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?