it all out themselves. The immorality of just this astounds me. That so many may be collateral damage astounds me.
I believe that those who can truly help are few and far between. The Canadian Certified Accountant who was previously doing my Canadian and US taxes will no longer take anyone who has to have US taxes done, especially with the time and cost required for the new Form 8938.
What is the answer for those who don’t have the funds to hire a competent professional in their country?, a question hard to answer.
*@ Renounce – I use the term “compliance” to include return preparation. Both lawyers and accountants need to “speak” Canadian and Uh-Merican in order to effectively deliver tax advice. Unfortunately, as you point out, US practitioners (and Canadian too) tend to turn a blind eye to issues north (or south) of the 49th.
@ Badger – I’m afraid I don’t have a very good answer for you. Practitioners (and taxpayers too) had been hoping for a real streamlined procedure that would provide a simple, certain, affordable way to get returns caught up. The procedure that was delivered, however, was far from what we had hoped.
Stay the course, Keep the faith.
@Roy Berg and @calgary411, thanks for your replies, and for considering my questions. I know that there are endless imponderables here, and no firm good answers to be had.
As many have noted before, this is a meaningless and horrible waste, that someone like you @calgary, should have to go to the lengths you have, and can’t renounce for your son, and can’t preserve that money for him, and continue to have his RDSP treated as a taxable trust by the US. What a travesty.
All this will produce for the US is a lasting enmity from people who would have been allies and friends, or at the very least neutral.
Thanks, badger. At least, just by knowing, I am far ahead of families just like mine but who, so far, have no knowledge of what they too might think insane (that they don’t have the right to renounce US citizenship for their developmentally delayed or otherwise mentally compromised family member — for whom they make so many other choices if they deem it in their family member’s best interest). I feel there have to be more than just a few such families, and certainly more without this right than me for my son. I’ve met two other families through Isaac Brock. Such families do not deserve this indignity.
@Lisa
http://isaacbrocksociety.ca/2012/09/16/a-minnow-opts-out-of-the-irss-ovdi-and-gets-the-correct-result-a-simple-warning-letter/comment-page-1/#comment-56953
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