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.