The Consequences of Being a U.S. Person

I have spent the last few days reading and contributing over at the Isaac Brock Society and following Just Me's links on his Twitter feed.  It has been a real education for me.  There is a saying in French, "nul n'est censé ignorer la loi." (There is no excuse for not knowing the law.)  I had no idea how ignorant I was until I met people who have done the research and do know what they are talking about.

Now that I am a little less ignorant, I would like to take this opportunity to make an important clarification about, and an appeal on behalf of, what are called "U.S. Persons."  Much of what I have posted here about U.S. tax law and reporting obligations I have tied to U.S. citizenship and that turns out to be a bit misleading.

U.S. citizens, I said, are taxed on their worldwide income.  This is still quite true but it is not the entire story.  More accurately, I should have said, "U.S. persons" are taxed on their worldwide income. This statement is vitally important to understanding just how aberrant the U.S. tax system is (and just how dangerous the FBAR and FATCA regulations are) because the term "U.S. Persons" includes U.S. citizens but is not limited to them.  Believe it or not, there are other categories of people concerned, people who are not citizens of the United States, and they have even less representation and less of a voice than overseas Americans.

A U.S. person is:  a corporation or entity based in the U.S., a U.S. citizen living in the U.S. or abroad, or a Resident Alien living in the U.S. (in other words, a legal immigrant or a Green Card holder) or you meet the Substantial Presence test (i.e. you live in the U.S. for a certain number of days a year).

All these people have exactly the same tax and reporting obligations on their worldwide income.  Yes, my friends, an immigrant or a Green Card holder living in the U.S. must report his or her worldwide income to the American IRS, report all his or her foreign bank accounts (even ones back in the home country) and is impacted by FATCA in much the same way as U.S. citizens.

To give you some idea of how this might work in practice, let's consider a hypothetical situation where my foreign spouse and I return to the U.S. Upon receiving his Green Card my spouse would be:

1.  Required to disclose all his U.S. income AND anything he earned in France (interest, dividends, rents) on assets he acquired before entering the United States.  Depending on the type of income, he may be required to pay U.S. taxes on that French income.
2.  Required to fill out an FBAR (Foreign Bank Account Report) disclosing all of his accounts in France and the balances.
3. And finally he would be required to fill out the new form 8938 (FATCA requirement) revealing his "foreign financial assets" (in other words just about anything he has in France).
4. Last but not least, in theory his bank in Paris would be required to turn over his account information in France to the IRS since by accepting a Green Card and residing in the U.S. he is a U.S. Person (not a citizen, mind you).

Not a pretty picture is it?  Failure to comply with the above may result in draconian penalties even if no tax is due.  I had no idea the U.S. tax system worked this way for immigrants and, I assure you, neither did my French spouse.

Clearly a potential immigrant to the U.S. with assets in the home or a third country would have to have a special kind of insanity to subject himself to this system with all the paperwork and potential for double-taxation. And it would do this person absolutely no good whatsoever to become a U.S. citizen since this would change nothing.  On the contrary, being a citizen would actually make it worse - one might shed a Green Card relatively easily (if done before the immigrant acquired too many assets in the U.S. or abroad) but U.S. citizenship is forever unless one renounces.

You know, if I were tasked with designing a system with the maximum number of disincentives in order to prevent educated immigrants with existing assets to come to the U.S., I doubt could have done better than this.  While this system has existed for some time, it was not well known until FATCA brought all these issues to light and the IRS actually started enforcing the rules.  Most immigrants were never aware of them and many are now in a terrible position made all the worse because they cannot vote.  I wonder if the French diaspora in the U.S. has brought this up with Mr. Courtial.

As for potential immigrants like my spouse, they have a lot of thinking to do.  I suspect that the young, educated, childless ones will continue to go to the U.S. but I doubt they will naturalize and surely they will have every interest in limiting their stay.  Older experienced workers with families and assets in the home country will probably avoid the U.S. in favor of places like Singapore or Canada.

Please feel free to correct me if there are any errors or omissions in what I have written here.  This is a complicated subject and I am not a lawyer or an accountant.  Also, I know that there are a lot of you visitors to the Flophouse are interested in immigrating and working abroad.  If you have a moment, I would very much like to have your impressions on this.  For U.S. citizens, how has the U.S. tax system impacted any ideas you might have had to live and work abroad?  For those of you from other countries does this information make you more likely to choose another another destination over the U.S.?