This series of posts developed from my “Educational Outreach” program for Americans abroad. It is an effort to respond in a practical way to the questions that people have.
The chapters of “Coming Into U.S. Tax Compliance Book” are:
Chapter 1 – “Accepting Cleanliness – Understanding U.S. Citizenship Taxation – To remain a U.S. citizen or to renounce U.S. citizenship”
Chapter 2 – “But wait, I can’t renounce U.S. citizenship if I’m not a U.S. citizen. How do I know if I am a U.S. citizen?”
Chapter 3 – “No matter what, I must come into U.S. tax compliance – Coming into U.S. tax compliance for those who have NOT been filing U.S. taxes”
Chapter4 – “Oh no, I have attempted U.S. tax compliance by filing tax returns. I have just learned that I have made mistakes. How do I fix those mistakes?”
Chapter 5 – “I don’t want to renounce U.S. citizenship. How to live outside the United States as a U.S. tax compliant person”
Chapter 6 – “I do want to renounce U.S. citizenship. This is too much for me. How the U.S. “Exit Tax” rules might apply to me if I renounce”
The Shorter Version: For those who are CERTAIN that you are “U.S Persons” (citizens or Green Card holders) and you want to remain U.S. persons and you want to come into U.S. tax compliance – just go here.
Chapter 1 – Prologue:
What did “change you can believe in” mean for Americans abroad?
From The Desk of John Richardson …
In 2009, the Obama administration began an unprecedented campaign to force American citizens abroad to file U.S. taxes. Although, the U.S. has always had “citizenship-based taxation”, it was never enforced. It was also virtually unknown to the specific group it was aimed at – U.S. citizens abroad.
U.S. Citizenship-based taxation requires all “U.S. persons” (which includes U.S. citizens) to comply with all provisions of the U.S Internal Revenue Code. In other words, if you are a U.S. citizen you are deemed to reside in the United States.
The “enforcement effort” (which was marketed by the media) and enforced by “tax professionals and lawyers) has caused tremendous damage to people who reside outside the U.S. and are often citizens of other countries.
In 2014, I developed an “Educational Outreach – Solving The Problems of U.S. Citizenship” program to help people understand this problem and deal with it. During these information sessions, I have experienced “first hand” the fear, the trauma and the anger. After attending one session, a commenter wrote:
I would add that it was evident that some people at the meeting have suffered significant mental anguish, either now or in the past. These are good people, who had tried as US citizens to do the right thing, but who have been stymied by rules and complexities of the IRS code which, to paraphrase John, “no rational person would ever have suspected or guessed would remotely be true”.
I find the damage to mind and body to be one of the most heart-rending things about this whole mess. Someone wrote to me recently, “So I’m not alone in my panic!! Yeah, there’s been plenty of sleepless nights. Just can’t get it out of my head.” Many reading have had that experience.
I am waiting for the day that someone in government finally notices and apologies, perhaps admitting, “We tortured some folks.”
This series of posts, which I call the “Coming Into U.S. Compliance Book“, is an attempt to organize information of interest and importance to those “affected by FATCA, FBAR and U.S. citizenship-based taxation”. Most of it is practical information related to how to file U.S. taxes. That said, the “context” of this issue is important. As a result, I have made some effort to suggest how these “U.S. tax issues” will affect (in a practical way) your day-to-day life as a U.S. citizen abroad.
I have no idea who will read these posts. Some people are offended by U.S. “extra-territorial” tax policies and others are not (surprise, surprise).
That said, those who have been negatively affected by this have suffered major “trauma”. The “trauma” has affected people physically and emotionally. It has impacted their marriages. It has forced them to have to rethink and redefine who they are as individuals. Some of those most affected by the enforcement of “citizenship taxation” do NOT agree that they are U.S. citizens. (Can the United States impose unwanted citizenship on those who do NOT believe they are U.S. citizens?)
But, hey that’s just some people.
Along with others, I have also worked hard to write submissions to various governments concerning FATCA and “citizenship taxation”. Most recently, Dr. Stephen Kish, Patricia Moon and I compiled a massive submission to the U.S. Senate Finance Committee to persuade the United States to repeal citizenship-based taxation.
This series of posts absolutely reflects my view that U.S. citizenship-based taxation is a profound injustice. It is taxation based on the immutable characteristic of “place of birth”. To quote a person from one of my information sessions:
“It’s unjust. It’s inhumane. I didn’t choose where I was born.”
I invite those who disagree with me to comment.
John Richardson
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It’s time for you to “Come Clean”!
Let’s begin
Americans abroad are constantly told that they should “come clean”. They should file their U.S. taxes. This assumes that they are somehow “unclean” or perhaps “dirty”. The life of an “American abroad” is about three things:
1. “Accepting Cleanliness” – Accepting that the U.S. tax system is designed to impose a specific “life style” and restrictions on them. Most of the U.S. tax system is about ensuring that when Americans live outside the United States, they live as a tourist and NOT as a resident of another country. They live pursuant to American values and NOT pursuant to the values of their country of residence.
2. How Do I Know If I Am A U.S. Citizen?
3. “Coming Clean” – Atoning for the sins of “living abroad” and entering the U.S. tax system
4. Fixing past compliance mistakes; and
5. “Living Clean” – Living as a Homeland American (when you are not) outside the United States
6. Renouncing U.S. Citizenship and the Exit Tax
Each of these issues will be considered as a separate chapter.
This is Chapter 1 and is about “Accepting Cleanliness”.
Of course, this applies only to “U.S. persons”. So, we have included a special bonus post to answer the question of:
Are you or have you ever been an American citizen?
Welcome – Chapter 1 – Executive Summary
Born in the USA
When I think of Bruce Springsteen, I think of his song: “Born In The USA!!”
What Bruce didn’t know was that those born in the United States of America are potentially “Tax Cheats By Birth”.
There are very few countries that grant citizenship based solely on being born in the country. There are only two countries that impose taxation based on citizenship. The United States does both.
So, what does this mean?
1. If you were born in the United States you started out life as a U.S. citizen.
2. If you were NOT born in the United States, you may or may not have started life as a U.S. citizen.
3. All U.S. citizens are treated as U.S. residents and are subject to U.S. taxation regardless of where they live in the world.
Therefore, if you were born in the United States, and are still a U.S. citizen, you are subject to US. taxation:
– wherever you live in the world
– ON ALL YOUR INCOME IN THE WORLD.
(However, your assets are treated as “foreign” and “offshore”. This is a fact that leads to massive problems.)
How could you have known? It’s the OMG moment!
You are one of the many people who has just learned (it’s your OMG moment) that you are subject to U.S. taxation. You are feeling an “uneasy sense of disbelief”. Join the club. The available statistics suggest that a small percentage of Americans abroad have been aware of any U.S. tax obligations. Furthermore, I assure that of those who have a vague awareness of the requirement to file U.S. tax returns, very few are (or will ever) be aware of the full extent of their tax obligations!
Defining your problem – if you have never filed U.S. taxes you have a compliance problem
Understand that, although you have not been filing U.S. taxes, your problem is more of a “compliance problem” than a “tax problem”. This post to help you understand how to come into U.S. tax compliance. This should be understood BEFORE you contact or engage a tax professional.
You have two problems of being a U.S. citizen abroad:
Problem number 1: You were born in the United States AND do not live in the United States.
Problem number 2: Compliance with the “Internal Revenue Code” involves much more than the payment of taxes.
End of “Executive Summary”. If you want you can stop reading and go immediately to “Coming Clean: Coming into U.S. tax compliance.”
But I suggest you wait just a minute and (if you have the “stomach”) read on. You will learn some things that may shape your thinking.
The reality of U.S. citizenship abroad: Where tax and citizenship intersect
Compliance with the Internal Revenue Code involves being subject to a whole “regime” of information reporting and life restrictions. It’s about more than paying taxes. Much more! What does that “Much more” include?
In fairness, all countries use their tax system as instruments of “social engineering”. In other words taxation is used to collect revenue, encourage certain kinds of behavior and discourage certain types of behavior. The Internal Revenue Code is also a convenient way for “elected representatives” do “favors” for their most “favored” constituents. But, let’s just concern ourselves with how the Internal Revenue Code of the United States affects the lives of Americans abroad.
So, how does the “Internal Revenue Code of the United States” affect the lives of SOME Americans abroad?
The above tweet references the accounts of seven people. Have a look at those who interest you . In fairness, not everybody experiences it quite this dramatically! Nevertheless, it demonstrates the problems of what the U.S. refers to as “citizenship-based taxation” and others call “residence based life control”. Some have gone so far as to refer to the taxation of Americans abroad as the
“prison of citizenship-based taxation”.
Different strokes for different folks …
Some people deeply resent being subject to U.S. laws when they don’t live in the United States. Some don’t care. Some feel that it is their “Patriotic Duty” to submit to U.S. regulation when they don’t reside in the U.S. People are different.
It’s up to you. Watch the videos if you are interested. They depict how people experience an institution that is specific to America. What’s that institution called?
The name’s “Taxation”, “Citizenship Based Taxation”
Understanding the “so called taxation” of Americans abroad requires that you remember the James Bond movie Goldfinger. (Incidentally, Dr. NO (the first Bond film) was released in 1962. This was the year that the “Controlled Foreign Corporations” took effect. And yes, that includes Canadian Controlled Private Corporations.)
Goldfinger – The three main villians
You may recall the main characters in Goldfinger were: Aurich Goldfinger, Pussy Galore and Oddjob. Each of these three people is a direct analogy to the aspects of the Internal Revenue Code that make the lives of Americans abroad impossible. Time to introduce them.
First: Goldfinger – Mr. FBAR: Mr. FBAR is the character who demands “full disclosure” of all information about your finances (and therefore all information about your life). Now, of course there’s much more than “FBAR”. But, Mr. FBAR is a symbol of the “forced disclosure” of information regime.
Bottom line: There is no financial (or any other kind of privacy) in America. All Americans abroad are well advised to learn about Mr. FBAR.
Second: Pussy Galore – Ms. PFIC: Ms. PFIC is the character who reminds you of the dangers of tax deferral and retirement planning. She is the character who seduces you into investing in “sacred instruments of tax deferral”. She is the character that imposes punitive taxes on many retirement planning vehicles in Canada. An evening with Ms. PFIC, will teach you why “some” Canadian mutual funds are problematic investments. They may be taxed in a punitive and confiscatory manner. Learning about PFIC is important for Americans who wish to live outside America.
Bottom line: The PFIC rules will definitely restrict your ability to invest and plan for retirement if you live outside the United States.
Third – Oddjob – Uncle FATCA: Uncle FATCA is the enforcer for Mr. FBAR and Ms. PFIC. Without Uncle FATCA, the U.S. government might not know about your PFICs or FBAR. Uncle FATCA is the centralizing force that protects Mr. FBAR and Ms. PFIC. He makes “U.S. taxation abroad” happen. Note also that Uncle FATCA has deputized non-U.S. banks and the the tax compliance industry AKA “Form People” in the hunt for you and your assets. “Form People” sing to the tune of “Uncle FATCA“.
Bottom line: The U.S. “FATCA Hunt” for “U.S. persons” began on July 1, 2014. The U.S. (with the assistance of non-U.S. banks) is hunting the world for people with U.S. indicia. FATCA is NOT going away soon. I suspect that Americans abroad will have to deal with this reality.
Don’t worry you will spend lots of time with Mr. FBAR, Ms. PFIC and Uncle FATCA. The represent the best of America. They are simply “America’s Best”. They are the symbols of the U.S. tax system as it applies to Americans abroad.
Interestingly, none of these characters is directly related to “taxes”. Each of them plays the role of ensuring, that you live like a “Homeland American”, when you are living offshore abroad.
“U.S. taxation abroad” – it’s about enforcing a “life style” more than it is about the collection of taxes.
The lifestyle enforced – Life as a “U.S. tax compliant” American
Living as a U.S. tax compliant person will restrict your earning, financial planning and retirement planning options. U.S. tax compliance will impact on virtually ALL aspects of your life. It will interfere with the relationship you have with your family.
Americans abroad must choose either: FATCA or Family. (Those who have chosen family may renounce U.S. citizenship.)
Such is the reality when “citizenship” is “paired with taxation”.
Can one “Live Clean” as a Homeland American outside the Homeland?
Are you are willing to live under “U.S. tax jurisdiction” when you are living outside the United States? U.S. citizens living outside the United States are subject to a different and “alien” tax system that will conflict with the tax rules in Canada (or your country of residence).
Please understand these realities:
1. There is a possibility of owing U.S. taxes. This is a real possibility because of both double taxation AND the U.S. levying taxes on things that Canada does not; and
2. Compliance with U.S. tax laws will result in restrictions that will cause serious problems to your life. Retirement planning and business options that are normal to your non-U.S. citizen neighbor will be difficult for you. Your ability to plan for retirement will be significantly impacted.
3. U.S. tax compliance for Americans abroad results in significant financial costs and emotional costs.
4. The United States currently has “Estate Taxes”. Many other countries do not.
As a U.S. citizen abroad, your problem is less “coming into U.S. tax compliance” than “living as a “U.S. tax compliant person” outside the United States.
There are two kinds of Americans abroad with “place of birth” problems
1. Americans abroad who are NOT U.S. tax complaint and worry because they are NOT tax compliant.
2. Americans abroad who ARE U.S. tax compliant and worry because they are tax compliant.
You will NOT solve your problem by being in “U.S. tax compliance”. You will create the problems of having to live under U.S tax rules when you do NOT live in the United States.
Sooner or later, all Americans abroad will be faced with the choice of:
To renounce U.S. citizenship or NOT renounce U.S. citizenship. Whether tis better to …
Before you file you U.S. taxes you should understand your objective You must decide …
Whether you wish to remain a U.S. citizen, and are coming into U.S. tax compliance for the purpose of remaining a law abiding U.S. citizen.
or
Whether you do NOT wish to remain a U.S. citizen, and are (first) coming into U.S. tax compliance and (second) coming into U.S. tax compliance for the purpose of relinquishing U.S. citizenship.
Think carefully. It is very difficult to live as an American abroad and be in compliance with U.S laws.
But, hold on! Let’s take a detour. Are you a U.S. citizen at all? It’s time to check.
After all you can’t renounce what you don’t have.
This has been Part 1 – “Accepting Clean”
Part 2 will focus on “Coming Clean”.
Part 3 will focus on “Living Clean”.
John Richardson
Citizenship Taxation - Theory vs. Reality 