The IRS has had a huge impact on your health, your wealth your life.
I came across a news article that started as follows:
“Several weeks ago, my brother sent me an article from the Financial Post — and my life changed in an instant.
My brother and I were born in the United States, but we left as teens. I have lived and worked in Canada for close to the last four decades, as a proud Canadian citizen.
The article talked about the fact that the U.S. is the only country in the world that taxes its citizens who are neither living in the U.S. nor working there. Even if American ex-pats are not earning an income there, the U.S. government is still able to tax them.
But it gets worse –- in its supreme arrogance, because our neighbor to the south is broke and in considerable debt, it is now bullying folks like me, by laying down the law saying that all of its citizens must pay U.S. taxes, regardless of the circumstances. And if any non-resident citizens choose to be ‘non-compliant’ and not file up to several years of back taxes, they could be punished by facing stiff fines of up to 25% of their entire financial worth, and maybe even go to jail. The jackbooted tone of the warning was clear. The IRS meant to scare –- and it worked.”
There are many U.S. expats who are still not aware of FBAR, FATCA, OVDI, and the like. Those who became aware of these things are unlikely to forget the day, the moment, where you were and how you learned of it. From the moment that you learned of these things, your life was irreparably changed. The vast majority of U.S. expats were and are law abiding citizens.
Furthermore, it is likely in terms of their self images that they:
- Thought of themselves as law abiding, honest people
- Had done their best to be tax compliant and law abiding
- Were loyal patriotic Americans
- Were and are fair minded people who could not conceive that the U.S. government could behave in such an immoral and “irresponsible and unreasonable” way (Apologies to Ambassador Jacobson)
From the moment they became aware of this IRS nightmare, it is likely that they:
- Felt frozen, scared and confused (like a deer in the headlights)
- Felt a strong sense of having been betrayed
- Were unable to obtain any consistent, reasonable and clear advice about what to do
- May have been pressured to enter OVDI
- Did not have the money to pay the legal and accounting fees to even begin compliance
- Would never have had the money to pay any penalties
- Find it hard to believe that they are being treated as though they are criminals
After the dust had begun to settle, on the “Economic Front” it is likely that may U.S. expats realized that:
- “U.S. citizenship was a problem to be solved” (to use the words of Phil Hodgen) and that the only way to solve it, was to renounce U.S. citizenship.
- U.S. citizenship presents a clear and present danger to the financial health of you and your family
Your Health – From the perspective of their emotional and physical health, there is no doubt:
- The “jackboot” behavior of the IRS has severely damaged the physical health of many U.S. expats. After all, how much stress and worry can a law abiding citizen take?
- The sense of betrayal, unreasonableness, and unfairness has created tremendous emotional and psychological problems for those affected by this. The shock of 2011 has been severe – it is likely that many U.S. expats will need psychological counseling if they are ever to recover. This is another aspect of the “collateral” damage associated with all of this.
My unprofessional but (I hope practical advice):
1. This is not YOUR FAULT – you have done nothing wrong. Even if you are violation of the FBAR law, you have done nothing wrong in a moral sense. As you now know, there is no relationship between law and morality.
2. You are shocked to find that the U.S. is not the country that you thought it was. You believed that the U.S. was that “great citadel of freedom and justice”. ‘That’s what the country was – that is how you remember it. You are finding it hard to believe that you were wrong. You feel that you were deceived, conned, lied to, misled. That’s partially true. The reality is that the U.S. is no longer the country that it was. The U.S. under the Obama administration is nothing more than a vicious, debt ridden thug. The U.S. has evolved from being a nation of laws to a nation of forms.
3. If you are a U.S. patriot you feel betrayed – you feel that your patriotism is being tested. A U.S. patriot has allegiance to the ideals and constitution of the United States of America. This is different from an allegiance to the U.S. government of the day. If the government does not respect the constitution, then the most patriotic thing you could do may to renounce your U.S. citizenship.
4. Although your first instinct may to run and hide – you do need to deal with this situation. The problem is that you don’t know how to deal with it – you can’t find consistent, reliable advice. You are required by law to file a tax return, and FBAR and the new (for 2011) son of FBAR form. Although this is not legal advice – common sense dictates that you should (at least) be compliant on a “going forward” basis.
5. Those of you who are U.S. Canada dual citizens should familiarize yourself with the provisions of the tax treaty in regard to reporting penalties. You will be happy when you investigate this.
6. Your tax and reporting issues are dependent on your decision to remain a U.S. citizen. No two people are the same. U.S. citizenship is a problem to be solved. What are the principles that should be utilized to solve it? What are the questions to ask? You have been betrayed by the U.S. government. The U.S. is not the country it was. The U.S. does not subscribe to the very ideals that are the basis of your patriotism. This is a decision that must be based on principle – the question is: what is the right principle to make the renunciation decision? You have been betrayed by the U.S. My advice: make this decision based entirely on what works for you in your particular life circumstances. Recognize that you cannot predict the future with accuracy. There is no decision where there is no possibility of regret.
7. The “what is good for you principles” for you should recognize that:
- The reporting requirements of FBAR, FATCA, etc. could put a serious strain on your marriage (the non-American spouse may be unwilling to live with the IRS);
- Remaining a U.S.citizen may make it difficult you to avail yourself of normal banking arrangements;
- Remaining a U.S. citizen will make it harder for you invest and save for retirement in your country of residence. Certain investments not available to U.S. citizens for all practical purposes;
- Remaining a U.S. citizen will force you to spend lots of time and money on reporting requirements. Remember the U.S. is now a nation of forms. Can you even afford the cost of IRS compliance?
- Remaining a U.S. citizen will force you to live in constant fear of the IRS
- Remaining a U.S. citizens means that if you ever do accumulate wealth you will be subject to the U.S. estate tax rules (I have no idea how this would coordinate with the death tax rules of other countries)
- If you have less than two million of net worth you are not a “covered expatriate”, you can (and possibly should) divest yourself of U.S. citizenship before you hit the two million mark (it is not uncommon in Toronto or Vancouver to own a house that is worth more than one million dollars) Once you hit the two million mark (many homeowners in Toronto and Vancouver) you may have to pay the 877A exit tax
- If you have a net worth of two million or more, you will have to pay an exit tax to leave the U.S. – if you renounce your U.S. citizenship. Remember that what you pay now, will be a savings to your estate. You can pass more money and assets to your children.
- And now to the only positive of retaining U.S. citizenship: you can go back and live and work in the U.S. Is it worth it?
Your wealth is only one factor in the equation. That said: for many U.S. expats the financial cost may be less to renounce now, rather than later. Think of your children.
A Final Thought
You have been placed in a horrible situation that is not of your making. Remember the bright side: as an expat you and (presumably most of your money) are already outside the United States. After January 1, 2014 (the day FATCA takes effect) it will be very difficult for U.S. residents to leave. You are blessed with the wonderful opportunity of being able to live where you want. It is interesting that the U.S. constitution guarantees neither a right to enter the U.S. nor a right to leave the U.S. The Canadian Charter of Rights guarantees Canadian citizens the right to both enter and to leave Canada. In 1982, I was puzzled by this provision. I now understand why the constitutional right to leave a country is important!
In closing, read the following comment which describes how the participation in the OVDI program has completely transformed the life, health and wealth of this U.S. expat. Do you need the protection of the U.S. government or do you need protection FROM the U.S. government?
“Just Me said…
My comments about the OVDP have mostly been posted previously on your TAS thread of August 29th.
I just have two additional comments regarding the entire process.
One relates to how much all of this has impacted me psychologically after a 2 year struggle to come up with a reasonable settlement. Is there such a thing as OVDP PTSD? I think there is!
The other relates to the closing 906 form and penalty payment reconciliation.
First. In the OVDP, the IRS wanted an outrageous $172K, as they were including my home in the highest aggregate penalty calculation. That put me into an incredibly depressed state when no discretion was allowed to adjust this ridiculous penalty. When I finally got relief via the TAS, it was lowered to something which I could live with at $25K. Now, I really think that a letter admonishing me to “Go and sin no more” was more appropriate. It would have accomplished a compliance objective, if that was really the goal of this process, but after 2 years, you finally have to make a business decision and try to move on.
I was very thankful for the TAS intercession, as the Opt Out did not look hopeful without their advocacy. Maybe Opt Out clarity will get better for those entering the OVDI right now.
Now that the “Rush of Relief” has passed, I have found that “moving on”, is very difficult. The unfairness, and injustice of all this continues to bounce around in your head. When you are on the receiving end of unintended consequences of flawed Statutes, you find yourself reassessing every Politician’s claims about any legislation. The reality is that many statutes come buried within other Bills, and you have no idea that they are there and how they may impact you. Take FATCA which is buried within a bill called HIRE (Hiring Incentives to Restore Employment) bill signed into law by President Obama in March 2010. Did you hear about FATCA in the media when they reported on HIRE? Neither did I, and it is very troubling.
Finding a means, to just forget this whole experience, and live a new compliant life, is easier to say then do. My feeling is the Examiners (and by extension the IRS leaders) have no idea or real empathy on how their process impacts a normal middle class Minnow, and what a drain it is on productive human endeavors. It has a huge personal cost, along with the loss of LCUs. (Life Credit Units). It does not show up on any FBAR penalty reconciliation spread sheet!
I am trying to follow the final advice from my “Examinator” who casually says now, “Oh you shouldn’t have even been in this OVDP in the first place. You are done now, so just let go.”
No big deal! Right?! So why do I feel like an abused spouse? I guess I am getting release by adding my blog comments here! Thanks for the therapy outlet Jack!
Secondly, when it came to the final 906, and reconciliation, the IRS is quite happy to produce a document that is factually incorrect, but doesn’t want to change it. Apparently, in this case, close is good enough. It isn’t material that it be precise. Suddenly it doesn’t matter as much as closing the file. Now, I would have said the FBAR requirement materially doesn’t matter either!!
So, in the end, I just had to pull a “W” impersonation of a ‘Signing Statement’ by writing an accompanying letter pointing out the errors, and I am not bound by them. I signed the document anyway just to bring closure to the whole darn process.
Now, we await the actual reconciliation, as the IRS owes me money. I had over paid taxes, and it should have stopped the interest accruals from running, but I can see that will still be an issue. My Examiner’s draft reconciliation is in error, but she is anxious to let some other IRS department deal with this. It is not her problem anymore. She says she will help, if I have problems. I believe she will try, but I predict, I will still be struggling with this 6 months from now. I hope to be proved wrong.
How fun it has all been! :)”