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

10 thoughts on “My decision to enter the US tax system

  1. Thanks for your latest installment. Very interesting. The problem you have is, less coming into U.S. tax compliance, than livings as a tax compliant U.S. citizen abroad. The older one gets the bigger this problem becomes. The problem is that “U.S. tax compliance abroad” is really a decision to live according to the principle:

    “When in Rome, live as a Homelander”.

    In other words U.S. tax compliance implies strong restrictions on your financial planning and retirement options.

    See:

    https://www.taxconnections.com/taxblog/how-to-live-outside-the-united-states-in-an-fbar-and-fatca-world/

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  2. Patricia Moon says:

    Enjoyed reading your post. Just in case you are unaware of this, you CAN go ahead and renounce and file all the returns at once. It doesn’t mean you have to file one return per year for 5 years and then you can renounce. And there is a program called Streamlined that probably will protect you from penalties………look forward to your next post……..

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  3. Juzzy says:

    This is very close to my thinking. I’ve been filing for the past 5 years. I’ve recently decided to give it another 5 years before I decide to go for a renounciation. In the long run if nothing changes I won’t be able to plan for my reply long term financial future properly. My decision to enter was basically down out of the sheer fear of FATCA. If I had my time over I’d seriously consider ignoring it and just lie about my US citizenship to any financial institution. Being born in Australia, as an Australian citizen there is no reason for any bank to question my nationality, as there is absolutely no evidence of my US nationality on any of my Australian documentation. The same would apply to you. As I have filed though I will probably answer truthfully if asked by the bank. This situation does have an influence on my vote, I recently voted for Sanders in the primary, who is surprisingly sympathetic to us (apparently his brother lives in the UK). Clinton seems to support the status quo although she recently indicated support for the same country exemption. The same country exemption is a complete cop-out, because instead of fixing citizenship based taxation it turns a blind eye to it, as the US basically did before FATCA.

    I could ramble here for ages. Is there a way to contact you directly (eg a designated email for people wanting to share their stories with you)? I’d really like to speak with someone who’s had a similar experience to myself.

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  4. Karl says:

    Great to read your blog. I have just found myself in the same situation as you but fear i may miss the cut off/deadline. can you tell me how you filed and with who?

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  5. JB says:

    I renounced straightaway, having lived in the UK for most of my adult life and having no interest in US citizen passport, voting, or investment privileges. I then backfiled the necessary forms, plus 8854.

    Your blog is interesting. Even if I had wanted to retain my US citizenship, I think I would still have decided to renounce. As observed by a poster above, it’s not easy to save or plan for retirement as a UK-resident US citizen. And there’s little reason for the US to change its policy, whatever various politicians may say. You only have to look at the new US Model Treaty to see that that’s not the direction of travel.

    Maybe you should consider living in the US for a couple of years, during your five-year experiment. That might give you a new understanding of what it’s like to be a US citizen living and working in the US. You might decide to become a single-ist (either US or UK), making your home in one country,, and paying your taxes only to the country you live in, where the money will do the most good for you and your community.

    Or you might find dual life agrees with you, and decide that the privileges of US citizenship are worth meeting the obligations, including taxation.

    Either way, you’ll be able to feel that you’re acting autonomously and not under duress.

    Good luck. 🙂

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  6. Stranded says:

    When I read your blogs, I feel like I wrote them myself. I identify with your thought processes and rationale completely, tho’ our personal circumstances are different.
    I am much older than you. I don’t have time for this. The stress of wondering and doubting has greatly affected my ability to enjoy a beautiful life.
    So I’m getting out. I entered the Streamlined Procedure and declared 3 years and 6 FBARS. I didn’t realize I could have declared 5 at once. This year I am declaring the remaining two years. (2011 and 2015). I pay more to my tax preparers than what I owe the IRS, but I choose to believe it’s worth it.
    My citizenship should come through soon, after which I intend to relinquish.
    I wish you good luck in your journey. I, personally think you are on the right path.

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  7. Adrian says:

    Hi there

    I came across your posts and they eloquently sum up the nightmare that I’ve been going through as well.

    I was born in the US to UK parents, and never thought much of having a US passport until I got a FATCA letter from my bank. Then the horror of the past couple of years started as I realised what those first 4 months of my life in the US meant.

    I found a reasonably priced, helpful accountant (pls email me if you want his name) and went through the streamlined program. I’ve now filed for 5 years and have just renounced – it took around 2 months for my Certificate of Loss of Nationality to arrive after my embassy appointment in London. Now I just have to wait until the start of next year to file my 8854/final tax returns and I hope the nightmare is over (subject to the IRS seeking to challenge the ‘non-wilfulness’ declaration in my streamlined application).

    I do not have the emotional ties to the US that you have (my parents were just there for work for a short period), but my strong advice would be to pay the accountant fees, get your filings in order, and renounce as soon as you can. As other commenters have said, you are young and your financial position relatively simple – get things sorted now and live your life without this hanging over your head. I would not go for the lying option – as they extend their reach/tentacles more and more (who would have thought 10 years ago that governments would be voluntarily signing up to FATCA to breach their data protection laws and hand over account details to a foreign government) you are likely to get stuck at some point and, perhaps more importantly, you don’t want to live your life with the “what if they catch me” at the back of your mind.

    I’d be v happy to answer any questions – the initial emotions of “you have to be ****ing kidding me” and “the b*stards” have generally been replaced with acceptance of just being unlucky and trying to get it sorted.

    Also, have a look at “Hodgson Law” online for advice – it’s a great site and the guy seems know everything there is to know about this stuff.

    Adrian

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  8. Barbara says:

    I want to scream “me too, me too”. I’m an accidental American, born to British parents living there temporarily. They brought me ‘home’ when I was four and a half months old and I’ve lived in the UK ever since. I have zero ties with the US. I’ve been back three times in my life, the last nineteen years ago. I’m now in my forties, married with three children. All our assets are joint, despite my husband being by far the main breadwinner (I was the one who sacrificed my carrier when the children came along) but my husband is British. I do not hold an American passport any more. I haven’t renewed it since I got married as I have no reason to go back. Until last year, my only worry was what if one of the children might meet an American or want to live/study/get married there. Without a US passport I wouldn’t be able to visit them and that would be an awful faff to sort out now.

    Then I got the FACTA letter from my British bank. How I WISH this had happened twenty years ago when things would have been so much more straight forward.

    I decided to go down the streamlined procedure route, filling for 12,13 and 14 (plus 09-14 FBARs) then did the 2015 returns at the same time, all for the June 15th deadline. It has been the most incredibly stressful experience. I have done it all without professional (or otherwise) help because a) I had no idea who to trust and b) even if I did, it would have been prohibitively expensive anyway because it’s not the most straightforward case (amongst other things, in that time we’ve sold a house, lent money to my dad, sold shares and I’ve been self employed) and c) I’m pretty sure I don’t actually owe anything anyway. I would hate to think of how many hours of my life I have spent working through all this.

    I’m now researching renunciation. Quite apart from the lifetime of filing requirements for me (I can’t see me ever actually owing anything) I don’t want whoever has the unfortunate task of eventually being the executor of my (modest) will, having to worry about all the US paperwork. And I just hate all the uncertainty. Being at the mercy of American law and feeling so unrepresented. I feel let down. Betrayed. If this is how they treat their honest, hardworking, decent citizens, then I want out.

    I don’t know anyone else who has been through the streamlined process. What happens next? Will I hear something from the IRS to say whether or not they want to take any further action? Do I assume no news is good news?

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