What U.S. citizens in Mexico need to know about their tax obligations?
Are you one of the more than 1 million expats living out your golden years in Mexico? Social Security and pension checks certainly go far in this tropical paradise, but there are two important things for US expats in Mexico to remember to do in the spring of each year: file a US tax return, file a Mexican tax return. You want to stay tax compliant no matter where you choose to spend your time. Read more
The implementation of FATCA and the ongoing efforts of the IRS and the Department of Justice to ensure compliance by those with U.S. tax obligations have raised awareness of U.S. tax and information reporting obligations with respect to non-U.S. investments. Because the circumstances of taxpayers with non-U.S. investments vary widely, the IRS offers the following options for addressing previous failures to comply with U.S. tax and information return obligations with respect to those investments:
In a rather swift and harsh judgment, the Ninth Circuit Court of Appeals affirmed a lower court’s decision in favor of the IRS, which assessed an approximately $1.2 million penalty against a taxpayer for failing to disclose her financial interests in an overseas account.
The decision, U.S. v. Bussell, is noteworthy for two reasons. First, it shows the magnitude of penalty that can be reached, even with respect to an individual and a single foreign account and tax year (in this case, the relevant tax year was 2006). Second, it shows the type of taxpayer arguments that courts will likely reject when reviewing an FBAR penalty case. Read more
Over the last few years, millions of US expats have been asked by their foreign banks and investment firms to fill out IRS form W-9. Receiving form W-9 often causes surprise or alarm. While there’s no need to panic, there are a number of things that expats should know if they receive form W-9, to ensure that they don’t create any problems in the future. Read more
President Trump’s former campaign manager Paul Manafort, along with his associate Richard Gates, were indicted last week, with a long list of criminal charges filed against them.
The charges include engaging in conspiracies against the United States and to launder money, making false statements, acting as an unregistered foreign agent, and failing to report foreign bank and financial accounts.
What will the IRS do with Paul Manafort if the special prosecutor’s allegations are true? On October 30, 2017, the special prosecutor released an indictment against Paul Manafort, former campaign manager for President Trump, related to his actions as an unregistered agent of the Ukraine government. The prosecutors allege that Manafort had opened 16 foreign companies and conspired to money launder over $18 million of payment through these companies.
The Information Reporting Program Advisory Committee (IRPAC) has issued its annual report for 2017, including numerous recommendations to the Internal Revenue Service on new and continuing issues in tax administration. The report includes a discussion on how to improve some processes, such as for penalties, abatement requests and levies, as well as business master file entity addresses. The report also recommended enhancements to Form W-9 and the truncation of Social Security numbers on Form W-2, IRC § 6050S and Form 1098-T reporting.
To anyone who doesn’t really understand the fear and frustration of FATCA and the insanity of the US tax system:
I am not and never have been American. I don’t live in the USA and I have no financial connections to the USA.
However, many years ago I got a green card when I married an American. We lived in the so-called, Land of the “Free”, until we decided to move permanently to my home country to care for my elderly parents.
A year or so after my return to my home country my green card expired, became null and void, but I didn’t know I was supposed to return it to USCIS along with an I-407 form. (Green cards don’t come with a set of disposal instructions.) Years later when I found out about this I searched for days to find that old green card and then I sent it away. It was received (according to the mail trace) but never officially acknowledged and there were no replies to my follow-up inquiries.
This left me trapped in a perpetual state of deemed US “personhood” which comes with onerous US tax filing and now highly intrusive FATCA reporting too. The threatened penalties for not filing FBAR (FinCEN114) forms are staggering. They would exceed my life savings (mostly a modest inheritance from my non-American parents). If I lose my life savings to the IRS I could end up on welfare and that would not be fair to taxpayers here in my home country.
What did I take from the USA when I left? I took savings of less than $5K and a gain of less than $75K from the sale of the house we built with our own labour and paid for entirely from the savings I brought with me from my home country (no mortgage on that house). All of this was reported to the IRS and taxed appropriately.
What do I get from the USA? Absolutely nothing – NO right to return to the USA to live or work; NO US Social Security because I have never had US income; NO rescue by US marines in a disaster; NO US vote; NO representation in the US Congress; and since I haven’t visited the USA in almost 20 years (and never will again), NO benefit from the USA’s infrastructure. I do not want any of those things anyway.
What do I want from the USA? I want to be left alone so that I can lead a normal life without the stigma of being called a “US person for tax purposes” (and ONLY tax purposes).
What’s the biggest irony of my whole situation? Well, my husband is no longer American since he recently relinquished his US citizenship. He now has a priceless piece of paper called a CLN (Certificate of Loss of Nationality) which means he can open and retain bank accounts here with no intrusive FATCA reporting.
Meanwhile I, who never was American, will have to live with uncertainty for the rest of my life. If my bank finds out about my past connection and failed disconnection to the USA, it will report me and my accounts to my country’s tax agency which will forward that information to the IRS. And then … well I shudder to think.
Some Americans may hate me for saying this but I have no love or respect for what the USA is doing with its irrational citizenship-based tax system and now its FATCA overreach. These same Americans might even laugh and gloat about how I became trapped as a “US person for tax purposes” but at least my husband, an upstanding citizen, has escaped the clutches of the USA. He did so with no regrets and when his CLN finally arrived he felt nothing but relief. I and my country are proud and pleased to have him. His warm and welcoming citizenship ceremony here in my, now OUR, country was one of the best days of both of our lives.
Neither of us is “un-American” but we are “non-American” and we cannot fathom why the USA will not graciously let its people go.
Anonymous
Original Statement on April 9, 2015
Submission to the United States Senate Finance Committee
International Tax
Have a question? Contact John Richardson
Your comments are welcome!
I am writing to express my concern regarding citizen based taxation. First, some background on my personal situation.
I was born in the United States. When I was 12 years old, my father was transferred by his employer to Canada, and moved the family to Canada as a result. Since the age of 12 (over 40 years ago) I have been educated and employed in Canada.
I have been a tax payer in Canada since I was 16. I receive my health care benefits from Canadian provincial governments. I graduated from the University of Waterloo, in Canada. I have no plans to return to the United States. I am a Canadian citizen and have been for over 20 years.
The decision to become a Canadian citizen was made with every expectation that I would not return to the United States. My only pension expectations are from the Canada Pension Plan. In anticipation of the fact that I have no other pension, I have saved diligently for my future retirement.
I recently renewed my US passport only because I was told by immigration officers that I must have a US passport to enter the United States. I have never voted in a US election, because I have never felt like I had the moral right to vote in the United States. I have voted in every Canadian election that I have been eligible to vote in.
Although I would like to relinquish my citizenship, I am unable to because of that push to obtain a US passport. I still have family in the United States that I would like to visit from time to time. But other than that I have no reason to visit the United States beyond tourism reasons that any other Canadian might have.
My concerns about citizen based taxation include the following:
Unfair treatment of local (foreign to the US) mutual funds:
Mutual fund investments are common, practical and generally considered an almost essential element of any investment strategy. They allow individuals to invest responsibly for their future. However, US tax law makes investments in something as relatively conservative as a mutual fund an absolute nightmare. The US treats foreign (i.e., not American) mutual funds as a passive foreign investment company (PFIC).
The US tax law is written to deter investment in these accounts –even though these accounts are not foreign to individuals resident outside of the United States. Frankly, the treatment of PFICs is so complex and confusing that I can’t be sure that I even understand the requirements.
However, my general understanding is: A foreign mutual fund investor may elect to treat the PFIC as a qualified electing fund. However, this requires coordination with the PFIC to obtain a PFIC Annual Information Statement, which may or may not be available, and the PFIC must have IRS approval to be treated as a PFIC.
Regardless it is not commonly available. Or the investor, may elect the Mark to Market election. This requires the investor to claim potentially unrealized capital gains / losses on the investment. Or if neither election is made, all income (including capital gains) is subject to taxation as ordinary income and is automatically taxed at the top individual tax rate (39.6%).
I believe this is on top of any local taxes paid on the investment.
All of which makes investing in local mutual funds for Americans that are not resident in the US basically impractical. Although I am unfamiliar with the treatment of ETFs, I believe the US tax treatment of foreign ETF’s is somewhat similar.
Financial Impact For Incorporation
I have been working for over 20 years as an independent consultant in Canada. The generally accepted method of working this way has involved the creation of a corporation that contracts with a third party for specific services. It is fairly common in Canada for independent contractors to work through a corporation. In fact, I am consistently required to work through a corporation in order to obtain these contracts.
In my case, the corporation has netted $0.00 in gross income for over 20 years. No income is hiding in this corporation. However the treatment of this corporation is far too complex for a lay person such as myself, to understand. Frankly I have no idea what to do with regards to the reporting requirements for this corporation. Although, Revenue Canada recognizes this corporation as a completely separate entity, somehow the US requires IRS declarations linking that corporation back to me.
Inability to Attract Partners
Because of the US treatment of foreign corporations that I have >10% ownership in, I have had to actively decline partnerships/opportunities with individuals that are Canadian citizens in order to exclude them from the complexities of IRS reporting. Loss of generally allowed tax deductions Boris Johnson recently shed some light on the tax of capital gains on a home that is charged in the US, but not charged in the UK. The same applies in Canada. In the US, mortgage interest is deductible from income tax, however it is not deductible in Canada. The two differences is a perfect example of situations where a US person living abroad is unable to take advantage of tax deductions afforded to individuals not subject to US citizen based taxation.
Loss of Privacy, Warrantless Search of Financial Accounts
The reporting requirements of FACTA are extensive. They include reporting of all of my foreign accounts, account balances and account transactions over a certain value. No US person living within the United States is subject to this type of reporting/search. There is no warrant for the transfer of my personal and very private financial information.In addition, there are no obligatory protections of any information that foreign financial institutions may collect with respect of my citizen and/or US person status.
In this era of digital privacy, this set of information would be invaluable to many. I do not believe that the collection of this information is constitutional in either the United States or Canada. The collection of this information for well over 7 million individuals worldwide is immoral and inconceivable for those of us that were raised in a free society. I am appalled by this collection of information.
Onerous Filings, Disproportionate Penalties
To provide an example of the disproportionate penalties, consider my set of 20 laddered Canadian GIC accounts. These accounts were started with a total of $20,000 invested quarterly over 5 years to build a 5 year GIC ladder where $1000 rolls over for re-investment in a 5 year GIC each quarter. Since I began this GIC investment, that $20K is now worth approximately $28K over approximately 15 years (due to the extremely low interest rate environment).
Potential penalties if those accounts are not reported to the IRS is $10K per account per year, for up to six years. Making approximately $28K subject to 20 * $10,000 * 6 = $1.2M – on an account total of $28K. That is, by far, enough to bankrupt me. That doesn’t include penalties for late filing, or penalties for FBAR failing to file requirements. If that is not a disproportionate penalty, I don’t know what is.
Consider The Fear and Loathing That The Penalties Are Instilling In The US Citizens Living Abroad
With regard to onerous filings – consider a US person, such as myself, living outside the United States. I’ve saved responsibly, looking forward to a point when I will be able to retire. While not even a millionaire, I have extensive investments in various stocks and mutual funds, not to mention several banking accounts.
The IRS estimates that Form 8938 can be completed in 1 hour and 5 minutes. My estimate:
Given the structure of my financial assets, my expectation is that the full completion of this could take up to 60 hours. That doesn’t include FBAR filing requirements for these accounts. It also doesn’t include general completion of Form 1040 and other additional forms that must be completed for non-residents.
Lack of information regarding IRS regulations
I am not a 20 year old with a small income. I am near the end of my career with relatively significant savings. I own a corporation in Canada. Although it has no net revenue year after year, it is still complicated understanding the filing obligations.
IRS materials explaining the filing obligations are indecipherable by the general US person living abroad. IRS phone support is difficult to reach. There are no local IRS offices where I live. Much of the information I know about filing US Tax returns is pulled from multiple internet sites offering various interpretations of US tax law.
It’s almost impossible to feel confident in filing a return.
Donald Rumsfeld famously writes a letter to the IRS to accompany his return each year. The letter explains how he has no idea whether his return is accurate because of the complexity of the tax code. As a US citizen living abroad, I concur with his concerns about the difficulties of filing an accurate tax return, and live in fear of exposing myself to severe penalties if I get it wrong.
Finally, I want to say that I feel that FACTA is an unprecedented display of American arrogance, and motivates other countries (China especially) to enter currency deals to the exclusion of the United States. I urge the Senate Finance Committee and US Congress to work toward immediate repeal of US citizen based taxation.
Sincerely,
A US Citizen Living Abroad
Original Statement on April 9, 2015
United States Senate Finance Committee
International Tax
Have a question? Contact John Richardson
Your comments are welcome!
Attention House Ways and Means Committee Members:
I am sending you this submission not as a person who is still a U.S. citizen nor as a person who is attempting to in any way regain his U.S. citizenship. Rather I am sending this to represent the interest of my disabled son who is a U.S. citizen and who is denied the right to renounce his U.S. citizenship because of his disability.
Not only is he not permitted to renounce his citizenship, but I am not permitted to renounce for him because U.S. law requires that the person renouncing be able to understand the gravity of the act. All of which I find rather ironic because while U.S. law requires such understanding when it comes to renouncing, it does not require the same level of understanding when it comes to tax liabilities. This clearly shows how self serving the law is for the U.S. government.
Dear Son,
Words cannot express how proud I am to watch you receive your diploma. Today marks the end of one chapter in your life and the beginning of another. Seize the day, or as Spock from Star Trek would say, ‘go forth and prosper.’
Last night was a celebration, with everybody talking about careers. Yet it will be your family, friends, and personal relationships that will be most important to you. Never confuse having a career with having a life.
On that note, I would like you to consider your citizenship.
To Whom It May Concern:
Thank you for the opportunity to comment to the Committee. Under normal circumstances I would introduce myself however, given present circumstances, I cannot as my status as a US Person, is being reviewed by the State Department at my request to validate my relinquishing acts in the early 1970’s.
I am a Canadian citizen, registered as a Canadian born abroad at birth, in the United States while my Canadian parents completed their post graduate education in the United States.
If you are unaware, with the exception of the United States, it is not a good thing to be considered a US Person (a newly coined status) for tax purposes, if you live outside the U.S. It is not a good thing to have any U.S. indicia at all. Who am I?
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