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.

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My decision to enter the US tax system