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What Does U.S. Citizenship-Based Taxation Actually Mean And To Whom Does It Actually Apply?



John Richardson - Citizenship Based Taxation

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.

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.

Laura Snyder has graciously contributed four posts of this series. In her series of four posts, she has outlined the origins and requirements of U.S. citizenship-based taxation.

Ms. Snyder grew up in the United States and moved to Europe as an adult. The tone and pain reflected in her writing suggests that she truly identifies as being a citizen of the United States.

The reality is that the U.S. rules of “citizenship-based taxation” impact large numbers of people who did NOT grow up in the United States and do NOT identify as being U.S. citizens. The purpose of this post is to identify some of the groups to which these rules apply. The rules apply to large numbers of people who are residents of other countries and who either do NOT identify as being U.S. citizens or identify primarily as citizens of other countries. These people do not appear to have a connection to the United States that would justify worldwide taxation.

These Individuals May Have Been:

1. Born in the United States but moved permanently from the United States as babies

2. Born in the United States but moved permanently from the United States before reaching the age of majority

3. Born outside the United States to a citizen or citizen(s) of the United States.

Speaking of people born outside the United States to a U.S. citizen parent, one need look no further than:

Some questions that come to mind are:

Can the United States forcibly impose U.S. citizenship on Baby Sussex?

Should the rest of the world tolerate the United States imposing worldwide taxation on people who were born outside the United States and do NOT live in the United States?

Should Meghan Markle register Baby Sussex as a U.S. citizen?

Is Baby Sussex automatically a U.S. citizen regardless of the decision to register the birth?

Assuming Baby Sussex is a U.S. citizen how might that affect Harry?

Accidental Americans

People in the above three groups are referred to as “Accidental Americans“. They may not know that they are U.S. citizens. They simply do NOT identify as being U.S. citizens. They have no connection to the United States. Many of them do not speak English. They do not and have never asked for any services from the United States. They have neither U.S. passports nor Social Security numbers. In some cases they would NOT be entitled to vote in the United States. They are “tax residents” of other countries and are subject to full taxation in those countries. Yet, pursuant to the rules of U.S. “citizenship-based taxation” (as described by Laura Snyder), they are subject to the provisions of the United States Internal Revenue Code (which includes) paying taxes to the United States! Yet they do NOT consider themselves to be U.S. citizens. They are U.S. citizens only in a technical sense. They are citizens of other countries who are technically U.S. citizens because of the “circumstances of their birth”. They were either “Born In The USA” or they were “Born To U.S. Parents” outside the USA. This constitutes a very large group of people. Although I have no statistics (because they don’t exist) I would wager that this is a larger number of people than those who identify as being U.S. citizens and are “American Expatriates“.

Rather than using the label “citizenship-based taxation”, I believe it is more accurate to describe U.S. tax policy as:

The United States imposes “worldwide taxation” on people who are “tax residents” of other countries and do NOT live in the United States!

As Laura Snyder tweets:

How can this be? What combination of law of laws can possibly have this effect?

The answer is:

1. There are only two countries in the world that impose taxation based only on citizenship.

2. There are some countries in the world that confer citizenship based on birth inside the country.

The United States of America is the ONLY country that does both!

How in the world could this have evolved to this point?

As Laura describes in her posts, “citizenship-based taxation” has been the law of the United States for approximately 150 years. It’s just that 150 years ago:

1. Dual citizenship was not common (and in most cases prohibited)

2. People were not as mobile as they are in the 21st century

3. U.S. tax was very simple. It impacted few people. It did not include the complexity, reporting requirements and penalties that exist today. To provide some examples of the evolution of U.S. tax law:

– The Subpart F rules that apply to Controlled Foreign Corporations did not exist until 1962. It was amendments in 1986 that made them more dangerous for Americans abroad. The 2017 TCJA created the transition tax and GILTI which have made the continued existence of Americans abroad all but impossible

– Mr. FBAR did exist until 1970 and was not unleashed on Americans abroad until 2010

– Ms. PFIC was not invented until 1986 and was unleashed on the mutual funds owned by Americans abroad until the 2009 OVDP program

– Uncle FATCA was not invented until 2010 and was unleashed on Americans abroad until the advent of the 2014 IGAs

The point is that neither citizenship nor taxation means the same thing as it did 150 years ago. U.S. Taxation has become far more complex. U.S. citizenship has become easier to get and harder to lose. To put it simply, anybody says that these rules have always existed doesn’t understand the evolution of U.S. taxation.

Q. What does this mean in practical application?

A. It means that the person who is technically a U.S. citizen (as detailed in Laura Snyder’s first post) is as:

– a citizen/resident of France (or any other country in the world) is subject to U.S. taxation on his French income when he doesn’t even live in the United States;

– a citizen/resident of France is subject to all the reporting requirements in the Internal Revenue Code that require him to report almost all of his financial activities to the United States

– a citizen/resident of France is required to report all of his French bank and investment accounts to U.S. financial crimes. etc.

The reality of “U.S. citizenship-based taxation” is different from the theory. This is because its primary impact is on people who do NOT regard themselves as U.S. citizens and are having U.S. citizenship forcibly imposed on them for the purposes of taxation. No government should tolerate this clear abuse of their citizens!

It gets worse. Subsequent posts in this series will explain that the United States is actually imposing a separate and more punitive tax system on U.S. “citizens” who live outside the United States and are “tax residents” of other countries. These posts will detail how compliance with U.S. rules will make financial planning difficult for these people. We will see how these rules interfere in their marriages to non-U.S. citizens. We will see how difficult and expensive it is to renounce U.S. citizenship. In short we will see the utter absurdity, unfairness and moral indefensibility of a system that imposes worldwide taxation based on the immutable characteristic of circumstances of birth.

I intend to continue this series of posts up until the May 17, 2019 discussion with Professor Zelinsky. As you read the posts (primarily written by guest authors) please remember the unique U.S. tax policy of “citizenship-based taxation” is actually the imposition of worldwide taxation on people who do not live in the United States. You should also remember that the United States does not make any particular effort to inform its citizens of its unique tax policies. As far as I know the United States does NOT:

– require a tax class as a condition of graduating from high school

– does not require knowledge of “citizenship-based taxation” when one naturalizes as a U.S. citizen.

The United States relies on the tax compliance industry to do this work. It’s the role of the tax compliance industry to identify the victims and (by encouraging them to enter the U.S. tax system) bring them in.

In closing, here are some excerpts from a series of five blog posts written by a U.S. citizen who at the age of 13 moved from the United States to the U.K. She of course knew nothing about her U.S. tax obligations until she accidentally found out. She published a series of five blog posts which chronicled her discovery of her U.S. tax obligations, how she processed this information and the road that she took. She did identify as being a U.S. citizen. She did decide to enter the U.S. tax system to preserve the option to renounce U.S. citizenship without being a “covered expatriate”.

Her thoughts (each step of the way) include:

Post 1 – “HALF AND HALF – OR, HOW I WAS BORN A DUAL CITIZEN”

By explaining how I happened to be born a dual citizen, and settled outside of the US due to family decisions during my childhood, I have presented one example of a typical expat – typical in the sense that I live outside of the US because life just worked out that way. I don’t recognize the typical media characterization of overseas citizens as wealthy elites who have made their money and left the country just to avoid paying back into the system. It doesn’t describe me, my family, or any other American I know or have met in Europe or elsewhere. Yet, that is regrettably the brush with which the media and US politicians tar the entire population of seven million-plus citizens residing overseas on a regular basis.

In my next post, I describe how I came to discover why my US citizenship carried significant burdens and risks for someone living overseas long-term.

Post 2 – “FINDING OUT I WAS A 23 YEAR-OLD US TAX “DELINQUENT””

The real beginning of my personal experience with US citizenship taxation was the moment I started to become aware that I was an unwitting US tax “delinquent”. With this part of my story I wish to argue against the commonly-espoused view by US politicians and a number of sanctimonious online commenters that citizens living overseas should know about their US tax obligations – and that any resulting problems we might face in our US tax affairs are ‘self-inflicted’.

Post 3 – “ASSESSING MY OPTIONS FOR ADDRESSING MY NEWLY-DISCOVERED ‘DELINQUENT’ US TAX SITUATION”

I described in my last post how, at the tender age of 23, I arrived at what others have called the “oh my god” moment – discovering that the government of a country where I haven’t lived for many years apparently expected me to be filing and potentially paying taxes, simply for having the citizenship of that country.

I am speaking about the United States’ unique policy of citizenship-based taxation (CBT), which means that from the US government’s perspective, it doesn’t matter that I have resided in the United Kingdom (where I am also a citizen) with my family since I was a minor. As a US citizen, “the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether [I am] in the United States or abroad. [My] worldwide income is subject to US income tax, regardless of where [I] reside.”

In reality this discovery was the first in a long series of “oh my god” moments as I attempted to unpick and understand the implications of citizenship-based taxation, which is the topic of this post.

Post 4 – “MY DECISION TO ENTER THE US TAX SYSTEM”

In my last post I described the options facing me – a UK citizen living, working and paying taxes in the United Kingdom – when I had just discovered that I am subject to US tax rules which say that no matter where I live, I should be annually filing federal income tax returns to the USA’s Internal Revenue Service (IRS), and reporting detailed information about all of my UK bank accounts to the Financial Crimes Enforcement Network. These rules apply to me because I am an American as well as a British citizen. The US government considers me to be a US taxpayer not unlike an American living within the States, even if I haven’t lived in the US since I was a child, rarely visit, make no income in the US and have no assets there. The fact that I hadn’t been filing meant I was considered as a delinquent non-filer under US tax policy.

In outlining the different options I had for addressing this newly-discovered ‘delinquent non-filer’ status, I showed that even though I was a young person from a normal background just starting out in adult life, there were no easy solutions or certain outcomes. Briefly, the main options were to stay outside the system, enter the system and try to live compliantly, or enter the system with the intention of renouncing my US citizenship in the future.

Post 5 – THE STREAMLINED PROCEDURE – STREAMLINED IN NAME ONLY, UNLESS YOU ARE A US TAX PROFESSIONAL

It’s been a few months since my last post, in which I explained why I decided, after much consideration, to enter the US tax system. For those who are not well-versed on the topic of the United States’ burdensome and complex tax treatment of its overseas citizens, I suggest that you read my story from the beginning or just take my word for it that it is not a straightforward decision to make, even for someone has never knowingly broken the law.

In these last months I have opened up a blank Word document to continue writing my story from where I left off a few times, but lately it’s been hard to muster up the energy to keep writing about this. In her final blog in an excellent series about FATCA and her reasons for renouncing US citizenship, Rachel Heller suggests that many American expats who have passed the initial moments of discovering they are subject to citizenship-based taxation and FATCA eventually start to experience ‘indignation fatigue’. When I think about how much time I have spent thinking and worrying about the constraints these policies place on my life, the general unfairness of it all for every long-term overseas American, and what seems like a total lack of interest and understanding from US politicians, media and average Joe on the street in the US, I would say that my lack of motivation to keep ploughing on with the blog is in some part to do with indignation fatigue. That, and the fact that I was in the midst of preparing my US tax return and FBARs on my own for the very first time – and there’s only so much of my mental capacity I am willing to devote to this at any given time.

Have a question? Contact John Richardson.

 

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The Reality of U.S. Citizenship Abroad

My name is John Richardson. I am a dual citizen. I am a lawyer – member of the Bar of Ontario. This means that, any counselling session you have with me will be governed by the rules of “lawyer client” privilege. This means that:

“What’s said in my office, stays in my office.”

I am also a member of the American Citizens Abroad Professional Tax Advisory Council (PTAC). This is an advisory panel focused on assisting American Citizens Abroad in an FBAR and FATCA world.

The U.S. imposes complex rules and life restrictions on its citizens wherever they live. These restrictions are becoming more and more difficult for those U.S. citizens who choose to live outside the United States.

FATCA is the mechanism to enforce those “complex rules and life restrictions” on Americans abroad. As a result, many U.S. citizens abroad are renouncing their U.S. citizenship. Although this is very sad. It is also the reality.

14 thoughts on “What Does U.S. Citizenship-Based Taxation Actually Mean And To Whom Does It Actually Apply?

  1. Avatar Aaron says:

    I hope this changes to residence based taxation.

  2. Avatar Laura Wilson says:

    “Indignation fatigue”; simply perfect and exactly where I find myself.

    Having submitted what feels like hundreds of letters and calls to congress, donated beyond my means to support lawsuits, wasted countless hours believing Twitter was an instrument of political enlightenment, naively thinking US would eventually do the right thing and foolishly believing in moral arc theory well, I’m starting to give up on Uncle Sam.

    Begging for crumbs, praying abuser (USG) would somehow find their soul, finally have their own “Oh my God” moment realizing how much harm this is actually causing to US itself (never mind what they consider unpatriotic human detritus that fled US not willing to pay their ‘fair share’) is both demoralizing and dehumanizing. One can only take so much of this.

    As a once loyal American, proud “Daughter of the Mayflower” good-will ambassador, I QUIT. My energies may be better spent working on my home nation to recognize US abuse in general. Every nation must stop US from overriding their sovereignty, controlling their financial sector and natural resources and using US citizens as Trojan Horses to steal their assets.

    US has been a poor steward of reserve currency/SWIFT, weaponizing this privilege, using it for extortion, control and eliminating competition in tax haven business. About time nations wake-up, join forces, protect their residents (even if they have a scarlet ‘A’) and and tell US to ‘go fish’.
    —-
    #BDS USA (So sorry it has come to this grandpa. Those just laws and liberty envisioned in the Mayflower Compact are rubbish now. You must be so ashamed that US has left me to feel no other way, I am.)

  3. Avatar Chrys T says:

    I had my OMG moment last June. I left the USA as a young adult, and all my economic life has been in Britain. By September I had renounced citizenship. I couldn’t be compliant even if I wanted to–I have signing authority on my employer’s accounts and various small charitable trusts, and none of them would allow me to report their bank account details to the USA. The cost of obtaining help to do the returns would have been more than I earn in a month. I don’t have any US income or assets, all I have was earned (and UK tax paid on) here in the UK. I decided to remove myself from any future hassles by renouncing my US citizenship, which was both hard but also liberating. I am culturally British, and this is my home and where I pay my citizenship dues (tax).

  4. Avatar Ron Henderson says:

    With very few exceptions, the US government does not *impose* taxation on anyone outside the US who (1) does not have US assets or income sources and (2) has a second citizenship. The US government and the tax compliance industry do, however, scare large numbers of those people into needlessly filing returns, with or without taxes being owed.

    What the US does, unfortunately, is mess with US persons’ bank accounts and financial services in some (but not all) countries, thanks to FATCA. Anyone with a US birthplace can expect difficulties banking in Switzerland; in Canada the banks don’t care, and won’t bother checking that a customer has correctly answered questions about citizenship or tax residence on the standard CRS/FATCA form (so it’s rather easy for non-compliant US citizens to avoid being reported to the IRS).

    Otherwise, for those who do not rely on a US passport or have financial ties to the country – i.e. anyone in the three categories of Accidental American described above – there are no risks to ignoring CBT and FBAR and any other US tax obligations. The IRS has no enforcement powers beyond US borders. Compliance is entirely voluntary.

    Accidental Americans should stay out of the US tax system, period. In some cases the only relief from FATCA problems may be to spend $2350 and renounce US citizenship, but no tax compliance is necessary before or after renunciation.

  5. Avatar Sarah Biggins says:

    Cannot believe the unfairness of the current system… things MUST change – we need residence based taxation NOW.

  6. Avatar Jamie D. says:

    I spend approximately $100 every year on Turbo Tax to confirm that I owe nothing to the US. Is it possible that there are lobbyists from TurboTax (or similar groups) trying to convince you that keeping an overly complicated tax code whose burden lies on the individual taxpayer is the best solution? The US government doesn’t even know how many of its citizens are residents of other countries. Stop the madness. End citizen based taxation.

  7. Avatar Sun Tzu says:

    Statesiders can hop in their car to visit their Member of Congress local office to discuss their personal issues such as taxation. Americans abroad don’t have this access and are left with having to deal with US laws tax on their own – and to fully understand their complexity.

    That is already bad enough considering expats are responsible to file while overseas but they are also dealt another whammy: Members of Congress are lazy which means they do not engage in policy that has an established committee. Even when they know of substantial problems brewing across the country they will keep to themselves because the responsibility to tackle it is in another committee. The most serious problem expats have is if their supposed MoC is not on the tax committee, their unique concerns are not raised.

    Most Americans abroad don’t have MoC sitting on tax committees which makes chances of being heard close to zero. Congress is structured this way to limit the scope of people involvement and to thwart challenges from third-parties. Of course, I am being charitable. Things are far worse.

  8. Avatar Matt says:

    The problem is well understood by those living it. Those who do not are unlikely to take the time to read a lengthy article such as this. 1. How do we convey the situation concisely to those who can support change? 2. The action plan for change is disparate. How can we leverage numbers to focus messaging and action?

  9. Avatar troutbum says:

    The tax compliance business is a cruel and shallow money trench, a long plastic hallway where thieves and pimps run free, and good men die like dogs. There’s also a negative side (thanks to Hunter S. Thompson for the quote)….The US government & its sad partners are kings at utilising the FUD strategy – fear, uncertainty & doubt – to drive anxious folks into the waiting arms of the compliance industry, their partners in implementing the money grab known as CBT. What’s really irksome is having to pay, in my case, thousands of dollars to fill out forms just to find out that no action is required, but the insult to injury is to pay to have the myriad forms filled out and be told the IRS wants some of your income – for what? I don’t utilise any of the US government’s services or resources so I refuse to pay for them. The US understands this domestically, if you move from New York state to California, you do not continue to pay NY resident taxes because you are no longer a NY resident & do not use any of their state government’s services. You are now a California resident & thus you pay your taxes there. How hard is that for the morons in Congress, the IRS and the rest of the US government to understand it should also work that way internationally? But trying to apply logic to the actions & policies of the US government is like trying to apply medicine to the dead.

  10. Avatar Michael S says:

    The regulations that apply to US citizens living outside the US are an incredible overreach of the US government. Before even considering whether US citizens actually should need to pay tax the US without receiving any services in return, the truth is that it is simply impossible for US citizens living outside the US to comply with both US tax laws designed with only US residents in mind as well as the tax laws of their country of residence. It is similarly impossible for the IRS to actually enforce US tax laws effectively outside the US. Even after collecting all of the private financial information from millions of suspected US citizens worldwide through FATCA, the US government cannot show any increase in revenue for the effort. On the other hand, the damage is clear: there is no shortage of heartbreaking stories from current and former US citizens whose lives have been destabilized in the attempt. Ironically, those who want most to comply and try the hardest to do so are the ones who are harmed the most. Citizenship based taxation is an unjustifiable and inexplicable policy that must be repealed.

  11. Avatar spyros F says:

    I hope something changes soon. Our ability to handle the burden of paperwork and additional taxes is wearing down rapidly.

  12. This is not a problem…it is a TRAVESTY for any and all Americans who live abroad. My bank is rejecting me for mortgage and they send my personal data to the US which can easily get intercepted…I have to pay hundreds of dollars a year to show I owe the US nothing…not to mention, there isn’t anyone who represents us! Inching closer and closer to renouncing…

  13. Avatar Kathleen says:

    If a Canadian couple, gave birth to a child in China while living their temporarily, then moved back home to Canada while that child was a minor, is that child now “Chinese living in Canada”? Of course not, yet Canadians who give birth in US, apparently have children who are “Americans living in Canada”.

  14. Avatar ronald says:

    Taking citizens as a sort of hostage is a concept of the 1860s. Imposing something to them, that they do not want to have and making them to pay a ransom (the renounciation „fee“ = fine) in order to get rid of it is abuse of power. Simply ignoring the fact, that ordinary people want to have a life in peace without the risk of being economically killed for the smallest mistake is wrong and will stay wrong. Things, that are wrong will be changed and mist be changed.

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