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Monday, June 30, 2014

Non-Willful Non-compliance: How We Got Here

"You should have known!"

Don't you just hate people who say that?

7 million Americans abroad and only a few are even quasi-compliant with the American tax system which requires that any American living outside the U.S. file tax returns and foreign bank accounts reports even where all the income and all those bank accounts are in the country of residence (not the US).

That's changing but I think it's useful to explain how this situation arose in the first place. "They should have known" just isn't helpful here and in many cases it is just outright ridiculous.  Why? Because before there was a compliance gap, there was a communication gap.

I'm not interested in pointing fingers and going "tsk tsk" - I already have two children and I don't want to be anyone else's mom (or grandma).  I am interested in getting it fixed because the problem is still with us   There is, I believe, a new American "tax evader" coming off the boat (or plane) every day because people still don't get it.  I meet this people and I assure you that confusion still reigns.   In order to do the Next Right Thing, we have to examine how we did the Wrong Thing.

An American Exception:  There are roughly 190 countries in the world today and only the United States (and Eritrea) has what really should be called a "diaspora tax" (the common term is citizenship-based taxation but that is a misnomer because non-US citizens are taxed under this system as well).  What that means is that any US citizen or foreigner with a certain status in the US who moves to another country is still required to file US tax returns, pay US taxes on any income earned (and unearned) in that other country and report all of his or her bank accounts outside the US.   It's an oddball situation, an outlier, a "who woulda thought" kind of thing.

It's so weird that I had one reader report via email that when he tried to explain it to his fellow Americans in his host country, he was accused of trying to tarnish the good name of the United States with his "anti-US government conspiracy theories."

The Homeland Experience:  Prior to leaving the US, many Americans have already migrated within the United States.  Maybe they were born in Virginia, but they went to school in California and, once they graduated, they landed a job in Wisconsin and settled there.  Happens all the time.  Now a lot of US states have state income taxes but if an American moves five times in as many states,  the state he was born in doesn't follow him around annoying him for tax returns when he is an income-earning, property-owning resident of another state.  So when an American goes abroad this is the model he has in mind and if, after having moved numerous times within the US, he goes abroad to Belize, it just doesn't occur to him that taxation and out-country migration does not work the same way as internal migration.

Accidental Migrants:  Some of the recent research into the American population outside the United States reveals that many (if not most) went abroad thinking that they would go back to the US at some point.  As one study participant (a US lawyer in London) reported to Dr. Klekowski von Koppenfels, "I was only supposed to be here for one year and that was 18 1/2 years ago."

As they acculturate in their new homes abroad, they become part of the local tax system and start paying local taxes (national and city taxes).  Yes, my fellow Americans in the homeland, if you live in France on a residency permit, you will pay taxes just like everybody else here foreign or native.  Ditto for just about anywhere else in the world.

So having declared and paid in the country of residence, it just doesn't occur to Americans that they are special among all the other nationalities in the world and they (lucky them) get to also report the same income (earned or unearned in the countries of residence) to the United States - a place that they haven't lived in for, say 18 1/2 years.  And if you try to call that person a "tax evader", well, they are likely to take exception to that characterization especially if they have 10+ years of tax compliance in their countries of residence outside the US. It really is a "WTF?" moment when they do figure it out.

Homeland Rhetoric and the Diversity of Americans Abroad:   This is a huge problem because it's about framing and context. The headlines in the media and the common perception of the need for things like FATCA and compliance programs and the like all focus on the hunt for the "rich tax evaders."  So a very common problem I see is that the American au pair or visiting professor or artist or writer or musician or translator or English teacher or stay-at-home mother or university student (who most assuredly are not rich) do not see themselves as being concerned by any of it. "But I hardly make any money here!" is something I hear time and time again.  "Those rules are only for rich people!"

Sorry, but that's not true.  That American English teacher may be making very little but if he or she is making French minimum wage and works even part-time, it's not too hard go over the filing threshold of 10,000 USD/7300 Euros. (And believe me, if you live in France on that kind of money you are very poor indeed).  Or take the American student whose parents perhaps have wired him or her enough cash to pay tuition, first/last month rent and food money - if that student's bank account goes over 7,300 euros then he must file a Foreign Bank Account Report.

It occurred to me once, seeing all those American students at McGill University in Canada, that if the IRS/Treasury wanted to make some quick money (10,000 USD for every non-reported Canadian "offshore" bank account) they could simply get the born-in-the-US student list and start checking them (and their parents back in the US) out.

Few Points of Contact:  7 million US citizens (not to mention Green Card holders) scattered all over the world and even the US embassies and consulates can't count them with a reasonable degree of accuracy.  There is no requirement that Americans have to register with State and most don't.  In some countries there is an American community to plug into with clubs and churches but in many there really isn't - just an "international" community perhaps.  Often the US consulate is only in the main city and Americans who live in the countryside or other regional cities have to travel quite a ways to get to one.  There are around 290 US embassies and consulates in the world but only five IRS international offices, over half in Europe:  Frankfurt, Paris, London, Beijing and Puerto Rico.

In the 20 years I've been abroad I have never seen any tax information "pushed" by the US government to the American communities in any country including the ones that have an IRS presence.  (If you have had a different experience, please say so.) In a few places with large numbers of Americans I have seen non-profits and other volunteer organizations doing their best with tax seminars and the like but these reach only a very small percentage of US citizens abroad.  Given the recent tax troubles there are more events than there used to be but still looks like an American would have to be "plugged in" in some way in order to get any useful information. About the only reliable point of contact that I know of is the trip to the local consulate to renew a passport (every 5 years for minors and every 10 years for adults).

There are probably other factors I'm missing here but that's the general landscape.  Even with all the recent national and international media attention, there is still a lot of confusion about American "citizenship-based taxation".  Until that gets cleared up, there will be new American emigrant and immigrant "non-willful tax evaders" created every minute. (That was actually the headline of a recent article and we just howled with laughter when we read it.)  And we will be having this conversation again in 5 or 10 years.  The recent IRS streamline amnesty program is a step in the right direction but that's slapping on a band-aid after the fact.   Common sense would dictate that perhaps it would be a good idea to address the communication gap as well as the compliance gap.

I don't pretend that there is one solution to all this but I can think of a couple of places to start.

How about a "tax note" to be given out to every individual applying for or renewing a Green Card or a visa, or anyone applying for or renewing a US passport inside or outside the United States that says in the clearest language possible: If you leave the US or come in to the US, you should know that the American tax system is a little different and there are some obligations you need to know about.
If you are a US citizen or Green Card holder living abroad you must file US tax returns  and report income earned in your country of residence just like you would if you were still living in the US. In addition to that you will be required to report your foreign-to-the-US-but-local-to-you bank accounts.  Please see IRS publication X or webpage Y for more information.  
If you are an immigrant coming in to the US,  you must report any earned and unearned income, and all your pre-existing bank accounts, from any country outside the United States including your home country/country of citizenship.  Please see IRS publication X or webpage Y for more information. 
I'd suggest that they play with the language a bit to see what is most meaningful to the target audience and what is most likely to get them to act.  Another idea would be to put posters up in conspicuous places in the US consulates and a note on the front page of every US embassy website around the world.  The key here is to challenge the default setting of American emigrants and immigrants and raise awareness.  Surely, mes amis, all this is doable.  More importantly, it's the right thing to do.  Without it, the whole business smells an awful lot like a deliberate trap - a "gotcha" game for emigrants and immigrants alike.  And that perception undermines....

Legitimacy.  Tax authorities can do all sort of very negative things to people who don't comply but enforcement efforts are expensive and most tax systems in developed countries don't rely solely on that.  Education is important and so is something called "tax morale" which just means that people voluntarily comply because they feel a moral obligation to do so, they see a link between their behaviour and a government which is providing valued goods and services, and it feels more or less "fair" to them.

That link is very tenuous to Americans living outside the United States because there are very few services for them abroad (even "protection" isn't really a reality in a lot of places).  Their first reaction is that it isn't fair at all and why should they, unlike all the other citizens/diasporas of the world participating in globalization, be reporting (and often paying taxes) TWICE.  You can call them all the names you like ("tax evader" and so on) and increase the already draconian fines, but the Holy Grail of international voluntary tax compliance will continue to elude everyone and poison the relationship between Americans abroad and the US government until someone stands up and starts the necessary conversation about Why This is Important and Necessary and Why We Need You to Do It.

So let's start talking already and may I suggest that HR 597 would be a good place to start?


Ellen Lebelle said...

Well said, once more!

Anonymous said...

Nicely said Victoria. Of course the obvious answer is "stop doing it". I could imagine constructing a non-discriminatory citizen-based diaspora tax but unfortunately it would raise no revenue, cost plenty to administer and harass citizens needlessly. Congress has, however, almost never considered the impact of amendments to the tax code on the diaspora and thus almost invariably harms them each time it tinkers. It is all but impossible for a long-term non-resident to comply with without massive cost and sacrifice. I personally doubt they'll figure out how to fix it in my lifetime - a more achievable outcome shorter term would simply be to provide a simple, no-fuss means for a long-term non-resident to cut the cord and say good-bye without a "shoot me" sign permanently affixed to their financial life. They don't want to tax those widows and orphans anyway- just let them go without a fuss!

bubblebustin said...

I imagine that many US residents who have no idea that CBT exists for Americans also base their assumptions on the fact that the countries from where their ancestors originated didn’t impose it on their citizens when they left those countries. Who would believe that the land of the free would be far less free than anywhere else in the world, especially countries where human rights and mobility mean very little? The ONLY thing CBT has had going for it was the fact that virtually no one knew about it. Well the cat’s out of the bag and bad news travels fast – expect renunciations to soar with increased knowledge. Let’s not fall into the trap that Nina Olson and the IRS Commissioner du jour have fallen into – to try to make CBT work. CBT is an abomination and will never work for the masses. The renunciations are all the proof you need of that.

BC_Doc said...

"Another idea would be to put posters up in conspicuous places in the US consulates and a note on the front page of every US embassy website around the world. "

Better yet, the US needs to comply with international norms and switch to residence based taxation. I've lived in Canada for over 20 years and been a Canadian citizen since 2001. There is little the US can do short of switching to RBT that would lead me to come in from the cold.

Blaze said...

How could I have not known?

Ummm Let's see. Because the US Consulate told me 41 years ago I was "permanently and irrevocably" relinquishing US citizenship. I am not in the habit of following the constitutional decisions and the tax laws of a foreign country.

How could a Canadian police officer born in the United States (because it was the closest hospital for his mother to give birth over five decades ago)not know that he was a US citizen with US tax obligations.

Ted Cruz didn't know he was a Canadian citizen because he was born here. He's a Harvard educated lawyer! I wonder when he will figure out Cuba also considers him a citizen because his father did not give up Cuban citizenship by becoming a US citizen until decades after Ted's birth.

Victoria FERAUGE said...

Thanks, Ellen. I thought about it last night and it's not just the tax rules that need to be more widely known but the new streamlined amnesty program, too. Just because it got some attention in the US papers and through various Americans abroad orgs does NOT mean that everyone got the message. How to spread the word?

@anonymous, You point out another thing I'd like to see and that is no questions asked, no bureaucratic nightmare and no fee renunciations. Let people go without a fuss? Absolutely.

@bubblebustin, Yes, even in the US homeland people have no clue or they have strange ideas about how it words. Especially this whole "it's only for rich people" business. They leave with that impression and so they don't even think to ask. But people leave the US all the time to take jobs, many in sectors like education (anyone ever get rich teaching English?) Sometimes I really hate talking to these folks because once they start to understand, they go sheet white. Just at the idea that they were supposed to file and didn't. Nobody needs that kind of stress and seems to me that it would be much better to tell them about this BEFORE they get into trouble.

@BC_doc: Yes, it would be better. No doubt about that. And something to work toward and brave to ACA for trying.

@blaze, Ah, and that is a future post because I have heard "How could anyone not know they are an American citizen?" way too many times. And that's just BS. Most of the world does not have unconditional jus soli. Kids born in France to foreign parents are NOT automatically French citizens - there are residency requirements and you have to ask for it. Seems very sensible to me but the US is stuck with the 14th amendment and that would not be easy to change... Can I interview you for this psot?

Christophe said...

I recall you mentioned that the US administration seemed very reluctant to the idea you suggested of adding an insert to passport renewal, green card paperwork etc. Did they give any explanation why they didn't like the idea? That seems like the right thing to do.

Blaze said...

@Victoria: Yes.4

Unknown said...

Tell 10 friends to tell 10 friends who can tell 10 friends: RESIDENCE-BASED TAXATION RESOLUTION: Spread the word and solve the problem.

Seventeen RNC members, including Seven members of the 9-member RNC Resolution Committee joined Solomon Yue, Vice Chairman and CEO of Republicans Overseas to propose the following RNC resolution in order to end double taxation and FATCA for 7.6 million overseas Americans.

Resolution Supporting “Residence Based Taxation”

WHEREAS, Residence-Based Taxation, (RBT), is a fair, equitable, and efficient taxation of American Citizens living overseas because it taxes their worldwide income only once in the country where they actually reside and receive government services;

WHEREAS, RBT would not only align U.S. law with the other industrialized countries, but also eliminate complex requirements and tax forms, such as the Foreign Account Tax Compliance Act (FATCA) and the Report of Foreign Bank and Financial Accounts (FBAR); and, it would significantly reduce IRS administrative expenses;

WHEREAS, The United States is the only industrialized country in the world that taxes foreign-source income of its citizens living overseas by Citizenship-Based Taxation (CBT), resulting in double taxation; all other industrialized countries only tax foreign-source income of their citizens residing in their home country (Residence-Based Taxation or RBT);

WHEREAS, The complexity of a U.S. tax return for an American living overseas and the significant additional penalties applicable to
Americans living overseas requires these U.S. Citizens to hire expensive tax preparers; the cost of this double-taxation along with the costs of preparation and compliance put American job seekers at a competitive disadvantage to other non-American workers, thus costing American jobs;

WHEREAS, The higher cost to hire American workers resulting from CBT causes multinational corporations, even those headquartered in America, to hire fewer Americans, to have less of a connection to America and purchase fewer American goods and services, thus decreasing American exports;

WHEREAS, The Foreign Account Tax Compliance Act (FATCA), implemented as a result of CBT, has caused banks, both U.S. and foreign, to deny access to banking and other financial services to the 7.6 million Americans overseas, thus denying employment and investment opportunities and forcing them to choose between U.S. citizenship and their livelihood;

WHEREAS, The implementation of FATCA to enforce CBT promotes the abandonment of the U.S. Dollar as the global reserve currency and hurts the U.S. economy; and

WHEREAS, History reveals that replacing Citizenship-Based Taxation with Residence-Based Taxation will raise net Federal tax revenue because of increased economic growth, therefore be it

RESOLVED, The Republican National Committee urges Congress to repeal Citizenship-Based Taxation and its supporting legislation such as FATCA and FBAR;

RESOLVED, The Republican National Committee urges Congress to permit restoration of citizenship for those who were compelled to renounce their citizenship because of the crushing burdens of FATCA and FBAR; and

RESOLVED, The Republican National Committee urges Congress to align U.S. law with the laws of other industrialized countries of the world by limiting taxation to Residence Based Taxation on American Citizens living overseas which will encourage increased employment of Americans and increased export of American goods and services.

Chief Sponsor – Solomon Yue, Jr., Republican National Committeeman for Oregon (Vice Chairman and CEO of Republicans Overseas)

Unknown said...

Tax problems can be darn insistent. It's something that insists not just on our compliance, but on our engagements as well. It's really best to arm ourselves on this end with all the knowhow we can muster, as well as the expert back-ups that can carry the textual pressures of that thing, such as in the realm of fact-checking and collation. Good luck!

Gene Chandler @ On Core Bookeeping Services

Anonymous said...

I have liked the new IRS compliance program announcement on Facebook and tried to get people to share it.

The IRS needs to hire that Department of Defense voting program PR guy. I got a message on my Facebook page today that it is something like Armed Services Overseas Voter date. I'm not a soldier, but it was nice to see some positive outreach for once.

Right now I feel like an evangelist, but the news I have to share is not good.

Victoria FERAUGE said...

@Antoine, Yes, that is one to spread around. The RNC resolution is a darn good one. I asked and got permission to put it in a post and I will do that next week.

@Gene, It is indeed best to find out as much as possible.

@Anonymous, Good for you for spreading the word.

Famala said...

Hi Victoria,

Thank you for your blog contributions on this topic.

I am a Frenchling, as you call your children, born in France of an American mother 45 yrs ago. She thought she was doing the right thing when she registered me as an American.

I feel culturally bi-cultural, but I have not held a US passport in over 24 years and never renewed one as an adult. I have always worked in France and my assets and revenues are all hard-earned in a country that imposes huge social and tax costs on its residents. But that's fair enough because I can choose to leave.

I am educated and politically aware. Yet I discovered FATCA on July 1, because I entertain no formal links to the American community.

After seeing a tax consultant, I understand that my degree of exposure is huge, that I am considered a criminal with offshore accounts, and that I could stand to lose everything I have.

The degree of unfairness of the system is unbelievable:
In spite of tax agreements between France and the US, I am subject to double taxation because both countries do not tax the same things (eg. you pay capital gains tax in the US on selling your primary home, the only thing the French do not tax)
I can be taxed on money I don't make (like paying taxes on your gross salary while in France your net is 21% lower; like fake capital gains due to a change in exchange rates, while there is no gain in Euro, or like the fact I will be taxed every year on capital gains for interest accrued on savings in mutual funds, which have not been cashed, and can still crash)

I will restroactively pay dearly for choices I did not know had any incidence (like putting my money in grandfatherly savings like assurance vie, which are French mutual funds, all fully legit, but apparently a major issue with the IRS)

And I cannot relinquish or renounce my US nationality, which I never asked for in the first place, without first filing for 5 years including 3 years of back taxes.

Let it be said I require and benefit from no services from America (defense, infrastructure, education, health, pension, you name it, it's all French).

So the best thing I can hope for today is to hand over most of everything I've earned, after paying a tax consultant 6000 USD for his/her help in back filing and then 2000 USD for two more years. And then I can renounce my nationality with a heavy heart.

What has America become ?

I have looked at ACA and AARO - both doing good things. But is anyone looking to create some traction beyond classical channels?
Protests in front of US Embassies?
A class action? (taxation without representation, discrimination, cruel and unusual punishment?).

I have written to the ACLU (DC chapter) today via an online form.

Are you aware of any support groups?
We need to get our stories out there. My French friends have a hard time believing what I am telling them although of course they won't put it past the US government given its recent track record, and my American US resident friends probably think I am making at least some of these things up.

It's one thing to denounce this abuse, but we need to channel our rage into something that actually goes somewhere. There are over 7 million of us, it seems.