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Testimony On FATCA’s Extensive Reporting Requirements From A US Citizen Living Abroad

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:

  1. Unfair treatment of local (foreign to the US) mutual funds
  2. Financial impact for incorporation
  3. Inability to attract partners
  4. Loss of generally allowed tax deductions
  5. Loss of privacy, warrantless search of financial accounts
  6. Onerous filings, disproportionate penalties
  7. Lack of information regarding IRS regulations

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:

  • Understanding the Form –4 hours
  • Part I –2 hours;
  • Part II –2 hours;
  • Part III –2 hours per asset;
  • Part IV; Understanding Forms 3520 , 8621, 3520-A, 8865, 5471, 8891 –10 hours;
  • Part V –4 hours per deposit;
  • Part VI –6 hours per “other foreign asset.

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!

Testimony: Letter From Father To Senate On FATCA Regarding Disabled Son

John Richardson, Tax Advisor

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.

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Dear Son: A Letter On FATCA From A Concerned Father

John Richardson, Tax Advisor

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.

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Testimony: Businessman Abroad Affected By FATCA

John Richardson, Tax Advisor

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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FATCA’S Unintended Consequences – Feeding Corruption And Suppression Of Political Rivals

William Byrnes, Tax Advisor

FATCA’s primary purpose was for the U.S. government to obtain otherwise private financial information and exercise control of the global financial industry. Unlike a conventional withholding tax which actually intends to collect tax, FATCA imposes penalties based upon non-compliance with tax.

The tax revenue projections, which were used to validate the passage of FATCA did not show FATCA raising any significant tax revenue annually. In fact, except for the extraordinary penalties assessed, little additional tax has been collected. In comparison to the annual on budget spending by the U.S. government, the actual amount of tax collected by FATCA is statistically insignificant.

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FBAR Reporting For U.S. Expats With A Foreign Business

FBARs (Foreign Bank Account Reports) have been a filing requirement for Americans with financial accounts overseas that meet the criteria since the Bank Secrecy Act of 1970. It has only been enforced for the last few years however, since the 2010 Foreign Account tax Compliance Act (FATCA) obliged foreign financial institutions to pass details about their American account holders to the IRS. Currently around 300,000 foreign banks and other financial firms are doing this. Read more

Understanding U.S. Federal Taxes For American Expats

The USA is almost unique in taxing U.S. citizens even when they live abroad. This means that expats who earn over $10,000 ($10,300 for 2016, to be precise, or just $400 of self-employment income) are required to file a U.S. federal tax return, regardless of where their income originates, or whether they are also paying taxes elsewhere.

While expats still have to pay any U.S. tax they may owe by April 15th, they have until June 15th to file, with a further extension available on request to October 15th. Read more

13 Reasons Why I Committed Citizide

In a recent submission to Senator Hatch, I argued that what the United States thinks of as “citizenship-based taxation”, is actually a system where the United States imposes U.S. taxation on the residents and citizens of other countries. That submission included:

On August 2, 2017 posts at the Isaac Brock Society and numerous other sources, reported that that there were 1759 expatriates reported in the second quarter report in the Federal Register. The number of people renouncing U.S. citizenship continues to grow. Read more

The Dual Citizen Exception To The Exit Tax

According to Treasury Department numbers, 2016 broke the record for annual U.S. citizenship renunciations with a grand total of 5,411 renunciations. As we’ve noted previously, possible reasons for the increase in renunciations include the global strengthening and influence of the Foreign Account Tax Compliance Act (“FATCA”) and President Trump’s election victory (the “Trump bump”). Read more

Tax Burdens Prompt More Americans To Ditch Citizenship

Americans abroad have just about had it with Uncle Sam’s tax filing requirements.

Those were the findings from a recent survey of more than 2,100 U.S. expatriates, according to Greenback Expat Tax Services, which specializes in working with American taxpayers residing overseas.

Just over 4 in 10 respondents said that while they aren’t planning to renounce their U.S. citizenship, they wouldn’t rule it out, and 19% said they’re seriously considering it. Read more

Will The IRS Streamlined Procedure For Expats Be Revoked?

Hugo Lesser

For decades, U.S. expats lived in peace, beyond the reach of the American tax system, despite being theoretically obligated to file U.S. taxes on their worldwide income from abroad by American’s citizenship based taxation regime.

Then came FATCA, the 2010 Foreign Account Tax Compliance Act. Designed to address tax evasion in the wake of the 2008 financial crisis, FATCA requires all foreign banks and investment firms to provide details of their American account holders to the IRS. Read more

IRS Crackdown And The Future Of Tax Amnesty Programs

Ephraim Moss

With the recent heavy focus on Congress and the Trump’s administration’s tax reform proposals, it can be easy to forget that the IRS continues to proactively crackdown on offshore tax evasion. Read more

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