“There is something fundamentally wrong with a country where compliance with its laws
forces you to (eventually) renounce your citizenship.”
This post is based on a comment by John Richardson. The comment is a response to
a post by laurainparis on the Thom Hartmann blogsite.
*******
Laura, you conclude your last comment with:
“In asking his question Thom demonstrates the importance of how the United States treates it citizens when they leave the country. He demonstrates that this is an important question not just for Americans who live outside the US, but for ALL Americans, regardless of where they live. Because anyone who thinks they can leave the country, anyone who comforts themselves with this idea – anyone who asks the question “why don’t more Americans leave?” – they are deluding themselves. There is no freedom for Americans. Americans are not free to live normal lives outside the US, unless they are financially and emotionally prepared to STOP BEING AMERICANS (that is, renounce their citizenship). The word “ironic” doesn’t begin to describe the situation. The words “impossible” and “tragic” do.”
A tragic situation indeed.
What’s most interesting and tragic is that:
The ones who try the hardest to comply with the U.S. rules are the ones who ultimately are forced to renounce. I have assisted a very large number of people in renouncing their U.S. citizenship (and thereby ending U.S. jursidction over them). A high percentage of people I have assisted are people who:
1. Have tried for years to comply with the “alphabet soup” series of laws and reguations that govern the lives of Americans abroad; and
2. Realize that compliance is no longer possible.
The only remaining Americans abroad will be “noncompliant” Americans abroad
In the long run, the only Americans abroad who will be able to retain their U.S. citizenship are those who do NOT attempt compliance with these laws. There is something fundamentally wrong with a country where compliance with its laws forces you to (eventually) renounce your citizenship. This is a problem that has escalated over time.
U.S. citizens abroad are living under siege.
A wonderful expression of the evolution of the problem comes from Jackie Bugnion in
her submission
to the House Ways and Means Committee on Tax Reform. Writing in 2013 she said:
“In 1776, the United States declared independence because the mother country on the other side of the ocean was imposing taxes on the colonies for the benefit of England. Resentment started when Britain tried to enforce the Navigation Act after 1763. Resentment increased with the Stamp Act in 1765, a way for Britain to tax the colonies. The British Tea Act of 1773 led to the Tea Party and we all know the outcome – the American Revolution and independence crying out “no taxation without representation”.
Today, the estimated 7 million Americans resident abroad, of whom the majority are long-term overseas residents in high tax OECD countries, face a comparable situation. Their representation in Congress is non-existent in reality. Americans abroad amount to only 1 to 2% of the votes in any particular state; Congressmen and Senators have ignored their tax issues. The unjustified myth that Americans abroad are wealthy and disloyal restricts a rational approach to the problems because of political image issues.
Citizenship-based taxation (CBT) has existed ever since the federal income tax was adopted. Despite CBT being an anomaly involving double taxation, taxation of phantom gains and explicit tax code discrimination, it was grudgingly tolerated by Americans abroad because it was essentially voluntary, most often involved little tax or no U.S. tax liability and basically was not enforced. In particular, the FBAR filing requirement was so obscure that even the big four accounting firms were not aware of the filing obligation dating from 1970 and failed to inform Americans abroad of the need to file the FBAR.
Since 2001, a series of legislative events have radically changed the situation:
- In 2001, the Patriot Act made anything foreign suspect, including Americans residing overseas.
- In 2004, Congress, under the Jobs Act, drastically increased the FBAR civil and criminal penalties to confiscatory levels, creating a disguised form of taxation on assets held overseas.
- In 2006 administration of the FBAR reports was transferred to the IRS for enforcement.
- In 2006 the Tax Increase Prevention and Reconciliation Act (TIPRA) extended the Bush tax cuts and included a compensatory revenue raising provision that reduced the benefit of the foreign earned income exclusion, limited the foreign housing allowance and pushed Americans overseas into higher tax brackets, thereby increasing U.S. tax liabilities for many Americans abroad.
- In 2008 the law relating to renunciation of U.S. citizenship was revised under Section 877A and introduced an Exit Tax on wealthy individuals (defined as “covered”). The law also provided that Americans who inherit from estates of former “covered” U.S. citizens are subject to U.S.
inheritance tax with no exclusion. This outrageous discriminatory provision aims to discourage renunciation of citizenship, but in fact penalizes children of former U.S. citizens for an act they did not commit. In practice, it encourages the children to also renounce their U.S. citizenship.- In 2009 the IRS launched its initiative against tax evasion linked to foreign assets through the Overseas Voluntary Disclosure Programs and a threatening public relations campaign. While it justifiably targeted U.S. resident tax evaders, it simultaneously trapped Americans abroad who necessarily have foreign assets. The IRS’s one size fits all policy and bait and switch tactics led to abuses of Americans abroad which inspired sharp criticism from the National Taxpayer Advocate.
- In 2010 FATCA was slipped into the HIRE bill with no debate in Congress and no cost/benefit
analysis. FATCA aims to provide the door that closes the fiscal trap by requiring foreign financial institutions to report to the IRS on assets held overseas by U.S. persons. It effectively cuts off many Americans from foreign financial institutions which find it too onerous to maintain American clients. FATCA creates a barrier to free movement of capital and people.- In 2012 S.3457 proposed to grant the IRS the authority to have a U.S. passport cancelled or not issued if the IRS determined that the individual owed $50,000 or more U.S. tax.
- In 2012 the Ex-patriot Act, S.3205, proposed to deny any “covered” expatriate re-entry into the United States, with retroactive effect for ten years prior to enactment of the law. The Reed
Amendment of the 1996 Illegal Immigration Reform and Immigrant Responsibility Act already
allows the United States to deny entry of former citizens into the United States.- In 2013, S.268 was introduced; it compounds difficulties created by FATCA.
- In 2013 the Senate Finance Committee included in its tax reform recommendations a provision which would grant the IRS authority to cancel a U.S. passport for tax collection purposes.
This stream of legislation and proposals categorizes Americans abroad as suspected criminals seeking to escape U.S. taxes. Congress has outdone George III and has turned the United States into a fiscal prison, including legislation which is deemed anti-constitutional under the Fifth Amendment1 and is contrary to Articles of the Universal Declaration of Human Rights.2
The foundation of the U.S. fiscal prison is citizenship-based taxation. Americans working and living abroad carry a ball and chain of dual taxation throughout their entire lives up to and including death.Americans abroad already pay taxes in the country where they reside and receive governmental services.
The additional U.S. tax obligation creates inevitable incompatibilities and discrimination and even requires Americans abroad to break foreign exchange control laws to pay U.S. taxes.
A revolution among long-term overseas residents is now underway. Five years ago, Americans abroad never talked about renunciation of citizenship. Today, it is a common topic in the press and among the community abroad. For more and more individuals, renunciation is the only solution to an intolerable situation created by the U.S. imposing its laws beyond its borders. The United States is literally destroying the community of Americans abroad, which plays an essential role in representing U.S. interests and goodwill overseas. The United States is shooting itself in the foot.
While the absolute number of renunciations, currently around 2,000 a year, is insignificant compared to the average annual U.S. citizenship naturalizations of 680,000, renunciations have multiplied seven times over the last four years. So far we have seen only the tip of the iceberg if CBT remains in force.
Today’s situation leads to serious hidden prejudice for the United States. U.S. exports are far below where they should to be because citizenship-based discourages U.S. companies from deploying U.S. citizens overseas to sell U.S. products; the law makes them too expensive. U.S. tax law and FATCA create insurmountable barriers for small and medium-sized companies to establish beachheads abroad to develop exports. The loss represents millions of U.S. jobs, hundreds of billions of dollars of exports, billions of dollars of U.S. tax revenue, and an unsustainable trade and budget deficit. Americans married to a foreign spouse, who represent about a third of the Americans resident abroad, now hesitate to register their children born abroad with the U.S. Embassy. The hot thing among young adults in their twenties is to renounce U.S. citizenship; they are aware of the impossible web of U.S. regulations that restrict job opportunities and personal freedom. Pushing away the young generation of Americans abroad is an immense loss to the United States. In prior generations, many highly educated multi-lingual American children returned to the United States, founded companies and created jobs in the U.S.
Adopting RBT will stop this revolution immediately. RBT law needs to be drafted in the spirit to allow free movement of individuals to leave and return to the United States, to reinforce the competitiveness of Americans and the United States overseas, to provide a simple, non-penalizing transition to RBT for the community of Americans already overseas, to ensure that Americans abroad are not subject to FATCA and FBAR, to adapt existing bilateral tax treaties and enter into new tax treaties so that withholding tax rates on U.S. source income are reasonable and to ensure that Americans abroad who have the majority of their assets in the United States (retirement funds, pension funds, real estate) are not disadvantaged under RBT with regard to either income or estate taxes.
I thank you for the opportunity to comment and hold high hopes that your bi-partisan efforts will lead to the constructive tax reform so necessary for Americans residing abroad.
Sincerely yours,
Jacqueline Bugnion”
@ Jon
I am not sure what Harrison is referring to re the Grandfather clause so will have to let him or others explain that.
BUT Not sure if you know about the exemption from exit taxes for duals from birth. You say that you were an accidental, so you may well be living in your other citizenship birth country.
Here are the rules.
Regardless of your financial status, you are not or will not be a “covered expatriate” if you satisfy all of the following items [see Section 877A(g)(1)(B), Notice 2009-85, Section 2(B)]:
•You became a U.S. citizen at birth; and
•You also became a citizen of another country at birth; and
•On your expatriation date you “continue” to be a citizen of that country; and
•On your expatriation date you “continue” to be taxed as a resident of that country; and
•On your expatriation date you were not a U.S resident for 10 of the 15 tax years that end with the year that you expatriated.
Note, however, that you will still have to certify that you are up to date with all U.S. tax requirements. Failure to do so will render you a covered expatriate even if you satisfy all of the dual citizenship requirements.
As you see you will have to obtain a SSN (now available from American Consulates) and back file 5 yrs of tax returns and the 8854, all with a note saying that you had only just found out that you were considered to be an American with filing responsibilities. It’s a lot of work, but you could keep it ‘simple’ .
I only mention this as it is another avenue to pursue if you feel uncomfortable with the other Hobson’s choices.
I believe Boris Johnson may have availed himself of this route.
As per Wikipedia A grandfather clause (or grandfather policy) is a provision in which an old rule continues to apply to some existing situations while a new rule will apply to all future cases. Those exempt from the new rule are said to have grandfather rights or acquired rights, or to have been grandfathered in. Frequently, the exemption is limited; it may extend for a set time, or it may be lost under certain circumstances. For example, a “grandfathered power plant” might be exempt from new, more restrictive pollution laws, but the exception may be revoked and the new rules would apply if the plant were expanded. Often, such a provision is used as a compromise or out of practicality, to allow new rules to be enacted without upsetting a well-established logistical or political situation. This extends the idea of a rule not being retroactively applied. Another common example of a grandfather clause is a customer of a utility or telecommunications service who pays a certain rate and maintains that rate even if other subscribers and new subscribers face higher or increasing rates. If it is an unlimited clause it continues indefinitely and is only cancelled if the subscriber discontinues the services, fails to pay their bill(s) or makes certain changes to their contract.
@Harrison
Most on this forum understand the basic concept of a “grandfather clause” or “being grandfathered”, but I’m not sure what you are referring to that is specific to US tax.
I agree with the others here who advise Jon that unless his US citizenship is presently causing him some sort of big problem in his country of residence his best option is to do nothing. As for what the future may hold, who knows? The possibilities range from the present situation continuing indefinitely (most likely) to the US unilaterally declaring everybody in the world a US taxable person (less likely but given Congress’ ongoing tendency to weaponize the US tax system, not impossible).
Pursuant to what Heidi said, covered expatriate status is only a problem if you intend to give or leave money to US taxpayers, who would lose a punitive 40 percent. (Feel free to leave it to non-compliant US-citizen family members, since they are by definition not filing.) Beyond that, no real downside to covered expatriate status, so no reason to obtain an SSN and deal with all the tax paperwork after renunciation.
I think what Harrison is trying to say is that if you renounce without compliance, the US may one day figure out a way to come after you for taxes owed prior to renunciation. To which my admittedly cryptic reply was, what’s preventing them from retroactively changing the laws and coming after you for more taxes after renunciation *and* compliance – the “clean exit” to which he refers. Basically it comes down to what level of paranoia are you going to apply here?
I apply a very low level of paranoia: the US is not competent enough to find me, powerless to do anything if it does, and generally not interested in attempting to collect small amounts of money when it has no leverage; Canadian banks pay lip service to FATCA rules and make no serious effort to find US persons; this will likely get better not worse as we return to the status quo of de facto ignoring CBT, particularly for Canadian duals.
Harrison and a few others here, primarily resident in Asia, seem to operate at a far higher level of paranoia: the US will one day find and impoverish us all, if identity theft hasn’t already cleaned us out; our only hope is to die a happy natural death before this nightmare is fully realized, but even then the IRS will destroy our families and haunt us into the afterlife.
As for Jon, do as Maz, myself and others have suggested: nothing for the time being, unless you are facing problems with banking access, in which case you might need to consider coughing up US$2350 for the privilege of being treated like any other customer in your country of citizenship. In no circumstances should you consider obtaining an SSN or entering the US tax system. If you travel to the US you *may* need a US passport due to your birthplace, but your obtaining the passport does not appear to put you on any sort of IRS radar (particularly as the application form allows you to enter all zeros for the SSN if you don’t have one).
Correction:
“the US may one day figure out a way to come after you for taxes owed prior to renunciation”
should read
“the US may one day figure out a way to come after you for taxes owed before or after renunciation”
@nononymous
I thought it was now impossible to obtain a US passport with all Zeros for a SSN? IfJon has any intentions of traveling to the US I would think it best for him to renounce and travel on his other citizenship passport with ESTA or whatever and his cln.
@nononymous
I am not advocating for this but if Jon is a dual from birth and fits the criteria mentioned re living in country of other citizenship he would NOT be a covered expat(ie no exit taxes for him or none for his US heirs)If he wants to go through all the 5yrs back filing and 8854.
Just giving him all options on the plate, others out there may chose differently especially with US heirs.
My choice if I was him would be to renounce to be shot of them and travel freely but do nothing else.
@Heidi
Here’s the relevant instructions from the current DS-11 passport application form:
Entirely possible to obtain a US passport without an SSN, if required for travel to the US. (Which isn’t necessarily the case, despite the rules.) Currently no evidence that the IRS does anything with that information.
As a practical matter, obtaining a US passport is much cheaper than renouncing, if US travel is for some reason required and likely to be difficult on a foreign passport with US birthplace. Obtaining a US passport does technically put one on the US radar, but not necessarily in a serious way, so it might be worth the risk in some cases.
Thanks a lot for the article post.Much thanks again. Fantastic.
@maz57 and @Nononymous. I don’t have any paranoia. I am not rich enough for them to be after me but I have children who love USA and want to continue living there as US is the best land for the youth no doubt about it. On buses, trains etc in EU I have met many Europeans and British youth who loved to immigrate to US. Even Canadians youth as well. I have lived in Canada for six months too. I have travelled a lot and find the world’s youth wanting to immigrate to USA but the older generations want to come back to their own lands. This is a reality not fiction. US keep making laws that are retroactive from years earlier when the law was passed similar to what happened in the new tax reform law that hit all of us having our own offshore corporation with a tax. What if another law comes and chases those who renounce even cleanly ? Tax their future generations in USA.
@Harrison
“What if another law comes and chases those who renounce even cleanly ? Tax their future generations in USA.”
In that case, the best plan is definitely staying hidden and noncompliant!
Thanks again for all your answers.
I’m not dual from birth. I don’t intend to step foot ever on the USA land, I’m disgusted by anything related to this country. I’d have loved to see nature there, but it’ll have to wait till they take down their violent, gangsterous government.
@Jon
Dual from birth is not hugely advantageous. As long as you’re a citizen where you live now, you can ignore the IRS. Banking problems due to US birthplace are your only concern.
@Harrison
I don’t think it is the best land for youth although they have been constantly brainwahed from their childhood that it it the best country in the world.
It is the most expensive for college education, it does not have a functioning Healthcare system like every other western civilized country, it has one of the highest proportion of violent crime and drug addiction.
Sure it has some very good, well meaning, smart, innovated people who live there who really deserve better.
Heidi — Although I too have decided to stay abroad for various reasons, I can very well understand, like Harrison, that many people are excited by the idea of trying their luck in the US, especially young people. Indeed my mother, who is French and back in France, used to tell me, when I was growing up in the US, that she enjoyed great opportunities in the US as a young lady but that she would never want to grow old and sick there (she left at 40). The downsides you cite do not register with healthy young people, especially if they got their (free or almost free) education in Europe before enjoying America. In fact this is why I gave my sons US passports, although it is truly a blessing that they are born elsewhere and also have untainted EU identities…
It pains me to admit this, but not every corner of the US is a Trump-loving shit-show. My daughter has, buried in a drawer, a US baby passport, mercifully without US birthplace. I’ve advised her to act as though it does not exist, say nothing to anyone about it, but not renounce either. There is no reason to take your first degree in the US – unless you are very rich and want to go to school in Manhattan or Malibu – but definitely good opportunities for graduate education (provided you get funding and aren’t borrowing) and working for a few years that she might wish to take advantage of. In the unlikely event that she settled south of the border, semi-permanently or otherwise, I would take a harder look at my own status just to avoid causing her grief – would certainly not become a covered expatriate.
But on the whole I do think Canada or parts of Europe are definitely better places to grow up.
@fred
I was educated in Europe and left for a one year medical sabbatical in the US and somehow stayed 30+yrs. The medical scene there was exciting, innovative, and there was money for research and I could certainly see all the advantages yet I was always torn and always knew I felt socially more comfortable in a more ‘gentile’ society and I returned home to retire and tell the tale. I can see some of the ‘advantages’ the US offers the young as I have been there and done that and left my offspring behind to reap all the US has to offer, good or bad 🙂
@Heidi
” The medical scene there was exciting, innovative, and there was money for research…..”
How ironic that all that excitement, innovation, and copious funding in the US medical scene doesn’t really benefit the general US population because of their miserable health care non-system.
Strangely, the residents of countries which do have decent universal health coverage can often reap more of those benefits than the country which funded and developed all that state-of-the-art knowledge. I remember a Congressman stating a few years ago “the US has the best care system in the world, but only if you can afford it”.
For many long time expats the US health care system is one of many reasons that returning is not an option, myself included.
@Maz
I had excellent coverage while I was working there, I decided to retire two years early, hence I had to leave my group plan and hey presto I was denied coverage for a pre-existing condition at any price (after I had been providing care for patients for over 30 yrs.) That’s how much you are valued.
Many rich and wealthy people all around the world come to USA to get their surgeries and other procedures as US has the best medical facilities available in the world. India, Malaysia, Thailand has cheaper and comparable facilities but their services and no accountability if anything goes wrong is the problem. US even has best malpractice insurance available in case something goes wrong and you and your relatives can sue the doctors. Unfortunately though US has too many ambulance chaser lawyers.
When you are young most not all do not need health care and US provides the best opportunities available. To young they have the best jobs available and they have age discrimination there once you get older like in other parts of the world but not as per by US laws. The US laws prohibits it but it does happen unofficially.
Many Canadians cross border to US everyday to take advantage of the best medical facilities available. There are some good advantages of US but US govt is a tyrant for its expats all over the world.
Heidi: I’m also in medicine and went back in my late 20s to the US just to prove to myself that I could insert myself in the system should I wish to. But I ended up back in Europe for various personal reasons, and was lucky to have great opportunities here. However the money in research and clinical medicine and the incredible opportunities do make the US a wonderland for people in this field, I agree. It is indeed strongly ironic that US medicine and research, truly a mecca for many, does not benefit as much as it should the general population. We’ve had Americans come to Belgium for procedures that cost 20% of what they do in the US, including the use of US-made medical devices sold for a fraction of the US price!!!
Anyway, I think this continues to illustrate the love-hate relationship we can all have with “America”. It also shows how and why the US is a land of net immigration.
Nevertheless, even if the flow is mostly in, we are here to show that some of the flow is out. Perhaps it is precisely because we have chosen to live counter-intuitively (i.e. leave the US) that we are victims of US-centric taxation laws (CBT). Only such a self-confident giant as the US could envisage to tax around the world, and fail to understand how people could decide to go live elsewhere.
@fred
I would have have chosen to live between the two worlds, perhaps with a winter home in Florida once Medicare kicked in but denial of banking services in my home in Switzerland made it impossible for me to function, I was so angry I felt I had been made a prisoner of the US, renunciation was an easy choice.