How U.S. Tax Law Impacts Non-U.S. Citizens

I've already talked a little bit about this in this post, The Consequences of Being a U.S. Person but I thought a recap would be useful since there are some new developments.

This is the situation in a nutshell:  people who have a connection to the U.S. but who are not U.S. citizens still have reporting and tax obligations to the American Internal Revenue Service.  A very common example would be a migrant who moves to the U.S. to live and work temporarily or permanently.  Let's say, someone from Germany who is working at an American company in Boston.  That person, once defined as a U.S. person because he resides in the U.S., must report his or her worldwide income to the U.S. government:  interest income from his accounts in Germany, for example, or rent on a property in the home country.  Yes, these must be reported on the American tax forms.  In addition, this person from Berlin who is living in Boston is also required to file an FBAR (Foreign Bank Account information)  with the U.S Treasury department if the sum of the foreign (local to the German but foreign to the U.S.) accounts exceeds a certain amount (10,000 US or 7,500 Euros).  This is not a joke - the U.S. is deadly serious about it and is it not something that migrants in the U.S. or anyone who has a connection to the U.S.can afford to ignore.  The fine for not filing an FBAR and reporting those accounts to the U.S. government is 10,000 USD per year that person did not file that form.  Be warned, the IRS is collecting those penalties.  Failure to file for three years could net that German a 30,000 USD fine even if he owed no taxes.

All this was true even before the U.S. Congress passed a law called FATCA (Foreign Account Tax Compliance Act).  However, under this law the German bank of the German living in the U.S. must now report that account to the U.S. government if it exceeds a certain amount. Germany is one of five countries that has struck a deal with the U.S. government to implement this law so any hope that the German had of ignoring the whole business is pretty much gone.  In addition the U.S. government is offering these countries some sort of reciprocity which means that the German's U.S. banks may soon be required to report on his or her U.S. accounts to the German government.

If you are in this situation, then you should probably get some professional help to get it sorted out.

If that were not enough, there are two other things to be aware of.  The first is a new form (required under the FATCA law) to be filed with the 2011 U.S. tax declaration.  This form 8938 is a declaration of foreign (foreign to the U.S) assets.  So, the hypothetical German that I'm using will have to file 1.  a U.S. tax declaration on all income earned worldwide, 2. an FBAR listing all his German bank accounts and 3. Form 8938 listing his German bank accounts AND all other assets in Germany including his house or apartment, pension funds and so on.  The fact that these things existed before the German moved to the U.S. is irrelevant.  By spending time on U.S. soil he or she became a U.S. person and must comply.  In some cases, even non-U.S. citizens who are not resident in the United States might have to file this form.  See this excellent post, Form 8938 Can Apply to Non-Resident Aliens, on Phil Hodgen's blog.

The second development that may impact that German is how his German bank is going to react to the news that they are now going to have report his account information to the U.S. government.  What we are seeing right now are European banks closing the home country accounts of their nationals living in the U.S.  This came in from Switzerland, Swiss Expats Caught in Middle of U.S. Tax Conflict.  Some Swiss banks have even decided that banking with anyone with a connection (however remote) to the U.S. is simply too dangerous.  This includes Swiss citizens who have a child studying at a U.S. university.  Will other European banks follow suit?  Hard to know but there is a certain logic to it.  Why keep as a client someone who is going to cost you money even if that person is a national?  It's not as if these people have to live in the U.S., right?  Basically, a U.S. connection has become a problem to be solved (and frankly it really hurts to write that) even for people who are not U.S. citizens.

And that brings me to my final point.  As a member of the American diaspora, I can do something about this.  I may not have very effective representation but I can and do vote in U.S. elections.  My hypothetical German (and any other migrant to the U.S., not to mention the millions of people with U.S. connections) doesn't have that and that makes the situation all the more outrageous.  This is "Taxation without Representation"and it is grossly unfair and completely contrary to U.S. interests in the world.  Do Americans want foreigners to pull their money out of the U.S. or their children out of U.S. universities?  Is the goal to punish migrants who want to live and work in the U.S. by making a grab for their home country assets and bank accounts?  That may not have been the intention of U.S. lawmakers but it is the outcome.  I've said it before and I will keep repeating it:  this is not going to end well for anyone.