U.S. hunt for “tax cheats” hurts millions

The added tax burdens of living overseas can strain the patience of patriotic ex-pats. Photo: Joshua Ganderson,  Creative Commons, some rights reserved

The added tax burdens of living overseas can strain the patience of patriotic ex-pats. Photo: Joshua Ganderson, Creative Commons, some rights reserved

Can you name the only two nations on earth that tax citizens who reside abroad? Well, one is said to be Eritrea, in the Horn of Africa. The other is the U.S.

Of course, this is immaterial for Americans who have never left home. But over 7 million Americans do live outside the U.S. and they feel this unique distinction acutely. Besides being expected to file tax returns in the U.S. and their country of residence, changes in U.S. rules designed to catch tax cheats are making life difficult for ex-pats – and banks – all over the world. (I won’t bore you with the sea of details, other than to say FBAR and FATCA have become “f-words” to many.)

Now, throw out the term “tax cheat” and it only seems fair to go get what’s due. The trouble is these regulations treat everyone as a suspected criminal, without any expectation of personal privacy, or fair play, just for the crime of living abroad. Those who say “What’s the big deal? Just follow the rules!” should know that even (especially?) the experts call the rules burdensome, confusing and unfair.

Here’s more from Forbes Magazine about the difficult choices Americans abroad face in making sure they are in full compliance:

You must report worldwide income on your U.S. tax return. If you have a foreign bank account you must check “yes” on Schedule B. You may also need to file an IRS Form 8938 with your Form 1040 to report foreign accounts and assets.

Tax return filing alone isn’t enough. U.S. persons with foreign bank accounts exceeding $10,000 in the aggregate at any time during the year must file an FBAR by each June 30. Tax return and FBAR violations are dealt with harshly. Tax evasion can mean five years in prison and a $250,000 fine. Filing a false return? Three years and a $250,000 fine.

Failing to file FBARs can be criminal too. Fines can be up to $500,000 and prison can be up to ten years. Even civil FBAR cases are scary, with non-wilful FBAR violations drawing a $10,000 fine. For willful FBAR violations, the penalty is the greater of $100,000 or 50% of the amount in the account for each violation. Each year you didn’t file is a separate violation. Those numbers can really add up and be much worse than the 27.5% Offshore Voluntary Disclosure Program penalty.

Banks all over the world are now expected to identify American account holders and share that information with U.S. regulators. It’s hard to emphasize how burdensome the reporting requirements are for non-U.S. banks, which largely feel obliged to cooperate because of the U.S. dollar’s primacy in the world economy. Let’s just say if any other country made similar demands on the U.S. that simply would not fly.

Unable to ignore the demands, some non-U.S. banks are taking the easiest escape and refusing to let Americans open accounts. (Go ahead, try living abroad if no one will bank with you.) Here’s a succinct comment from Business week in a 2012 article “Why Foreign Banks are Shunning American Millionares“:

The attitude of American regulators is “Draconian,” says Su Shan Tan, head of private banking at Singapore-based DBS, Southeast Asia’s largest lender. “I don’t open U.S. accounts, period.”

Now, this is all headache enough for full-blown Americans abroad. And you might think American millionaires, for goodness sake, have enough clout to push back, though there’s precious little sign counter-lobbying is getting anywhere. But there’s also the plight of thousands (tens of thousands?) of so-called “accidental Americans” in Canada.

There are many ways to be an accidental American. One may be the Canadian child of a parent who was American. Or have been a Canadian born in a town that shared services with a U.S. hospital. (Anyone born in the U.S. is technically a U.S. citizen even if they never set foot in the U.S. again and do not consider themselves American.) Imagine learning, as a working adult, or someone safely into retirement, that the U.S suddenly wants to have a very long and lucrative conversation about back taxes owed for a life that only took place in Canada?

That’s one reason why FATCA has garnered far more attention in Canada than in the U.S. and why much of that attention has been critical and despairing. One recent compromise concerned the fact that compliance with FATCA reporting requirements would violate Canadian privacy laws. As reported by CBC, this is being “solved” by using a Canadian intermediary… to violate Canadian privacy laws:

Canada is the last G7 country to sign an agreement with the U.S. to implement FATCA, in part because government officials say they spent a long time negotiating exemptions for Canada.

Although the most contentious aspects of the law remain intact — the requirement for financial institutions to flag the account information of “U.S. persons” for the U.S. Internal Revenue Service to then verify if all taxes have been paid — the agreement allows the Canadian banks to provide the information the Canada Revenue Agency instead of the IRS directly.

Using the CRA as a “go-between” allows a mechanism for Canadians who feel they have been wrongly flagged to appeal, and also avoid an almost certain breach of Canada’s privacy act had banks been sending customer information to a foreign government.

Small progress was attained for fairer recognition of Canadian retirement and education savings programs, in terms of how they are taxed. Again from CBC:

While banks say they will still be left on the hook for the enormous compliance costs of tracking and reporting all this additional information on a some of their clients, this agreement spares them the penalties the U.S. was threatening for non-compliance; a 30 per cent withholding tax on all of their U.S. transactions.

The Canadian government has raised objections to FATCA from the beginning, saying the existing Canada-U.S. tax treaty allowed the U.S. to do all it needed to.

I’ve heard from at least one American in Canada who had to spend thousands of dollars with a skilled accountant just to file the papers to be fully compliant with reporting requirements. That person owed no taxes – zero – and all that came of it was a message stating he/she was deemed “at low risk for non-compliance”.  Indeed, some ex-pats can’t take the hassle and are considering renouncing their U.S. citizenship - not that doing so solves the whole issue.

Many Americans living abroad – and Canadians caught in this trap – are beyond frustrated. Accidental Americans are in a tremendous bind and even Americans complain of feeling like second-class citizens. Why second class? Because their reporting requirements are invasive and excessive, and because their plight is largely invisible. Scattered as they are, with a distracted and divided Congress, ex-pat Americans by and large have zero political clout, or redress. There’s some degree of fear in play too. Because it’s hard enough to argue with tax regulators or face an audit within the U.S. Risking that abroad feel suicidal. It’s frightening and oppressive, the opposite of what being an American is supposed to be.

Of course stay-at-home Americans can sniff and say “Well, you should never have left.”  Or, “If things are that bad, just come back and be done with it.” And yes, I am biased, because I too must navigate these rocky shoals. But who knew that American exceptionalism means less freedom to live and work in a larger world?

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41 Responses to “U.S. hunt for “tax cheats” hurts millions”

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  1. Pete Klein says:

    I’ve already gotten out the violin so I can hear sweet music while I cry over the plight of Americans who live and work outside the USA.

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  2. JDM says:

    “But who knew that American exceptionalism means less freedom to live and work in a larger world?”

    I think you are confusing exceptionalism with progressiveism.

    Hot debate. Like/Dislike Thumb up 3 Thumb down 14

  3. CM says:

    Thank you for the well-written, balanced article on US citizens living abroad.

    Many Americans share a misconception that US citizens abroad are affluent. The fact of the matter is that we are similar to a cross-section of Americans living in the US. Oftentimes we went abroad for a planned short stay, perhaps to study, or for a job, or to be with a boyfriend or girlfriend, and then we stayed. However, unlike Americans in the US, we must contend with two tax systems, which are seldom aligned. For example, the US considers my foreign employer’s pension contribution to be income although my foreign country’s tax authorities do not. My foreign IRA-equivalent is considered to be an offshore account while my foreign country’s tax authorities see it for what it is, a tax-deferred savings vehicle for retirement purposes, similar to a US IRA, in a local bank here. And, of course, don’t dare invest in a foreign mutual fund – these border on being illegal in the eyes of the IRS although they are just normal mutual funds.

    In 2013 at least 2,999 Americans abroad renounced their US citizenship due to the ongoing hassles in obtaining basic banking services and oftentimes under pressure from foreign spouses who fear that not completing an IRS form might cause the family’s savings to evaporate.

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  4. Jim Bullard says:

    The problem is that corporations and some wealthy individuals use foreign income to avoid taxes that should rightfully be paid. Unfortunately they have the accountants expert in dealing with compliance issues, the same accountants who arrange to advised them how to shift income out of the country in the first place. The ordinary folks are the ones who end up caught in the net.

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  5. Sam Clemmons says:

    Even Americans hate Americans. Take a look at the comment from the American from Feb 9 at 1:58 pm. He hates Americans.

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  6. Just Me says:

    Progressives, it seems, are quite happy to round up EVERYONE in a global FATCA Cavity search, if it means they can find ONE Homeland tax Evader. Consequences be damned.

    This is a FATCA data collection regime to control all. It, like NSA spying, is part of the U.S. global Total information awareness programs. If you like the NSA, than you will love FATCA.

    Sadly for Americans living abroad, ever since Obama launched his Offshore jihad back in 2009, it has become abundantly clear that if one is to remain a member of the unique U.S. TAX, FORM and Penalty Club, there are expensive dues for compliance. ‘Pay up or give up’ membership is the clear and unambiguous message being sent. We only value you for what revenue you can send back to support our entitlement programs on the homeland. Somehow they think that soaring renunciations of citizenship is a good thing for America. Now up over 3000 last year.

    They have it all wrong, but they are deaf to the cries that in a good intention , therein lies a lot of unintended consequences and collateral damage. But, as we have seen, with America and its Wars on Everything, homelanders don’t care, and their politicians reflect that.

    The FATCAnatic ideologues that are running this global data collection and extortion racket to get other countries to comply are just like NeoCons of the Right. They are Certain of the justice of their mission! If they have to carpet bomb the world to get a few tax evaders, well that is just the collateral cost of war.

    Never mind that good ole Constitutional ‘due process’ procedures can be very effective at deterring homelander tax evasion. If we have to sacrifice all Americans living broad to “getem’, well as Pete Klien says, he crys.

    Frankly Americans abroad created most of their own problem by swallowing the Obama campaign promises and the slogan, “Change that you can Believe in”. I know, as I was one!

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  7. Philip Williams says:

    Surely these expatriates expected to pay taxes SOMEWHERE. Am I correct to state they get an exemption from US tax on the first $97,000, if they are paying the local taxes; and additionally, get a tax credit against US taxes for the local taxes they pay?

    There are situations where US citizens get tax exempt earnings, however – military pay in combat zone up to a fairly large amount, including re-enlistment bonuses (which is why re-up rates are so high in Afghanistan.)

    I wonder if Senator Rubio pays Canadian taxes – after all, he is a Canadian by birth. His office could probably help explain this.

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  8. Lucy Martin says:

    Yes, there is a comprehensive tax-treaty between the US & Canada which exempts a generous layer of income for Americans who are subject to Canadian taxation by virtue of residency in that country. (Thank goodness because who could afford to pay that load twice?)

    The exempted amount is on earned income and does not exclude everything – capital gains, for example. (Or,in my case, self-employment tax.)

    Since the U.S. expects married couples to file jointly, many dual-income households could easily exceed the exemption amount – at which point they do start paying double taxes, on the amount over the cut-off. (Canada doesn’t have a “married filing jointly” category.)

    I’m guessing Philip Williams is thinking of Sen. Ted Cruz, who was born in Calgary. But no problem, because Canada does not expect income taxes from Canadian citizens who establish residency outside of Canada.

    That’s part of the complaint: only the U.S. and Eritrea will tax you anywhere you go, no matter what other taxes you are already paying elsewhere.

    Here’s an imperfect analogy of why this feels wonky: imagine states insisted you owe state tax to your home state – always and forever – even after you moved to a different state and already pay taxes there. Taxation based on residency makes a certain amount of sense and is the norm worldwide.

    But that’s the underlying background to the post’s gripe over heightened, intrusive and burdensome reporting requirements – on top of everything else.

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  9. American escapee says:

    The ignorance displayed here is why I left the USA in 1970 and never looked back. And it is also why I get a perverse pleasure in watching your economy and society go down the tubes, all the time watching your exchanging gunfire among yourselves.

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  10. GwEvil says:

    Thank you Lucy for this comprehensive article on the travesty that is FATCA and the worse travesty that is Citizenship Based Taxation, which is practiced by only the US and Eritrea (for which they were condemned by the US and Canada by the way!).

    All Canadians who say “oh this only pertains to Americans living in Canada” are sadly mistaken. I am a Canadian from birth by virtue of my birth to a Canadian father who registered my US birth abroad. I have lived in Canada for essentially my whole life (moved as a small child back to Canada), worked and paid taxes in Canada, voted in Canada and held a Canadian passport. I have very few ties to the US, other than some extended family that I have seen sporadically over the 45 years that I have lived in Canada. I do NOT consider myself an “American living in Canada” but a Canadian who happens to have been born in the US. Why I should have to file tax returns of a foreign nation (in which I would owe ZERO tax), or pay a capital gains tax on my primary residence that I own in Canada if I was to sell, and pay taxes on my childrens’ RESPs and my TFSA’s and have to report my “foreign bank account” balances (the ones I hold in my local Canadian bank) to the IRS is incomprehensible! There are at least a million more Canadians like me (some who relinquished years and years ago by taking their Canadian citizenship oath to the Queen, only to find that they had had their US citizenship “reinstated” without their knowledge, retroactively). I am just as much a “true Canadian” as any other Canadian. Where is my protection under the charter from my own government against a foreign assault on me and my fellow Canadians of US origin? The Canadian government has failed a huge proportion of Canadian citizens with this capitulation to the US.

    That the US is now forcing my bank to spy on me and rat me out to the IRS under threat of EXTORTION by the US Treasury of a 30% withholding “tax” on all their transactions going through the US is a total TRAVESTY and a threat to Canada’s Sovereign right to have NO foreign laws enforced on Canadian soil. Anyone who thinks that there will be reciprocity in this “deal” is sadly mistaken as the wording of the IGA from the US only promises that they will “consider ‘trying’ to reciprocate”. As it is, since Canada practices Residence Based Taxation like the REST of the world rather than Citizenship Based Taxation like the US, there can NEVER be true reciprocity anyway.

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  11. Dar Hall says:

    Lucy, I am in agreement in all you wrote. It is sad day when our Canadian government chose tommake a million Canadians second class citizens by violating their Charter of Freedoms and Rights. I hope this goes to the Supreme Court. It is time for the USA be like the rest of the world and have Resident Based Taxation. It would make for a better world.

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  12. bubblebustin says:

    Great article. There are other reasons why American emigrants are essentially second class citizens of both the country they live in and the US. We pay the higher of the two country’s taxes and receive the lower of the two country’s deductions.

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  13. SwissTechie says:

    Thanks for the nice article. I renounced US citizenship to refinance my mortgage. Why America puts its citizens into such a situation is totally beyond me. An individual shouldn’t have to renounce US citizenship like that simply because they found a job in a different country!

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  14. Sam Clemmons says:

    Canada doesn’t tax its citizens when they don’t live outside Canada.

    Minnesota does not tax its citizens that live in New York. There are no other countries in the world, except USA’s model: Eritrea, that tax their citizens everywhere in the Milky Way.

    Does USA believe that Americans have moved to Canada and Sweden and France, in order to avoid taxation?

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  15. Em R. says:

    Know what is really crazy? It is the whole notion, unique to the USA, of citizenship-based taxation (CBT). There’s a reason why residence-based taxation (RBT) is the international norm. It is NOT crazy and it is as easy as A-B-C. (A) Money earned in any non-US country by (B) people living in that country should be (C) taxed only by that country. If the USA would take away CBT, replace it with RBT, then relinquishments would become the rare oddity they should be. FATCA would then accomplish exactly what it was conjured up for (or so they said) — catch US homelanders with offshore stashes who are intentionally evading US taxes.

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  16. seszoo says:

    Soon if they have their way , there will be no Canada ,U S, Mexico ,Etc,Etc, and they’ll be able to Tax the World ….!Almost forgot about the E.U. ,But according to our diplomatic girl we don’t care much for them anyway.

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  17. Anita says:

    My daughter is a student at a Canadian university, and her taxes are pretty complicated for someone who is not leading a complicated life. An example of how things get sticky: in the US, tuition assistance is not considered to be income, but in Canada it is reported on the equivalent of the W-2, comingled with earnings from student employment.

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  18. NativeCanadian says:

    We are slowly all getting the message that this is pure EXTORTION and THEFT to all Canadian citizens. Notice I say Canadian Citizens. There is now a CLASS of SECOND CLASS Canadians. They are NOT Citizens of Canada anymore. The Canadian government has now created this UNIQUE Class of people in Canada. There needs to be a huge WARNING TO ANY IMMIGRANTS TO CANADA that they are essentially now NOT PROTECTED as outlined in a DEAL WITH THE USA. When India comes to Canada to take away the drivers license of Indian women, they will need to hide in fear just as the EX-AMERICANS did who came here legally. I challenge those who paid taxes to Canada to ask the government where their protection is now. Part of the Tax system is allotted to our military to enfore Canadian law. We ovbviously have been short changed on protections. It need to be trumpeted to all who came to Canada and became Canadian citizens, that the government they felt they were supporting has now given their rights away to a foreign country and they may be next. If this government can easily write off their responsibilities to these people, where will it end? We are no longer protected people… time to wake up!!!

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  19. zeke says:

    Having worked overseas for approx 10 years from the early 80′s to early 90′s as long as I was in the U.S. less than 30 days each calendar year I paid no U.S. income tax. Is that no longer the case? At the time the law seemed more than fair.

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  20. knuckleheadedliberal says:

    Zeke, that is the way I understand it from ex-pat family members, and as far as I understand it -which isn’t very far- military and even civilian contractors to the military who are serving in a war zone are exempt from US income tax. But then I don’t even understand my own taxes.

    Doesn’t NYC collect taxes on income earned in the City by people who live in other states?

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  21. knuckleheadedliberal says:

    Seems like this has really hit a nerve though and it will be interesting to find out more.

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  22. dave says:

    Knuck, I live in the Adirondacks and pay MA income taxes.

    I’m having a hard time understanding the issue here. Are these people being taxed twice? Once by the country where they live and work, and then again by the US?

    Like/Dislike this comment: Thumb up 3 Thumb down 3

  23. JDM says:

    I just put some trial data into Turbo Tax to see what it thinks about double taxation.

    If you live 330 days in a foreign country, don’t make any trips home for more than 24 hours, don’t work for a US company (which requires filing a Schedule K), then the answer is:

    You only pay taxes in the foreign country. You are not taxed twice.

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  24. knuckleheadedliberal says:

    Here’s something I don’t get to say often: thanks for the insight JDM!

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  25. GwEvil says:

    The problem here is not visiting or travelling to another country and having to pay taxes there. We are talking about Canadian citizens of US origin who live and work in Canada (some have never lived in the US at all!) having to file tax returns to the US to the tune of $1000-3000 in accounting fees a year, with no taxes owed.

    Also, the IRS does NOT recognize RESPs, RDSPs or TFSAs as tax savings vehicles and will tax a Canadian with US personhood on those rendering them useless as tax savings vehicles as they are for all other Canadians. If a Canadian US person sells their primary residence in Canada they will be subject to a 30-40% capital gains tax on the sale of that home IN CANADA. So as a person with the gum of US personhood stuck to your shoe, you are screwed from both sides, as, unlike in the US we cannot write off our mortgages and unlike Canada we are taxed on the capital gains of our primary homes.

    The problem is that the US taxes based on citizenship (or US personhood…you don’t actually have to be a citizen for the US to consider you taxable wherever you live) while the rest of the world taxes based on residence.

    However, what I see as the main problem is that this is a FOREIGN law being imposed on Canada and our government is allowing a foreign law to be imposed, which is a threat to Canada’s sovereign right to practice our own laws and not have other countries’ laws imposed on us. If they allow this foreign law, then what’s stopping other countries and the US from imposing more? Where is Canada then?

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  26. GwEvil says:

    JDM and Knucklehead. Did you not see what I wrote above? It’s not just double taxation which in some things YES there is…just not on INCOME (as long as there is a treaty). Tax savings vehicles that we use here in Canada ARE TAXED by the IRS! and the capital gains on our primary residence IS TAXED 30-40%. People are ignorant of the facts when it comes to the IRS taxing US persons. PLUS I AM A CANADIAN! Why should I fill out tax forms for a foreign tax body? That can be $1000-3000 a year just for simple tax filings. Add to that a company that you own and it can go up to $5000 a year. Why as a Canadian should I have to do any of that? Because the US practices Citizenship Based Taxation and that is the travesty. NO other country besides the rogue country of Eritrea practices CBT. Everyone else in the world practices RBT (residence based taxation). Imagine if all our countries of origin started doing this? Scotland, Ireland, India, Jamaica…they would all be coming after you for taxes if your ancestors were from there. Think that’s fair? I sure as hell don’t!

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  27. Lucy Martin says:

    Making sense of tax codes is something I detest in the first place. They’re complicated enough in one country. It gets far worse when multiple tax codes are in play.

    JDM is correct that Americans who reside in Canada would not face double taxation for the first (almost) $100K in earned income per household – although there are many specifics that are not covered (capital gains and different investments). A fair number of those do result in double taxation, as do earnings above that threshold.

    The post is confusing because it references two issues: Citizen-based taxation (which is one set of problems) and new reporting requirements and sanctions, which are presenting an additional layers of difficulty, and fail to let “accidental Americans” who feel 100% Canadian off the hook.

    EM R’s comment above (February 10, 2014 at 4:34 am) nails it – although many would still find FATCA’s reporting requirements highly problematic.

    For those who would like more info, this topic page from an advocacy organization, American Citizens Abroad, has a wealth of useful information.

    One last thing, the IRS takes a dim view of renouncing American Citizenship if (in their view) it’s being done to avoid taxes. For many, taking that step may not solve the problem.
    “Persons who wish to renounce U.S. citizenship should be aware of the fact that renunciation of U.S. citizenship may have no effect whatsoever on his or her U.S. tax or military service obligations”

    Accidental Americans (for example) are waking up to to possibility that the U.S. could review a whole life lived elsewhere and demand back taxes, with no excuse for “But I didn’t know I was American/I don’t want to be American/my spouse is not American and this hits them too”, etc., etc.

    It goes on and on.

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  28. WhiteKat says:

    @Dave. Yes the people who are PO’d here, are tax payers of two countries even though they live and earn in only one of those countries. This is because USA is the only country in the world that has citizenship-based taxation where the technicality of being a US citizen (even if you only spent the first 3 hours of your life in USA) makes you a US taxpayer for life.

    Unfortunately, many of these technical Americans, most of who are also citizens of the countries where they actually live, did not know that USA considered them taxpayers, so did not file tax returns or ‘foreign bank account reports’ (YES, their LOCAL BANK ACCOUNTS ARE FOREIGN!), so now thanks to FATCA, they are up the creek.

    Countries, like Canada, have agreed to hand over the bank account details (balances included), so that the King (USA) can count up all the gold of the slaves (technical US citizens living outside USA with other citizenships), so that it can punish the slaves with confiscatory penalties, thus relieving the slaves of their gold.

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  29. calgary411 says:

    FATCA combined with US citizenship-based taxation, attacks “accidental Americans” in other countries as extra-territorial US tax law crosses all borders, making our local Canadian (and other country) “foreign financial institutions” arms of the US IRS.

    To tell you how it ENTRAPS the most vulnerable of these countries into automatically conveyed US citizenship in countries in which their parent(s) have CHOSEN to live in and raise their families, I hope that this link will not be disqualified and you can read my post: http://isaacbrocksociety.ca/2014/02/10/i-want-my-son-to-be-able-to-expatriate-but-they-wont-let-me-do-so-on-his-behalf/

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  30. knuckleheadedliberal says:

    GwEvil, I saw what you wrote. I’m just trying to understand this in bite sized chunks.

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  31. Lucy Martin says:

    Hey folks, this topic is generating responses from many who have never commented before.

    Because of the constant onslaught of SPAM, first-time comments get read on our end just to be sure they are for real.

    Pretty much everything that is civil and on-topic gets a green light and enters the line-up. Subsequent comments (if any) from those senders should post right away.

    I’m checking in several times a day to keep that moving along, but I’m not doing that 24/7 so some delays may occur. Your feedback and patience are most appreciated.

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  32. dave says:

    “@Dave. Yes the people who are PO’d here, are tax payers of two countries even though they live and earn in only one of those countries.”

    If you were to take 2 income taxes worth of money out of my paycheck, I would have just about nothing left. I can’t imagine that is what is really happening here.

    Also, No one can force you to be a citizen of their country. If I suddenly got a tax bill from Ireland, and they were claiming that I was a citizen even though I have never lived there, ya know what I would do with that bill? Recycle it with the rest of the junk.

    There has to be more to this than I am reading here.

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  33. Ruth says:

    The problem for most families isn’t taxes owed to the U.S. 82 percent of all expats would never owe a dime in taxes to the U.S. due to current treaty provisions.

    The problems are to do with Citizenship based taxation practices instead of Residency based taxation.

    The cost to comply to show you don’t owe anything in a foreign country can be very high for low to middle income families. Sometimes this cost is paid by the non U.S. spouse who doesn’t understand Citizenship based taxation nor the logic behind it. Most countries do not do things that way. Canada allows that if you move away you file a final form saying “I don’t live here right now” and that’s it. If you return you resume paying tax to Canada where you live and use services. The U.S. says if you were born there it doesn’t matter if you left as a baby you file to them for the rest of your life and you also file FBARS upon pain of huge penalties. Most people never heard of FBARS until recently as no one, not even the IRS mentioned that piece of paper to anyone. Originally FBARS were supposed to be filed by Americans living inside the U.S. who had actual “off shore” accounts. They were not meant for every single expat who had zero U.S. holdings.

    With FATCA what you have is banks turning over the banking information of every expat whether long term or not, whether or not they have any U.S. holdings or earn or gain anything from the U.S. or whether or not they would ever owe a dime in taxes.

    This causes a lot of problems. For instance, in my household I am the ONLY American and I do not make our income. My Canadian spouse makes our income at his Canadian job. He has never lived or worked in the U.S. However as he is married to me our bank would report his account numbers and other private data about HIS account to the U.S. treasury and IRS. The crafters of FATCA have already said that this data can be shared among other U.S. agencies. For a Canadian this sounds outrageous to say the least. You have no one of knowing who has your private banking data in a foreign nation. You pay your tax faithfully where you live but, because you are the spouse of an American abroad or the child of one, anyone who shares an account with the dreaded American will have their banking data turned over to a foreign nation, the U.S.

    This has caused loads of complications in households outside the U.S. that has nothing whatsoever to do with taxes.

    The UBS scandal was terrible indeed but, the vast majority of those people were Americans living INSIDE the U.S.while hiding money “off shore”

    If you haven’t lived inside the U.S. for decades your bank accounts down the street from you, which you need to live, pay bills, deposit your paycheck are NOT “off shore” to any other nation in any sense of that word except for the U.S. and Eritrea.

    The U.S. needs to go to the international norm of residency based taxation then implement something like FATCA. It’s doing nothing as it stands now especially here in Canada but, protecting bankers while selling out average low to middle income families.

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  34. knuckleheadedliberal says:

    Ruth: “The U.S. needs to go to the international norm of residency based taxation then implement something like FATCA. It’s doing nothing as it stands now especially here in Canada but, protecting bankers while selling out average low to middle income families.”

    I doubt very many people in the US know about this situation and it doesn’t seem like an issue many politicians are going to get behind to try to fix because it isn’t going to affect their constituents. And protecting bankers while selling out average people is what we do best down here. What is a plan to affect policy?

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  35. bubblebustin says:

    The problem is Dave, there are a vast many more Canadians than Irish who have very strong business and family ties with the US. With the integration of tax information at the border, Canadians won’t be able to circular file a demand letter from the IRS without serious repercussions.

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  36. Two Cents says:

    my father fished the south shore of long island his entire life.
    since a kid I pulled in gill nets along side him many many times.
    I remarked once that fat fish get caught in the net.
    he said no, they’re the ones that often break through, skinny fish get through but they’re the main course. it’s the middle fish that pay the check.
    as a kid I didn’t recognize the sarcasm as a form of humor.
    mom was a waitress, so I figured it was always about food with him or something.
    somewhere in here, there’s a jesus, fishing of men, irs agent joke. something about net gains.
    I get sarcasm now

    I dream about having enough money to consolidate, move to a third world country like say beliez (after I learn how to spell Belize) live as an indigenous local would, giving me an ability to live out my years with the little money that it will be that i’ll have. right now I do live like an indigenous local from beliez, including the amenities of urban decay, poverty, foreign tongues, etc,etc, and all this at a higher premium, because it is more expensive to be poor in America.

    ps. st. peter would work too. getting yelled at by jesus for keeping poor records
    “they’re gonna nail you for this one”

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  37. Ken Hall says:

    A number of people raised the point that thousands of dollars in accounting fees were required to be expended to accommodate the filing of said US tax documents. In as I, and multitudinous other tax payers, utilize relatively inexpensive personal computer tax programs ($20-$200) why would the information provided by such programs not suffice, without going to a human accountant?

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  38. Lucy Martin says:

    Ken, if only it was that easy! I suppose tax-prep programs for citizens abroad may exist – and do an adequate job – someday. But I haven’t seen any yet. I suspect the customer base is too small, too variable and too specific to develop such a product in the first place.

    Additionally, some of the cases I’ve heard about require retroactive fixes too. Some who only discovered this issue recently must re-file for past years to come into full compliance. (That adds the potential of needing to re-file previous year’s returns in the country of residence too, depending on what comes of re-filing in the USA. A double nightmare.)

    It’s true that parts of this are fairly straightforward – if intrusive, such as reporting “foreign” (local) bank accounts. Other parts can get very complex indeed, even if no taxes are owed in the end. Either way it’s expensive – in terms of your own time or fees paid to experts.

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  39. maz57 says:

    Just a few notes for the homelanders who can’t seem to understand what all the fuss is about:

    1. This $97k that can be excluded from your income (thus reducing your tax to zero) that everyone refers to is called the Foreign Earned Income Exclusion. This means income earned from employment. If you are retired like I am and don’t have employment income then it is not applicable. And yes, there is the Foreign Tax Credit; yet another stupid form. But it only works for income taxes, not all the other taxes we pay.

    2. The interaction of the Canadian tax code and the US tax code makes it virtually impossible to do proper retirement planning because ordinary Canadian investment vehicles are punitively treated by the US tax code. The Canadian equivalent of all those nice IRAs, 401ks, etc are “foreign trusts” in the eyes of the IRS. That creates a reporting nightmare that no tax software can deal with. That’s why you get the high quotes for professional help to do a US return. There are very few Canadian accountants that can even do a US return. And a simple mutual fund is a Passive Foreign Investment Company (PFIC). Trust me, you don’t want to own one of those, either. Even more forms that the software can’t handle.

    3. If I’m lucky enough to realize a nice gain on the sale of my principal residence, do you really think I’ll feel good about sending a chunk of the proceeds down to Uncle Sam? I’d rather keep the money to fund my retirement. The US government sure as hell won’t.

    4. I don’t have “foreign” accounts. I have accounts in the town I live in. Why do I have to send the IRS a list of my “foreign” accounts every year for the rest of my life. And with FATCA, comes all the reporting on “specified foreign assets”. (You know, those forms all you homelanders don’t have to file.)

    5. I’m not an American living in Canada; I’m a Canadian living in Canada. The US is a foreign country to me; is it really that hard to understand? I’m not ever going home…I am home.

    6. For the inevitable jerk who says “well if you don’t like it, why don’t you just renounce?” I have. The trouble is, not even renouncing fixes this mess. After renouncing you have to file an “exit tax return” for assets that were never in the US in the first place! And the exit tax isn’t income tax, its confiscation, pure and simple. Punishment for leaving the plantation, I guess. I could go on, but I won’t.

    P.S. Good article, Lucy!

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  40. Pete Klein says:

    Citizenship based taxation and Residency based taxation makes sense if you care to think about it.
    There are benefits and obligations of being a citizen of any country. The same holds true for where you chose to live. It is only right that you pay something (taxes) for those benefits.
    Residency is also a key component of taxation. You pay taxes in NYS if you live here. You also pay property taxes in a locality if you own property in that locality.
    No one likes to pay taxes. That is a given. But don’t dream for a moment that you can take advantage of what is provided by a country, state or municipality and escape paying something from your income for what is provided.

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  41. maz57 says:

    Well Pete, I’ve thought about it a lot and my conclusion is that residence based taxation makes sense and citizenship based taxation makes no sense at all.

    I agree that no one is really fond of paying taxes but we also all realize taxes are the price we pay to live in a civilized society. We pay taxes to fund the services we receive in the place we live. That’s residence based taxation. And its not just me, the world is in agreement on this; RBT is the world standard.

    Citizenship based taxation, on the other hand, is an aberrant relic of the US civil war. It makes no sense at all in the modern world. As a Canadian living in Canada what benefit do I derive from US citizenship? The US government doesn’t doesn’t build the roads I drive on, run the hospitals that heal me when I get sick, or operate the schools that educate my children. The only possible benefit US citizenship offers me is the right of return. Every other country in the world automatically grants that right to it’s citizens and welcomes them home without hounding them to the ends of the earth to extract an annual pound of flesh. (By the way, as a Canadian passport holder the US automatically grants me visa-free entry for up to 6 months a year; that’s more than enough. That right of return is therefore of no value to me.)

    The only reason the US can get away with this nonsensical taxation system is because it is the only country (except Eritrea) that practices it. If other countries followed suit, world tax mayhem would soon result as jurisdictions fought over the right to tax their hapless citizens wherever they lived. That’s why the world community has agreed on RBT as the world standard. Its long past due for the US to align with the rest of the world. Does the US really want to be part of an exclusive club of two with Eritrea, a thoroughly discredited despotic regime? That’s really great company, huh? (Did you know the US joined the other countries of the world signing a UN resolution condemning Eritrea for it’s CBT? How hypocritical can you get?)

    I really don’t understand why the US insists on continuing with this obviously unworkable system that causes genuine hardship for its far-flung expats. Persisting with CBT and the unilateral imposition of FATCA is creating world-wide resentment that will ultimately work to the detriment of the US. Can you play that tune on your violin?

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