Before moving to the post, if you believe that Americans abroad are being treated unjustly by the United States Government: Join me on May 17, 2019 for a discussion of U.S. “citizenship-based taxation” as follows:
You are invited to submit your questions in advance. In fact, PLEASE submit questions. This is an opportunity to engage with Homelanders in general and the U.S. tax compliance community in particular.
Thanks to Professor Zelinsky for his willingness to engage in this discussion. Thanks to Kat Jennings of Tax Connections for hosting this discussion. Thanks to Professor William Byrnes for his willingness to moderate this discussion.
Tax Connections has published a large number of posts that I have written over the years (yes, hard to believe it has been years). As you may know I oppose FATCA, U.S. citizenship-based taxation and the use of FATCA to impose U.S. taxation on tax residents of other countries.
Tax Connections has also published a number of posts written by Professor Zelinsky (who apparently takes a contrary view).
This is the first of a series of four posts that reflect views and experiences of Americans abroad who are experiencing the reality of actually living as an American abroad in an FBAR and FATCA world. I think it’s important to hear from people who are actually impacted by this and who have the courage to speak out. The “reality on the ground” is quite different from the theory.
I hope that this series of posts will give you ideas for questions and concerns that you would like to have addressed in the May 17, 2019 Tax Connections – Citizenship Taxation discussion.
I am grateful to Laura Snyder for contributing her thoughts, writing and research to the discussion.
Now over to Ms. Snyder …
“How Do I Protect Myself?”
A Case Study in the Marginalization of Americans Living Overseas
by Laura Snyder
I am cut off from my own company’s bank accounts and accounts with my husband thanks to tax, FATCA and FBAR. My name is also not on property. How do I protect myself?
Last year I formed a new business with two cofounders. First a partnership, then this week we formed a company. Trying to make decisions with the constantly shifting and complex tax laws is incredibly difficult. Our first year we had no take-home pay and to get tax advice and to file requires me to ask my husband for money to meet my obligations as a U.S. citizen. Last year I opened a bank account for my maternity leave payments, and my account was frozen until I supplied information for FATCA. I am not on our business bank account and my US citizenship is a constant source of embarrassment and a headache for my cofounders. They are both dual citizens and yet have none of the problems I have, because they are not U.S. citizens. I am surprised they even wanted to start the business with me, and I try to shield them from as much US trouble as I can. I can’t buy post-its or a pen without going through my cofounder to supply the funds.
The first year of my business I had $0 take home pay, and yet was quoted $300 to discuss my tax situation and expect over a $1,000 to file and report. I also expect to pay tax on my maternity leave benefit, or at least pay for additional reporting costs.
I have almost no money invested in my country’s retirement plan because of the threat of high US taxes and I am uncertain about how to save for retirement, or how or where I’m permitted to invest. To get professional advice would cost more than I have to invest.
Since moving here, I’ve met many ‘accidental Americans’ who had to pay enormous amounts after finding out about FATCA and CBT in their late 20s. Usually from their banks freezing their accounts. Some of these people work in government positions!
My newborn son is also an automatic US citizen, due to the length of time I lived in the US, and I worry about him losing out on job opportunities or being unable to bank properly. If I want him to visit my family in the US, I will have to get him a passport or face anxiety about entering the country.
My husband is in the military and frequently serves with the US troops and works in the US. We have to move around every two years because of his work, and so being self-employed is important for me to stay employed at all. US taxation makes this unbelievably difficult, and adds stress and a huge financial burden on an already difficult situation. We live in military housing, but purchased a condo to rent out and to get on the property ladder. Due to the potential for US taxation of that property and renting it out, my name is not on the property. My husband served in the Middle East with my fellow Americans last year and my name was not on property, not on our main bank accounts, or any other sort of savings or investments and so I found myself living on what money he would transfer to my own small account. If he was killed in action, I would have a long wait for access to all of these things to take care of myself and our newborn son. I would be reliant on a credit card and the small amount of savings I have in a local bank account, which comes with threatening FATCA letters and warnings from the tax professional industry who want to charge me more than I have to discuss anything.
Previously, I worked in another country overseas making around $12,000 a year as a teacher, filed the wrong form accidentally, and the IRS sent threatening letters and threats of fines to my family home in the United States. This went on for well over a year, and my father (who has power of attorney) had to go to the IRS office and call multiple times asking how to fix this situation. Every time they said it would be fixed, and then my father would receive another threatening IRS letter. He nearly ended up paying the fine on my behalf, even though it was an innocent mistake and my income was just barely above the reporting threshold. The fine was a substantial chunk of my annual income. I believe nearly half but would have to look again. It was a nightmare and caused a lot of embarrassment and guilt because my little teaching job after graduating almost cost my family a large amount of money and hassle, because I made the error of providing the correct salary information on the wrong form. It was finally resolved after an in person meeting between my father and an IRS official, and I believe took a year and a half. By that point, I had already moved to another country and was terrified of making another paperwork mistake.
I do not want to give up my U.S. citizenship, because my entire family is in the US. I worry about having to care for a family member, or what I would do or where I would live if my husband was killed on deployment. However, I will be applying for citizenship where I live because I don’t know if I can run a business and provide for my son while having these threats from the US government hanging over my head.
Anonymous US citizen living outside the United States. What is this woman talking about? FBAR? FATCA? CBT? What are those? What do they have to do with being blocked from bank accounts and property ownership? With her newborn son’s future job prospects? With her son possibly not being able to travel to the United States to visit his family? With her fear of not being able to care for a family member? With her giving up US citizenship?
A lot, as it turns out.
In a nutshell, FBAR, FATCA, and CBT are how the United States both surveils foreign-held banking accounts and taxes income earned outside of the United States. While this might make sense when it comes to people who live within US boundaries, it makes little sense when it comes to Americans who don’t. Moreover, it leaves ordinary Americans trying to live ordinary lives fearful, vulnerable and marginalized.
The testimony above is a case study in how that happens:
1. Complexity of non-resident tax returns and severity of the consequences of mistakes: While certainly some US residents face complicated income tax filings, in contrast nearly all US citizens living overseas do. There is a multitude of confusion about just what the differences are among the minimum filing requirements, foreign earned income exclusion, foreign tax credits, as well as a multitude of confusion about just how each of those work. That is without mentioning confusion around exchange rates, PFICs (passive foreign investment companies), retirement plans, and the application of child and other tax credits. The income tax return of a US citizen living outside the United States is often 40 to 50 pages or more; this includes the returns of citizens who make very little (just over the minimum filing requirements) and so owe little to no tax. In this context, it is more than easy to understand how someone could use the wrong form. Indeed, it is difficult to understand how the average US citizen living outside the United States can complete their US tax returns correctly without costly professional assistance. If they try (and of course many do given how high the professional fees are), penalizing errors are par for the course.
2. High cost of professional advice: Professional tax advice and tax return preparation for US citizens and green card holders living overseas does not come cheap. At a minimum it costs in the hundreds of dollars; bills in the several thousands of dollars are common. These costs are incurred even in the highly frequent case when the US citizen or green card holder does not owe any US income tax, and even when the US citizen’s income is so low the fees for the preparation of their US tax return consumes a large percentage of it.
These costs are even higher when the US citizen or green card holder owns 10% or more of a foreign partnership or corporation. This is because the completion of additional highly complex forms is required, even if the partnership or corporation makes no distributions to the US citizen. Transforming a foreign partnership into a foreign corporation (as occurred in this case) will result in even greater fees given the complexity of such an operation from a US tax perspective. In all these cases, the US citizen must pay these fees (again, they are fees to a private tax preparer, not taxes) from other sources of funds. In the above case, the fees to prepare her US tax return were paid from the non-US salary of her non-US citizen husband.
3. “Constantly shifting and complex” US tax laws that apply to a business located outside the United States: The most recent example of “constantly shifting and complex” tax laws and perhaps what the testimony above is referring to is the Tax Cuts and Jobs Act adopted in December 2017. The international provisions of this law were intended to target large multinational companies like Google and Apple. However, those provisions are having devastating effects upon many US citizens who live outside the US and who own small or medium-sized businesses in their countries of residence. On one hand, the “Repatriation Tax” requires the US-citizen shareholders of a non-US company to pay a one-time tax of as much as 17.54% of the post-1986 retained earnings of the company. On the other hand, Global Intangible Low Taxed Income (“GILTI”) requires that, on an ongoing basis, US-citizens who hold a minimum percentage of the shares of foreign companies include in their personal tax base a share of certain types of the company’s earnings.
The point here is not whether these particular provisions apply with respect to any specific US citizen; indeed, the business described in the testimony above was created too recently to be affected by the Repatriation Tax and it is not clear whether or how it will be affected by GILTI either. Rather, the point is that the adoption of these provisions, one of which applies retroactively, makes it easy to understand why any US citizen who owns a small business outside the United States—as well as their non-US citizen partners—would find decision making difficult and stressful. It also makes it expensive because even those to whom these provisions do not ultimately apply are required to engage in complex and expensive research just to make that determination.
4. Fragilized relationship with business partners: United States laws like the Foreign Account Tax Compliance Act (FATCA) and the Tax Cuts and Jobs Act subject non-US businesses to scrutiny by US Treasury authorities and to increased US tax obligations. They do this via the business’s US-citizen partner or shareholder. Non-US businesses that do not have any US-citizen partners or shareholders are not subject to such scrutiny or obligations with respect to the United States (of course in either case they remain subject to the taxation and banking policies of their home countries). Seen from this context, the surprise in the testimony above that her partners want her—a US citizen—as a partner is understandable. Indeed, many other US citizens have been rejected as business partners for these very reasons. Those who are not rejected, must work in the context of a fragilized relationship with his/her partners where, as the testimony above explains, the US citizen must “shield” his/her non-US partners “from as much US trouble” as possible. She must live with the fear that at any time her partners may decide that her US citizenship is too much trouble and ask her to leave the business.
5. Lack of access to company bank accounts: FBAR requires that all US citizens, including those who live outside the United States, report all accounts with foreign financial institutions over which that person has signature authority to the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). This means that US citizens living outside the United States must report to an agency responsible for the investigation of crimes what for those US citizens are local bank accounts needed to conduct ordinary business and to live ordinary lives and in the places where they live.
The threshold for the application of this requirement is low—just $10,000—and it applies not with respect to each account on an individual basis but with respect to all of the US citizen’s accounts in the aggregate. Further, it applies to all accounts: personal as well as business. Penalties for failure to file are steep: a fine of $10,000 per violation in the event of a “non-willful” failure to report and a draconian fine in the event of a “willful” violation: the greater of $100,000 or 50% of the account balance. Additional and in most cases duplicative account reporting requirements apply under FATCA, subject to different and additional failure to file penalties. In light of these provisions, it is hardly surprising to se US citizens denied signature authority over their own non-US business’s bank accounts, for the simple reason that she is a US citizen.
6. Lack of access to household assets (bank accounts and real estate): For the same reasons that US citizens do not have access to business bank accounts they also do not have access to household bank accounts: in order to not trigger FBAR and FATCA filing requirements or risk their corresponding penalties. Those requirements and risk of penalties would be triggered by a joint account with a non-US citizen even if the account principally or exclusively contains the salary of that non-US person paid from sources outside the United States.
In the testimony above, the US citizen has also been purposely excluded from joint ownership of real estate with her spouse. She explains that this is because this property is rented out and if she were an owner then the income from the property would need to be declared on her US tax return and would be subject to US taxation. This would be the case even though the property is not located in the United States, even though neither of its owners lives in the United States, and even though the rental income is already declared on the tax return in the country where they live. Further, upon the sale of this real estate, there is a risk that for capital gains tax would be due to the United States.
There is another good reason for a US citizen to not hold bank accounts, real estate or other assets with their non-US citizen spouse: the gift and estate tax implications become exceptionally complex.
Under these circumstances, decisions for a US citizens and their non-US citizen spouse to not hold joint accounts and to leave the US citizen’s name off deeds of real property are understandable and judicious. Except that, as the testimony above exposes, these understandable and judicious decisions leave the US citizen financially vulnerable, especially in the event of the death of the American’s spouse. And in this case, that scenario is all too real given that the US citizen’s spouse serves in the military and could be killed on deployment.
Recently after FATCA’s adoption, a tax attorney located in Dubai commented: “[We are] rearranging family relationships because of this.” This result is fully exposed by the testimony above.
7.Frozen bank accounts: As a result of FATCA, the local bank and other financial accounts of US citizens living overseas are frozen on a regular basis. This occurs because FATCA imposes obligations not only on account holders but also on foreign banks and subjects them to severe penalties for failure to comply. For this reason foreign banks are highly cautious with clients who are “suspected US persons” and many foreign banks simply refuse US citizen clients altogether.
8.Taxation of maternity leave benefits: US citizens living overseas are subject to US taxation on the basis of their worldwide income (this is often referred to as citizenship-based taxation or CBT). Thus, the maternity leave benefits that a US citizen receives while living in another country are subject to US taxation and must be reported as “income” on that US citizen’s federal tax return. After that, the extent to which any US tax may be due with respect to that income will depend upon (i) whether or not it is considered to be “earned” and thus may qualify under the foreign earned income exclusion, and (ii) to what extent the taxes (if any) paid by the US citizen in the country where they live with respect to the benefits is eligible for a foreign tax credit. If US tax laws do not deem this income to be “earned,” and if the US citizen either paid no income tax with respect to this income in the country where she lives or paid it at a lower rate than the applicable US rate, then the US citizen will be liable for US tax on her foreign maternity leave benefits—money that that country’s economic and tax policies intended for her to have in order to support her during her maternity leave. Further, and regardless of any US tax that may be owed and including if no US tax is owed, the complexity of the determination means that the US citizen has little choice but to engage and pay the fees of a private professional tax adviser. Further, the new mother in this specific case is likely motivated to be especially cautious given the traumatic consequences of her mistake when declaring her income from teaching in another country overseas.
9. Retirement planning: As a general matter, US citizens must be very careful when participating in foreign retirement schemes because depending on how they are structured they may be subject to penalizing US taxation. At a minimum US citizens contemplating any such participation need professional advice in order to avoid unfortunate surprises. As an example, Australia’s superannuation retirement scheme is particularly notorious for creating penalizing tax issues for US citizens, such that many are unsure as to whether or how they should participate. This places them at serious disadvantage with respect to retirement planning as compared to other Australian residents who are not US citizens.
10. Accidental Americans: These are US citizens who have never lived in the United States or who have lived there only for a short time when they were children. Since leaving the United States they have had little to do with the country, if any connection at all. As a result of US non-resident taxation and banking policies, many of these persons have found themselves in very difficult situations that either they cannot resolve or can resolve only with considerable anguish and expense. Furthermore, in a recent survey to Americans living abroad, several of whom self-identified as Accidentals, several participants offered similar testimonials consistent with the claim of foreign financial institutions disrupting the lives of U.S. persons because of costly IRS-reporting requirements.
11. Citizenship of children: Children born overseas to one US-citizen and one non-US-citizen parent acquire US citizenship from birth if the US-citizen parent meets minimum US residency requirements. This citizenship is attributed automatically by operation of law and regardless of whether the child’s birth is registered at a US consulate. However, it is considerably more difficult to prove (or, inversely, easier to hide) the US citizenship of such a child if his/her birth is not registered. Given prior experiences with US non-resident taxation and banking policies described in the testimony above, it is understandable that she is wary of registering her child—that is, she is wary of claiming his US citizenship or of having it recognized in an official manner. Understandably, she fears that this could cause him to experience difficulties comparable to hers.
However, US citizens are required by law to travel to the United States using their US passport and not the passport of any other country of which they may also be a citizen. Thus, if she seeks to have her son enter the United States (to visit his grandparents, for example) with a foreign rather than US passport she takes a certain number of risks: (i) that she is unable to obtain a visa or ESTA for him, (ii) that immigration authorities at the border, upon seeing her US passport, question his citizenship and whether he is using the right passport, and (iii) that he be prevented from boarding a flight either to or from the United States until she obtains a US passport for him (which in that case she may be required to do on an emergency basis). Given the above, the dilemma over whether to register her son’s birth and obtain a US passport for him is understandable.
Note that if she decides to register her son’s birth, his ability to vote in the United States when he reaches 18 is not at all guaranteed. This is because only some states allow US citizens who have never resided in the United States to register in that state if their US citizen parent was last registered there. Not all states allow this so if the parent was last registered in a “wrong” state then their US citizen child who has never lived in the United States is out of luck: he/she is essentially disenfranchised. This disenfranchisement has no bearing upon his/her US tax and banking obligations; they remain firmly in place.
12. General confusion and lack of information: Many of the problems exposed in the above testimonial are a result of confusion over what US law is and how it applies in any given situation. Unscrupulous tax compliance professionals fill this informational vacuum by stoking fears of draconian IRS penalties and in doing so increase compliance costs.
13. Renunciation of US citizenship: Perhaps the biggest dilemma exposed in the testimony above is whether, once she obtains citizenship in the country where she lives, she should renounce her US citizenship. She has a multitude of reasons for renouncing because without it all her difficulties detailed above would disappear. But renunciation of US citizenship is a drastic step that in her case would have profound and irreversible consequences. She indicates that her entire family lives in the United States—without a US passport she could never be sure of being able to enter the United States, even for just a visit, because only US citizens have the right to enter the country—anyone else can be denied entry. Further, she envisions a day when she may need to return to the United States for an extended period of time, if not indefinitely, perhaps in order to care for an aging family member, perhaps because her husband is killed on deployment and she needs the support of her family to raise her son. It would be very difficult if not impossible for her to do that without US citizenship.
Finally, setting aside the considerable expense of renouncing US citizenship, for many it is emotionally very difficult to do. Former US citizens who felt obliged to renounce their US citizenship as a result of US non-resident taxation and banking policies describe their experience as “hit me in the gut” and “it hurts my heart.”
The testimony above exposes how and why US non-resident taxation and banking policies instill fear in US citizens living overseas. These current policies place them as well as their children in positions of financial vulnerability. The policies result in the marginalization of US citizens in their own businesses and families. Renunciation is possible only for those who can afford the world’s highest renunciation fee and who have a second citizenship to fall back on; in any case, renunciation is a drastic and irreversible step of last resort. US non-resident taxation and banking policies place US citizens living overseas in the position where they must choose between either living a normal life outside the United States or giving up the right to return to the United States. This forced choice violates Article 13 of the Universal Declaration of Human Rights, which provides: “Everyone has the right to leave any country, including his own, and to return to his country.”
* Laura Snyder was raised in the United States and has lived in Europe (mostly in France) since 1995. She holds a JD from the University of Illinois, a DEA in droit privé from the University of Paris 1 (Panthéon-Sorbonne) and she completed the TRIUM Executive MBA program (an alliance of New York University, London School of Economics and HEC School of Management). She is a doctoral candidate at the University of Westminster. She is the author of the books Democratizing Legal Services: Obstacles and Opportunities and Modernizing Legal Services in Common Law Countries: Will the US Be Left Behind? She is a member of the bars of New, York, Illinois and Paris.