The Streamlined Procedure – streamlined in name only, unless you are a US tax professional

It’s been a few months since my last post, in which I explained why I decided, after much consideration, to enter the US tax system. For those who are not well-versed on the topic of the United States’ burdensome and complex tax treatment of its overseas citizens, I suggest that you read my story from the beginning or just take my word for it that it is not a straightforward decision to make, even for someone has never knowingly broken the law.

In these last months I have opened up a blank Word document to continue writing my story from where I left off a few times, but lately it’s been hard to muster up the energy to keep writing about this.  In her final blog in an excellent series about FATCA and her reasons for renouncing US citizenship, Rachel Heller suggests that many American expats who have passed the initial moments of discovering they are subject to citizenship-based taxation and FATCA eventually start to experience ‘indignation fatigue’.  When I think about how much time I have spent thinking and worrying about the constraints these policies place on my life, the general unfairness of it all for every long-term overseas American, and what seems like a total lack of interest and understanding from US politicians, media and average Joe on the street in the US, I would say that my lack of motivation to keep ploughing on with the blog is in some part to do with indignation fatigue. That, and the fact that I was in the midst of preparing my US tax return and FBARs on my own for the very first time – and there’s only so much of my mental capacity I am willing to devote to this at any given time.

Now that my 2015 return is out of the way, and I’ve had a brief mental vacation from thinking about CBT, here I am – back at the campfire to continue my tale.

Streamlined Compliance Procedure

I decided to enter the tax system using the streamlined compliance procedure, which does not feel streamlined in the slightest. I had to gather information about my bank accounts going back six years, and information about my income and taxes paid in the UK going back three years. Most of it was information I would never need for UK reporting purposes, so of course I hadn’t been diligently keeping the necessary records (for example, what was the maximum, exchange-rate adjusted balance of the random savings account I use to deposit birthday cheques from my grandmothers in 2009? And for all of my accounts, in each year for six years? Should anyone actually care? Well, apparently the US Financial Crimes Enforcement Network does, and I had to find or estimate this information for my stack of ‘Foreign Bank Account Reports’ (FBARs).

I painstakingly got all the information together and spread it all over the living room floor in little categorised piles one sunny Saturday morning to ‘do my streamlined filing’.

Somehow, after eight hours of (frankly) effing around with IRS guidance and my little piles of paper on the floor, I still hadn’t made any significant headway in the so-called streamlined procedure. The sun was gone. Surely it couldn’t be so complicated – why was I finding it so impossible to just fill out some forms?

There were so many little questions that cropped up at each line that weren’t always answered by the guidance. Should I fill that in? What about this? What is the difference between this and that option? Do you just leave things blank if they don’t apply, or do you write ‘N/A’? What if you don’t have an exact record of something anymore? If I’m preparing a filing for 2011 and it’s now 2015, should I be using the form that was issued back in 2011 or should I use the current form and adjust the dates? Which accompanying schedules am I meant to be filing in addition to the 1040? Which 1040 should I even file?

If you are an American used to filing US returns and these seem like stupid questions, might I point out that in the UK, if you are employed your income tax is automatically figured and deducted by your employer, and HMRC (the UK’s IRS) will check at the end of the tax year whether you’ve paid the correct amount or not. In other words, I’d never actually ‘done’ a tax return before – it was always done for me. Now, all of a sudden, I was attempting a multi-year filing to a country where I don’t live, which has rules and terminology I wasn’t familiar with. Reading stories of mistakes in streamlined procedures leading to the IRS rejecting whole filings, I was not prepared to take a best-guess approach.

At this point I started to second-guess myself for deciding to file at all, if this was what I was letting myself in for each year. I tried for another couple of hours before throwing my hands up and enlisting the services of a professional tax preparer specialising in expat taxes. For a mere 1500-ish dollars (the best deal I could find), they could do my streamlined filing for me!

So, I spent the Sunday filling in the tax preparers’ purpose-built survey online, which translates the items on the tax return forms and puts them into words I could understand.  I assume they then press a button and the impenetrable tax return forms are filled in with the correct numbers and schedules as if by magic. It must be a pretty lucrative business model – I guess the ‘streamlined’ aspect is for tax preparers rather than individual filers. Any bitterness I feel about having needed to pay a professional to prove I owed nothing (I repeat, zero dollars) to the US government is squarely aimed at whoever designed these forms and these rules. The company itself was helpful, and I used them again for my next filing (the next year’s deadline came up shortly after I finished my streamlined filing, and I couldn’t bear the thought of trying to do it by myself again).

Some time after sending the preparers my details, I was sent the near-completed streamlined filing and told there was one more step I needed to take before I could sign the forms and send everything off to the IRS, and it was something the tax preparer could not do for me (although they could provide advice at $X hundred dollars an hour): I had to write a statement explaining why my ‘failure to file’ to that moment had been ‘non-wilful’.

It felt more than a little surreal to be penning my life story with justification for why I did not know that I was supposed to file taxes to a country where I haven’t lived since I was a kid – in the knowledge that this would be assessed and judged by some faceless IRS agent. It took a few drafts before I managed to minimise any passive aggression in my response- which is not easy, I learned, when you are trying to justify why you didn’t know something which is patently absurd (I didn’t know because… Like most people I don’t read about foreign tax policy for leisure? Or because no other country in the world besides Eritrea has this arrogant policy?)

As a quick aside, I became aware that the instructions for this ‘statement’ became even more stringent after I did it. Here is an excerpt of the instructions you can access from the IRS website now:

“Note: You must provide specific facts on this form or on a signed attachment explaining your failure to report all income, pay all tax, and submit all required information returns, including FBARs. Any submission that does not contain a narrative statement of facts will be considered incomplete and will not qualify for the streamlined penalty relief.

Provide specific reasons for your failure to report all income, pay all tax, and submit all required information returns, including FBARs. Include the whole story including favorable and unfavorable facts. Specific reasons, whether favorable or unfavorable to you, should include your personal background, financial background, and anything else you believe is relevant to your failure to report all income, pay all tax, and submit all required information returns, including FBARs. Additionally, explain the source of funds in all of your foreign financial accounts/assets. For example, explain whether you inherited the account/asset, whether you opened it while residing in a foreign country, or whether you had a business reason to open or use it. And explain your contacts with the account/asset including withdrawals, deposits, and investment/management decisions. Provide a complete story about your foreign financial account/asset. If you relied on a professional advisor, provide the name, address, and telephone number of the advisor and a summary of the advice. If married taxpayers submitting a joint certification have different reasons, provide the individual reasons for each spouse separately in the statement of facts. The field below will automatically expand to accommodate your statement of facts.”

Do they realise how invasive these instructions are for somebody whose entire life is lived (and thus financed) outside of US borders?

I digress. I finished my statement (which mercifully did not need to go into the detail which is now required), and the filing was ready to go! When I filed the IRS only accepted paper filings for the streamlined procedure, so I had to print it out at an internet café because I didn’t have access to a printer at home. Did I feel comfortable printing out around a hundred pages of personal financial data, including six years’ worth of bank account details (account balances, account numbers), my social security number, my income tax return figures for the last three years, my home address, my employer, etc. etc. in a questionable internet café? No, I did not feel comfortable. But it was the only place I could print at that time and because I was running up against the deadline of the next tax filing year, I feared that my streamlined filing could be invalidated by being out of date. I just wanted to send the damn thing and be done with it.

I stuffed the 100 pages into an envelope and sent it off into the ether of the international postal system. Like, actually into the ether, because the US Postal Service lost my package and it still hasn’t been returned. Who knows where my nice little goldmine of personal data, ripe for identity theft or fraud, is floating around? I sent another filing after a couple of rounds with USPS’ and Royal Mail’s respective customer services departments, who both told me it was the other’s responsibility to figure out where my package was.

After streamlined filing 2.0 was sent off, that was it. I was told not to expect any acknowledgement whatsoever, so one day, about five months later, when I saw a letter on the doormat from the IRS with my name on it my heart was in my throat almost immediately, thinking it could only be bad news.

Well, it wasn’t – they actually sent me a letter to tell me they had filed my returns “under the streamlined procedure as I had requested” or something along those lines. A sigh of relief ensued. I suppose we could call this a small happy ending to the streamlined chapter of my story? One of the things this sorry US tax saga is teaching me (and my god, it is teaching me a lot) is to hunt for that silver lining. So far though, the silver lining has been looking pretty thin.

As always, I welcome your comments. The next instalment should bring me up to the present day of my personal account, after which I’ll start writing about the wider issues of CBT, related policies and dual citizenship for Americans overseas in general.

The Streamlined Procedure – streamlined in name only, unless you are a US tax professional

My decision to enter the US tax system

In my last post I described the options facing me – a UK citizen living, working and paying taxes in the United Kingdom – when I had just discovered that I am subject to US tax rules which say that no matter where I live, I should be annually filing federal income tax returns to the USA’s Internal Revenue Service (IRS), and reporting detailed information about all of my UK bank accounts to the Financial Crimes Enforcement Network. These rules apply to me because I am an American as well as a British citizen. The US government considers me to be a US taxpayer not unlike an American living within the States, even if I haven’t lived in the US since I was a child, rarely visit, make no income in the US and have no assets there. The fact that I hadn’t been filing meant I was considered as a delinquent non-filer under US tax policy.

In outlining the different options I had for addressing this newly-discovered ‘delinquent non-filer’ status, I showed that even though I was a young person from a normal background just starting out in adult life, there were no easy solutions or certain outcomes. Briefly, the main options were to stay outside the system, enter the system and try to live compliantly, or enter the system with the intention of renouncing my US citizenship in the future.

Deliberations and doubts

In deciding how to deal with the situation of being a tax subject of the government of a country where I don’t live, but where I have an emotional attachment and may wish to return one day, I have had to consider and question many things that I once took for granted, including things about myself and how I wish to live my life – on one level, the economic and family choices I will likely make in the next decade or two, and the extent to which US laws will impact on those decisions. On another level, I have done a fair amount of thinking about my own principles and how I think I should act when subjected to laws like this, which I believe to be unjust. The reasons on which I based my decision were a combination of these considerations, outlined below.

Risk of entering the system versus the uncertainty of not entering the system

As long as I have an idea of the size of a risk, I’d like to think I have the faculties to make a somewhat informed decision about whether to take it or not. What I don’t want to live with is unnecessary uncertainty – like that of having an invisible IRS club hanging above my head, and not knowing if, when or how badly it might start to strike on any given day of my life.

There were risks associated with entering the system – in terms of potential penalties and compliance fees. There was a lot more uncertainty about my future exposure to penalties and costs if I stayed out of the system. Maybe they’d never find me. Maybe they would and it wouldn’t cost too much to fix (if, say, the laws had changed by then) or maybe they would find me a few decades down the line and I’d be facing financial ruin of my hypothetical family or business, as is happening to some older folks in this situation today. I don’t want to spend my life living anxiously under unnecessary uncertainty.

Of course, in the case of entering the US tax system, it wasn’t possible to predict the fines or penalties I might face, but I knew how many assets I had (not many) so there would be a limit to how much they could physically take from me now versus how much they could take in the future after I have been saving and investing. If I entered the system now and they decided to fine me however many tens of thousands of dollars for not telling the Financial Crimes Enforcement Network about the bank account I use to pay for my groceries, well then, they would just have to send an IRS agent to London to exact a few pounds of my flesh instead, because I just didn’t have that sort of money.

Freedom to travel to the US

Some people in this situation decide not to enter the US system and resolve never to visit the US again (if they ever had) and/or pretend that they aren’t American to whoever asks, until these policies are changed. I myself have received this advice from numerous acquaintances I’ve discussed these issues with– “Just don’t enter the system and don’t go back to the US!” (and subsequent to coming into the system, “Why didn’t you just hide? I wouldn’t have bothered…”).

The way I see it, even if I was prepared to never go to the US again, then I would be better off formally renouncing my citizenship anyway – being out cleanly and without a doubt (as far as I understand that to be possible) – rather than hiding and hoping they don’t find me. At least by renouncing I’d be able to visit the US as a solely British citizen on a tourist visa. What would be the point of staying an American if it meant hiding – effectively exiling myself from the country, denying being American, hoping the IRS don’t find me and passively waiting for things to change?

To comply or not comply on principle

I can say wholeheartedly that I believe the US’ tax treatment of overseas Americans is wrong. I can’t see how anyone would perceive the concept of citizenship-based taxation as anything other than the US government treating overseas Americans as the economic property of the US tax system, rather than as citizens who contribute their fair share to the countries where they live, work and receive public services. Further, I believe that recent enforcement and financial surveillance efforts by the US government under Obama (like FATCA, passport revocation) are damaging overseas citizens’ and their families’ rights to free movement, to privacy and to freedom from excessive fines and penalties.

If I feel so strongly about it, maybe I should have refused to enter the tax system on principle. However, the way I saw it, refusing to enter the system would only mean anything if I did it vocally; i.e. stand up and publicly announce to the relevant authorities that I am choosing not to comply with rules which I believe to be counter to basic civil liberties, and that the IRS, FinCen and any politicians or officials supporting the status quo can all go take a flying FBAR. Silent non-compliance, on the other hand, would look no different to the powers that be to hiding in the shadows and hoping it will all blow over.

As strongly as I feel about these policies, I didn’t wish to be vocally non-compliant for three reasons:

  • I had family members living overseas who were yet to make their own choices in these matters.
  • I felt that empathy with our position from homelanders would be more forthcoming if I expressed my views from the position of someone who is trying to follow the rules, or in the future; as someone who tried. Many homeland Americans aren’t aware or don’t understand these problems, and the fact that the issues pertain to taxation makes our task of expressing our complaints all the more difficult, as people often stop listening early in the conversation if they assume you ‘just don’t want to pay taxes’.
  • I am a tiny little minnow in all this. If even London mayor Boris Johnson concedes to the IRS after an initially defiant stance when asked to pay what they demanded on the proceeds of the sale of his London house, how long would it be before I’d have enough savings to regret my earlier remonstrations? For the potentially tiny impact someone like me could have in this debate by actively refusing to cooperate, the personal risks could be large in the future. Renouncing citizenship and publicly explaining why would likely be a more effective message to send, and would have the benefit of limiting possible repercussions later on.

My decision

For all these reasons, I decided to enter the system, but with a caveat – I would play ball for at least the five years of filing needed to enable me to renounce citizenship as a non-covered expat, take steps in those years to do my small part in arguing against the current system (and vote accordingly), and if there is not sufficient progress in the policy landscape in that time, I will pay my two thousand, three hundred and fifty dollars and say goodbye to my US citizenship- sadly, but in the knowledge that I tried as much as reasonably possible to remain both free and American.

 

 

I welcome your comments below. I’m especially interested to hear from US expats or accidentals on whether or not you chose to enter the system and why.

My decision to enter the US tax system

Assessing my options for addressing my newly-discovered ‘delinquent’ US tax situation

I described in my last post how, at the tender age of 23, I arrived at what others have called the “oh my god” moment – discovering that the government of a country where I haven’t lived for many years apparently expected me to be filing and potentially paying taxes, simply for having the citizenship of that country.

I am speaking about the United States’ unique policy of citizenship-based taxation (CBT), which means that from the US government’s perspective, it doesn’t matter that I have resided in the United Kingdom (where I am also a citizen) with my family since I was a minor. As a US citizen, “the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether [I am] in the United States or abroad. [My] worldwide income is subject to US income tax, regardless of where [I] reside.”

In reality this discovery was the first in a long series of “oh my god” moments as I attempted to unpick and understand the implications of citizenship-based taxation, which is the topic of this post.

The more I learned, the clearer it became that as long as I:

a) remain a US citizen, and

b) refuse to uproot my life to move to the US under duress;

I was, am and forever will be running the gauntlet of the USA’s extraterritorial tax system – with its complex, onerous and punitive rules and enforcement mechanisms on overseas citizens – because my life is by definition “offshore”.

What could I do to square my situation and not be ‘delinquent’?

On discovering the initial CBT bombshell I panicked because I wasn’t ‘compliant’, which was disturbing in itself for someone who has always been law-abiding. “So what?” says the rational but uninformed onlooker (including myself, as a first reaction), “just start filing this year and all will be well.” Unfortunately, as one becomes more informed about the USA’s taxation policies for overseas Americans, straightforward responses show themselves to be unworkable or to carry risks that aren’t always possible to estimate.

It wasn’t clear what I should file

First, I couldn’t confidently figure out exactly what forms and schedules I needed to file for the current tax year as an overseas citizen. I consider myself to be an intelligent person, but I didn’t find the IRS instructions to be user-friendly in the slightest.

I tried to seek information elsewhere, visiting message boards online which offered conflicting amateur advice and plenty of horror stories about honest mistakes being fined by the IRS. I looked into getting professional help, but the prices that these niche, international tax specialist firms were charging was an awful lot of money for 23-year-old me, and filing with professional help still seemed to be risky when I read that even tax preparers struggle with the complexities of overseas citizens’ returns, and have been known to make mistakes for which their clients have to pay. There was also the profound indignation I felt towards  paying an accountant thousands of dollars to show that I don’t even owe any money to the US (given that I earn my salary and am taxed on it in the UK).

FBARs

I then discovered that there were potentially large penalties, or even the threat of incarceration, involved because of certain things I hadn’t been filing, even if I hadn’t owed any actual taxes. In particular, because I hadn’t been reporting any of my UK bank accounts to the US Financial Crimes Enforcement Network every year[1], I could theoretically be liable for imprisonment under US law, or face large financial penalties – $10,000 per account for every year not reported is the minimum fine for when the IRS agrees that you didn’t know you had to file, or that you were acting in a ‘non-wilful’ way.

With the concept of ‘wilfulness’ being somewhat nebulous to prove (how do you prove you didn’t know something?) and open to their own interpretation, it seemed like there was some risk, however impossible to quantify, that entering the system could create a nasty situation for me before my adult life had really begun. Again, as someone who had always been law-abiding, all this talk of penalties and prosecution was terrifying, even if the chance it would affect me was small.

PFICs

I then discovered more alarming news. Back in the days when I had thought I was free to save and plan for my future in the country where I live, I decided to start saving a bit of money and made small investments in some UK-listed mutual funds – nothing remotely exotic, just small holdings in things like a FTSE 100 tracker fund.

According to US tax law, I shouldn’t be investing outside of America. If one happens to have US citizenship, even a FTSE 100 tracker fund held in the UK by a UK citizen and resident is a “passive foreign investment company”, or PFIC, to the US government. A PFIC has one of the most complex tax forms that need to be filled out for every mutual fund held (once one has more than $25,000 invested across non-US mutual funds), with the IRS estimating each form to take 22 hours of preparation per year. They carry a very punitive tax rate (39.6% or up to 50% of capital gains).

The chorus all over the internet from professionals and armchair accountants sang unanimously: “do not buy or sell any mutual funds ever without legal and accounting help!”  Well, s***. I was far under the $25,000 mark but I stopped my monthly payments going into my investment account and I haven’t bought or sold anything since – all I am comfortable saving while subject to this system is cash.

How I should file – quiet disclosure, Streamlined Compliance Program, OVDP?

Beyond the question of what to file was how to file as a ‘delinquent’ who was not in the system yet. It turned out I couldn’t just start sending in tax returns from the current year – I would have to ‘back-file’ a number of years or risk the IRS punishing me for earlier non-filing (which, according to forums and tax advisers’ websites, they had been known to do).

So, perhaps I should just send in filings covering the last few years and then keep filing each year going forward. That surely wouldn’t be too difficult. Except that the IRS refers to this approach as “quiet disclosure” and discourages it strongly. They want non-compliant overseas filers to formally announce their non-compliant status when they file for the first time by entering one of two main programs: the ‘streamlined’ procedure (file three years of federal returns and schedules, five years of bank account reporting, and an explanation of why your non-filing was non ‘wilful’) or the Overseas Voluntary Disclosure Program (8 years of tax returns and FBARs, plus any taxes due, interest charged on the taxes that weren’t paid before, a 20% penalty on whatever was owed, and often a 27.5%, or in some cases 50%, penalty on the highest offshore account balance). Streamlined clearly looked better from a financial perspective, but then one has no assurance that the IRS will agree that the non-filing was ‘non-wilful’ (so they could decide to prosecute you), whereas the OVDP is meant to protect you from any chance of prosecution (in exchange for inordinate amounts of money and by the looks of it, whatever sanity you had left).

Trying to come into compliance means exposure to the risk of penalties

So, the ‘rational’ choice to enter the system and start filing turned out to to have a lot of risk attached to it – the risk of being fined for making mistakes on complex forms that I have never filled in before, the risk of not filing all the forms and schedules I am supposed to, the risk of being fined because the IRS might decide that I wasn’t reporting my bank accounts on purpose, the risk that I couldn’t continue to invest optimally for my future, because once I was in compliance I would no longer have the excuse of ignorance to keep saving into my UK mutual funds without encountering ‘PFIC’ filing.

“So,” says our rational onlooker defiantly after agreeing that this is all a ridiculous mess, “just don’t bother entering the system. Ignore it, they’ll never find you or come after you.”

FATCA

I probably would have been content to kick the can down the road and ignore the situation for a while, but then I learned about FATCA. FATCA (the Foreign Account Tax Compliance Act) was pushed through by the Obama administration. It is a law which requires Foreign Financial Institutions (i.e. banks and other institutions operating outside of the US) to report to the IRS the accounts of their American customers, or face a 30 percent withholding penalty on their transactions in American financial markets. Naturally, being cut off from US markets would be like telling the US to pull the trigger on the gun pointed at their head for many international financial firms, so they have all signed up and agreed to share the information, and/or decided to dump their American customers for being too much compliance hassle (especially smaller customers).

Suddenly, I feared that my banks in the UK might already know that I was a US citizen (I opened the accounts a long time ago and do not recall whether they asked me about my dual citizen status). Even if they didn’t know, it could be a matter of time before they ask me to confirm or deny it. I read about others in Europe receiving letters asking for legal proof that they are not American, or saying that the account will be closed because they are American.

What would I do if my banks asked me if I’m American? Lie to them? Pretend that I’m not American for the rest of my life and hope that the rules change? Tell the truth and potentially have my accounts closed, or have my details passed to the IRS before I’ve decided what to do? All of this heightened my paranoia that it was only a matter of time before the IRS was coming to ‘get me’. I didn’t yet have enough money saved up that I would reach the FATCA reporting requirement of $50,000, but after some years of saving money I would, so it didn’t make sense to ignore the situation.

Move to the US to escape the nightmare?

At this point the rational onlooker, racking their brain, often asks, “why don’t you just go back to the USA if it’s so complicated to live outside?” Of all the potential options available to me for dealing with this situation, this the very last thing I would do. Why should I be forced by bad policies to leave my home in Europe and come to live in the US when I am doing absolutely nothing wrong? It’s a human right to be able to freely leave and return to one’s own country (see Article 13 of the Universal Declaration of Human Rights). Surely it is an obvious corollary right to be able to leave and NOT return to one’s country.

Damned if I did, and if I didn’t

So, to recap, the options so far were (in no particular order):

1) Enter the system with specialist professional help, incurring professional expenses and risking penalties for previous non-filing and for mistakes or omissions the preparer might reasonably make;

2) Enter the system without professional help and face a bigger risk of penalties for omissions, mistakes, and penalties for previous non-filing;

3) Do nothing, and risk getting found out later on and having to incur even bigger expenses and penalties than in options (1) and (2);

3.a)  Lie to my banks if they ask me if I’m American, risking whatever punishment that would entail under UK law;

3.b) Freely admit to my bank that I’m American if they ask, and risk having my account shut and/or being highlighted to the IRS without my knowledge by my own bank and the UK government;

4) Move the United States, radically changing the course of my life for no other reason than to be able to live a normal financial life and save for retirement.

 

Renunciation: the nuclear option

There was, and is, one final, nuclear option – to legally renounce my US citizenship. This would mean shedding my US passport and right to return to the country forever. If I had never lived in the US, or was sure I never wanted to live there, this option would make the most sense.

However, I’m not a so-called “accidental American”. I do have an emotional attachment to the US through my family and childhood experiences. As I described in my first post, I have spent my life considering myself to be as American as I am English, and I hate the thought of telling my father and relatives that I am not a US citizen anymore. My citizenship belongs to me as a birth right and I feel that it is wrong on a very deep level that anyone would be forced by tax policy to consider giving up their citizenship to live a free and normal life.

That said, even if I decided that the situation was totally unworkable in the long run and renunciation was the least bad option, it would not be an easy task. I would still have to enter the tax system and be able to prove five years of compliance (thus exposing myself to the penalty risks and expenses). I would then have to pay $2350 to complete the renunciation process, which is almost one month of the average gross salary in the UK, and a price much higher than any other country’s renunciation fee.

All this, and for what?

In the period after the initial “oh my god” moment I felt seriously paranoid, scared and confused about what I should do. The whole concept of citizenship-based taxation was so bizarre to me, and its enforcement rules so disproportionate, that trying to come to terms with it all could be best described as disorienting. ‘Surely this is all just a big misunderstanding,’ I often thought, ‘or a bad dream!’

I didn’t even speak to anyone outside my immediate family about the situation until after I decided to become compliant (a decision I will explain in my next post), because I was worried that people might think I was somehow to blame.

It is bad enough that innocent Americans (dual or otherwise) overseas are discovering these rules by accident, but it is shocking that when looking to understand and make things right, we are faced with such an abysmal and often terrifying set of choices that the dramatic and irrevocable act of giving up our citizenship is on the shortlist of options for dealing with it – and often seems to be the only real option to live freely and normally once more.

Why does the US government want to make our lives so difficult when we have done nothing wrong? Why are they burdening us to continually prove that we are innocent, and invading our privacy using third parties and foreign governments to make sure that we’re telling the IRS the truth? Why are they terrorizing us with threats of bankrupting penalties, incarceration and (very recently) passport revocation? What exactly are they hoping to achieve, when the vast majority of us do not even make enough money to owe taxes to the US?

Can they talk about the ‘land of the free’, or being ‘leaders of the free world’ with a straight face anymore?

 

 

[1] The reports are known as FBARs, and all Americans overseas have to file them for each of their local accounts annually if the overall balance is $10,000 or higher at any time in the year

 

 

Assessing my options for addressing my newly-discovered ‘delinquent’ US tax situation

Finding out I was a 23 year-old US tax “delinquent”

The real beginning of my personal experience with US citizenship taxation was the moment I started to become aware that I was an unwitting US tax “delinquent”. With this part of my story I wish to argue against the commonly-espoused view by US politicians and a number of sanctimonious online commenters that citizens living overseas should know about their US tax obligations – and that any resulting problems we might face in our US tax affairs are ‘self-inflicted’.

I explained in my last post how I was born a UK-US dual citizen, and how my family ended up settling in the UK in my early teens after my childhood in the United States. I discussed why I have always considered being British and American as part of my identity, despite spending over a decade in the UK. I wished to highlight with my own example that being an expat often happens because life just works out that way.

So, how did I discover the USA’s tax laws which directly affect me, a long-term overseas citizen, and all other US citizens living around the world (of which there are estimated to be over 7 million)? It wasn’t thanks to any outreach from the US Government or IRS, nor from the US Embassy in London. Not a phone call, email, letter, advertising campaign – nothing. I found out by accident. A chance conversation with a near stranger became the start of my discovery of US tax filing obligations I never knew I had.

It all began during a client dinner in the City in London one evening. I was sitting at a large table with around a dozen people. Half of them were our firms’ clients, and the other half were my colleagues. The most senior employee of the client firm present, an American, noticed my accent and asked me where I was from. I explained that I was a dual citizen, and that I had grown up in the US. After a few polite questions about where I had grown up, and when I had left the country, he abruptly asked:

“So, do you file your US taxes?”

Conversation must have hit a lull, because as he asked his question the whole table went quiet, and everyone was listening. I was taken aback by the question, partly because it was very direct, but mainly because I didn’t really understand it. Why would I file taxes to the USA? I haven’t lived there since I was 13 years old. I only started my graduate job one year ago, and anyway I pay plenty of income tax, council tax, VAT, national insurance etc. in the UK…!

I glanced over at my Managing Director, and saw his expression change to one of alarm. Was his junior analyst about to casually announce to a table full of clients that she’s some kind of cross-border tax evader? Even though I didn’t really understand the question, I figured that “No” was the wrong thing to say given the context, and asking for clarity was probably a more awkward way of saying “No”, so I lied: “Yes…”

The client turned to the rest of the table, declaring nonchalantly: “It always amazes me how many Americans overseas don’t know they still have to file taxes to the IRS.”

With a chuckle, he changed the conversation. My MD’s face relaxed once more, but I was left with a feeling of unease.

Fairly soon after the client dinner, with the unease gnawing away at me, I looked up the IRS website for the first time. Here is what it says on a page about overseas citizens:

“If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside.”

“Wow. What on earth?!” was my initial reaction. I had to read it a few times, and looked it up on other websites to make sure I had understood correctly. In the months that followed, I spent hours and hours reading IRS tax forms and guidance and trawling social media, news articles and tax adviser websites. I read horror stories, conflicting sets of guidance and sponsored articles by tax professionals. Bit by bit I came to discover several ‘bombshells’ regarding the tax obligations that my US citizenship imposes upon me now and in the future, and I became more and more angry, confused and anxious about what I should do next.

There was no reason for me to know I was supposed to file to the IRS when I had left the US as a child and never gone back. No other country in the world taxes people based on their citizenship (except Eritrea, which has been condemned for the practice by the UN). Like most people, I don’t have an academic or professional interest in tax policy matters, certainly not the tax policies of a country where I don’t live. I haven’t even paid much attention to domestic US affairs in general because I haven’t lived there for so long. My local interests are in the UK and in Europe, where I live. I pay plenty of taxes in the UK, which makes sense as it is where I work and receive services (roads, healthcare, social security, bin collection, etc. etc.)

In a world of residence and source-based taxation, there is no intuitive reason why the USA would demand to be told how much money I have in my UK checking and savings accounts, or how much money I make from my UK employer, when I spend no time at all in the USA, and have zero economic connections or activities in the US. There is also no intuitive reason why they would have any claim to my income or assets when I receive none of the public services which are paid for through federal taxes (though this is an argument for another post).

Even if you accept the premise of the USA’s tax and reporting requirements on overseas citizens as legitimate, it still stands that I discovered the rules, and the fact that I was in breach of them because I hadn’t known about them, completely by accident. There must be thousands, if not millions, like me in this regard.

When recent US Government policy has been to strictly increase enforcement of its tax rules on overseas citizens (including the extraction of penalties for filing mistakes and omissions, or non-filing which is judged at IRS discretion to be ‘willful’), it is unjust that they have made no concurrent effort to directly inform the millions of US citizens living overseas of their annual filing responsibilities. In fact, it is worse than making no effort to inform – they have been closing international taxpayer support services to cut costs.

Regardless of how you feel about the legitimacy of taxing citizens who don’t live in the country and who have no economic ties there, it is a basic taxpayer right to be informed of what the law requires. The US’ tax rules for its citizens overseas are not intuitive and they are not the norm in the world. The US Government’s failure to reach out directly to its overseas citizens to make sure they are aware of these rules, and its decision to cut back support services for international taxpayers, is simply wrong.

Finding out I was a 23 year-old US tax “delinquent”

Half and half – or, how I was born a dual citizen

I have introduced myself to people as half-English and half-American ever since I was old enough to respond to the question, “where are you from?”. It is almost always the first thing I say when asked to tell somebody about myself. I never reflected too deeply on what being half-English and half-American actually meant. It has just been the simplest, shortest way of alluding to certain personal circumstances, like having an American father and an English mother; as well as experiences, like moving between England and the States growing up, that have contributed to who I am.

Since leaving the US at the age of thirteen around a decade ago, my permanent home has been in the UK, with a couple of exchange programs abroad as a student. Since I left the States I have returned to visit only once, in the spring of 2014. It was not a conscious decision not to visit more often, or not to move back when I was old enough to decide for myself. Life just worked out that way. When I was a teenager, my parents were not strongly motivated to fly us kids back and forth to see our state-side relatives – with money certainly being one factor. I might have chosen to return to the States for university, but a quick look at the tuition fees at an average US state college, compared to the fees I would pay in the UK, changed my mind very quickly – I couldn’t afford college in the US. By the time I finished my Bachelor’s in the UK, it just made sense to look for my first job in London, where employers would understand my educational background, and where I could be near my immediate family.

Despite all this time in the UK, and my lack of strongly-maintained social ties to the US, I continued to call myself half-English and half-American. Not everybody has agreed with that definition. An acquaintance (who was neither English nor American) once smirked and said, “yes, but you’re not really American.” Thankfully, most people I speak to aren’t so presumptuous. Many are curious, though, and I am often asked whether I feel like I am “more English” or “more American”.

It is true that I didn’t experience high school or college in the US. I haven’t been to keg parties, Cancun spring breaks and I haven’t tailgated at football games. My Midwestern accent has slowly softened into an indistinguishable one which has flatteringly been called “mid-Atlantic” by one friend and by another (less flattering) friend as “Lloyd Grossman-esque”. I don’t make a huge effort with American holidays. I haven’t registered to vote in either of the last two presidential elections, and there are certain political debates in the States which alienate me.

All of these things are true, but I still consider myself to be an American as well as being English. England may currently feel more like ‘home’ as a result of spending most of my teens here, and because my immediate family is still here, and yet: I vividly remember my American childhood, my father is an American, and half of my family and heritage are American. I am proud of America’s founding principles and the values of the people I grew up around. Any children that I bear will have a right to American citizenship. At any point I could move back to the States, spend the rest of my life there, and I’m sure within a few years the US would feel more like ‘home’ than the UK. My extended time away hasn’t changed or diminished any of those things.

So, am I more or less American or English – and where does the dial rest? For most of my life, this wasn’t a question I felt I needed to answer for myself (as for the acquaintances or friends who asked, I would just reel off one of many non-committal stock answers to move the conversation along). I was content, I suppose, to define myself using this ‘half-and-half’ label for the rest of my life. It’s true that it doesn’t really reveal much, but does anyone ever manage to adequately describe who they are and where they are from, during small talk, interviews or introductions, on any more than a superficial basis?

It was with this relaxed belief that I was free to define myself any way I chose, that I began to discover in 2013-14 certain realities about my US citizenship which have fundamentally changed my carefree attitude towards my national identity and citizenship(s). Where pondering what “half-English, half-American” means would have once been nothing other than an exercise in navel-gazing, it is now something I regrettably must do.

By explaining how I happened to be born a dual citizen, and settled outside of the US due to family decisions during my childhood, I have presented one example of a typical expat – typical in the sense that I live outside of the US because life just worked out that way. I don’t recognize the typical media characterization of overseas citizens as wealthy elites who have made their money and left the country just to avoid paying back into the system. It doesn’t describe me, my family, or any other American I know or have met in Europe or elsewhere. Yet, that is regrettably the brush with which the media and US politicians tar the entire population of seven million-plus citizens residing overseas on a regular basis.

In my next post, I describe how I came to discover why my US citizenship carried significant burdens and risks for someone living overseas long-term.

Half and half – or, how I was born a dual citizen