“How To Live Outside The United States In An FBAR And FATCA World” – Part 3 – Sanctions and “direct life control”

Introduction …


Tax Connections recently reposted a post that I wrote:

“How To Live Outside The United States In An FBAR And FATCA World”. That post was reposted at the Isaac Brock Society, where it has received a number of interesting comments. Additional comments appear at the American Expatriates Facebook group. The comments have made me realize that there are many, many, more dimensions to this problem.

In 2012 a seminar presenter at NYU joked that:

“FATCA is the gift that just keeps on giving”.

What has become clear (as a U.S. tax expert once commented) is that:

“U.S. citizenship is the gift that just keeps on taking!”

FATCA is simply a mechanism to help the USA exploit “U.S. citizenship” to keep on “taking” from:

There is more than one way of “taking” …

“Some” ways of taking include:

  • direct taxation
  • extra-territorial laws that restrict the liberty of U.S. persons (including “accidentals”) abroad

Restricting the activities of Americans Abroad

This post is to acknowledge and describe some of the ways that the USA uses its assumed jurisdiction over “U.S. citizens” to restrict the activities of those “citizens” when they are outside the United States.

A “direct restriction of activity is different from “punitive taxation”. In the case of “taxation’, you are free to engage in the activity, you will just be punished through punitive taxation. In certain circumstances you are NOT free to engage in the activity at all. This is a form of “direct control”.

The “direct control” of the activities of “U.S. citizens” outside the United States includes the direct control of the activities of “accidental Americans” who are permanent residents and citizens of other nations.

Think about it:

Because you were born in the United States, the United States claims the right to control your activities for life!

What follows are three examples from three different contexts and sources. Each one is an example of how the United States claims the right to control the activities of non-U.S. residents based on a U.S. birthplace.

Sanctions and U.S. Extraterritorial Law – Which country’s prison system do you prefer?

The problem of currency controls …

You will see his comment on page 9 of the following document which read:

Although IRS regulations allow the deferral of payment where foreign government exchange controls prohibit it and the taxpayer does not have funds outside of the controlled – currency country, these
rules are unworkable for individuals residing in such countries since they define income to be “unblocked” when it is used in the same foreign country for any personal expenditure (e.g., food, clothing, rent, etc.) thus causing U.S. taxes to become immediately due and payable in U.S. dollars, even when there is no legal way for the person to obtain dollars to make such tax payments. U.S. citizens in controlled currency countries are obligated by U.S. tax law to violate laws of their host country and, in effect, choose which country’s prison system they believe they stand the best chance of surviving.

Roger Conklin Retired_International_Sales_and_Marketing_Executive

U.S. sanctions against a specific country (in this case Iran)

In a recent post Virginia La Torre Jeker comments on how U.S. law regulates the activities of Americans abroad. This is a topic that is rarely considered and almost never understood. I highly recommend her post which describes what can happen to U.S. citizens (including “accidentals” who are primarily citizens of Iran) who do business with Iran. The post explains how the dangers of been exacerbated in a FATCA and FBAR world. The post also explains the specific difficulties that U.S. citizens in Iran (including “accidentals”) can have in attempting to come into U.S. tax compliance. The post includes:

Can US Persons Now Have Dealings with Iran?

Despite the reaching of an accord under the JCPOA, the “primary sanctions” will remain intact, at least in the near future. What this means is that the sanctions applicable to “US persons” under the ITR will stay in place, although it is expected that OFAC licenses may be easier to obtain now, consistent with the overall spirit of relaxed sanctions.  Thus, without having obtained the requisite license from OFAC beforehand, US persons still cannot invest in Iran, or sell most goods there whether the sale is directly from the US or through a third country, such as the United Arab Emirates.

Significantly for US individuals with tax compliance issues, US persons are generally prohibited from depositing and maintaining funds in Iranian banks.  If the institution is a government-controlled one (e.g., Bank Melli), the OFAC rules will clearly be violated. If the financial institution is a private one, the underlying facts and circumstances must be examined, such as the source of the deposited funds.

The JCPOA sanctions relief will be provided through the suspension and eventual termination of certain “secondary sanctions”. The phased-in relief from certain “secondary sanctions” will commence once the International Atomic Energy Agency confirms that Iran has implemented key nuclear-related measures described in the JCPOA.

US Persons Facing US Tax and OFAC Problems

US persons facing complicated US tax and OFAC issues need proper counsel with legal professionals skilled in both US tax and OFAC matters. They should not be entering either the OVDP or Streamlined programs without a full understanding of the risks and possible options available to remedy the tax and OFAC transgressions. “Voluntary Disclosures” are possible under OFAC as well as the US tax laws, and in both cases, can mean a significant reduction in penalties that would otherwise be imposed if OFAC or IRS discovers the violations first.

The “Corrupt Foreign Practices Act”

The above tweet references an excellent article by Phil Hodgen. In general Mr. Hodgen’s article describes aspects of the problem of being a U.S. citizen, lives outside the United States, and is still subject to U.S. law. The U.S. imposes sanctions on countries on on people who do business with those countries. One example is the “Corrupt Foreign Practices Act“. Mr. Hodgen comments:

The U.S. citizen children become officers and directors of the family business, along with their cousins and uncles. All of a sudden you have potential exposure to the various sanctions regimes (don’t do business with Iran, Sudan, etc. etc.), the Foreign Corrupt Practices Act, the anti-boycott stuff (see Form 5713), and other exciting accoutrements of U.S. foreign policy and domestic morality. The companies I see might do business anywhere from Nigeria to Khazakstan. Business operations become problematic. The U.S. shareholders, having newly inherited their shares, are quickly becoming toxic to the business operations.

The fascinating story of Bobby Fischer …

Bobby Fischer (subject of the soon to be released movie “Pawn Sacrifice” was born a U.S. citizen. He was also one of the greatest chess players who ever lived. He eventually renounced U.S. citizenship and died as a citizen of Iceland (having won the world chess championship in Iceland in 1972).

What is of interest is how the U.S. government tried to prevent Bobby Fischer (taking jurisdiction over him because he was a U.S. citizen) from playing a chess match in Serbia. The above tweet references the 1992 report in the New York Times which includes:

WASHINGTON, Dec. 15— Bobby Fischer, the mercurial chess master who returned to the game professionally in September after 20 years, was indicted today on charges that he had violated economic sanctions against Yugoslavia by playing a match there.

A Federal grand jury here handed up the single-count indictment that accused Mr. Fischer of violating an executive order issued by President Bush in June that restricted commercial relations with what remains of Yugoslavia.

In the match, Mr. Fischer defeated the Russian-born grandmaster Boris Spassky in an exhibition rematch of their celebrated 1972 world championship.

Bobby Fischer was a brilliant and eccentric man. The violation of U.N and U.S. sanctions resulted being incarcerated in Japan. It led to his renunciation of U.S. citizenship.

The U.S. attempted to punish Bobby Fischer for playing a game of chess in Serbia.

A most recent legislative expression of how the United States views its relationship with it’s citizens abroad (Expats)

Americans abroad are required to report on most of their activities to the U.S. government. Form 8938 is an asset disclosure form that is mandated by S. 6038D of the Internal Revenue Code (which is the result of FATCA).

Here is  S. 6038D of the Internal Revenue Code. You will note that the penalty for not filing this information return is $10,000 quickly increasing to $50,000. “Reasonable cause” is a defense to a failure to file. There is no “hard and fast rule” for what meets the test of “reasonable cause”. That said, S. 6038D(g) makes it clear what is NOT “reasonable cause”.

(g) Reasonable cause exception
No penalty shall be imposed by this section on any failure which is shown to be due to reasonable cause and not due to willful neglect. The fact that a foreign jurisdiction would impose a civil or criminal penalty on the taxpayer (or any other person) for disclosing the required information is not reasonable cause

This is a clear expression of how  the United States sees its relationship with it’s citizens abroad and with other nations. “Shades of Roger Conklin”.

Conclusion …

There are at least two kinds of restrictions on life “Outside The United States in An FBAR and FATCA World”. They are:

  • control through taxation; and
  • direct control

It’s no wonder the interest in renouncing U.S. citizenship is increasing.


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