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.

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

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

  1. Thanks for your this installment in your interesting series, which I predict one day, you will title:

    “The Renunciation Odyssey”.

    This post is one of the better and more descriptive accounts of someone who is attempting to navigate the U.S. “tax” system for the first time. Your description suggests three things: (1) about you, (2) your situation and (3) the U.S. “tax” system.

    About you – You are obviously an intelligent person who (in a rational system) should have no trouble understanding what is expected. Yet, your description underscores the difficulty that an intelligent person has, in understanding what U.S. tax compliance actually requires. Your words: “Surely it couldn’t be so complicated – why was I finding it so impossible to just fill out some forms?”

    About your situation – The fact that you were able to organize this on your living room floor coupled with the fact that you were charged $1500 dollars (relatively a small number) suggests a very very simple situation. (After all, you are just starting out in life).

    About the U.S. “Tax System” – The U.S. tax system is NOT primarily about taxation. It’s about extracting information. It’s the “information returns” that are the biggest problem for people. As you point out, the result of all this nonsense is that you owed no U.S. tax.

    Information returns, FBAR, and the forced disclosure of information …

    Your post was more interesting to me today than it would have been last month or would be next month. As you know, the FBAR is due on June 30, 2016 and (as FINCEN warns) there are no extensions. In your case, as intrusive and annoying as the FBAR is, you were able to manage it – for basically two reasons.

    First, your situation is relatively simple.

    Second, you have complete control of your information.

    Not everybody enjoys those circumstances.

    I am working with a couple of people (the end goal to secure their freedom through renunciation) who are not capable of managing the FBAR and other information returns. It is very difficult to bring them into compliance (but, my motto is: “The difficult we do today. The impossible takes a little longer”).

    The reasons include:

    – as life unfolds life gets more complicated (more accounts, different kinds of account, shared accounts, etc.)

    – people tend to NOT keep records that are unrelated to the calculation of taxes, per se.

    – it is common to share accounts with those who are NOT “U.S. Persons” and sometimes they will NOT allow their information to be sent to the IRS. This problem is exacerbated when there is a marriage or business breakdown.

    The cumulative effect of these things can result in an “emotional tsumani”. The result: people can be incapacitated from dealing with the requirements of U.S. taxation. Add to this, the incredible unfairness, injustice and abusiveness of the system. (It’s really a form of terrorism directed against Americans abroad.)

    Aging and the U.S. person abroad …

    I perceive this situation to get worse as people get older. I have heard a number of people say (usually over the age of 60) that they feel that as they age they will lose the capacity to understand the forms. How would somebody in these circumstances comply with these rules? How could a person on a pension or a fixed income find the money to pay for professional help? Many of these people are renouncing because they do fear and believe that they could never maintain the compliance, even if they wanted to. They renounce. That’s all they can do.

    Anyway, sorry for the long comment. I guess the point I want to make is this:

    The problems of U.S. tax compliance for Americans abroad are not the same for those in their 20s as it is for those in their 60s. You may find this hard to believe, but I know people who have sought medical help with the problems associated with the requirements imposed on Americans abroad.

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  2. Thanks John, an insightful comment as usual! I am very aware that my tender age makes my situation vis-à-vis US tax rules much more straightforward than for someone older. At the same time, it still causes a lot of stress, though perhaps of a different kind. I’ve heard from others around the world who are around my age dealing with these things and it is true that we often have the ‘luxury’ to wait it out for a few years where someone older may not — but this doesn’t change the fact that we still have to go through the motions and grapple with what should be unnecessary choices about the future. Not to mention — $1500 may sound reasonable for older, better off individuals- but I was a grad student at the time so it didn’t seem a relatively small number to me!

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    1. You are 100% right …

      Every person involved in this suffers from his/her own brand of stress. The cost is outrageous, unjust, unfair and punitive for ALL affected.

      It may be prudent to remember, that:

      absent a change in U.S. tax policy, as a U.S. citizen abroad goes through life, he/she is more likely to accumulate tax and penalty liabilities.

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  3. 2terrified2sleep says:

    I found both of your comments very interesting and the article very accurate. I did streamlined and am 57 years old and have a complicated financial life due to sharing accounts with my non US husband and other things. Well…to get an accountant to do streamlined for me was a whopping 7,000 dollars. And guess what?? I didn’t owe any taxes but the filing costs, the filing stress and penalties are truly outrageous!!

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