The conventional wisdom is that taxes are a domestic matter and that the U.S. State Department should not get involved in the vicious assault levied on American citizens living abroad. The conventional wisdom is wrong. The conduct of the IRS is becoming and will become more and more of a diplomatic issue for the U.S. There are two broad categories of reasons. The first pertains to the role that U.S. citizens play as ambassadors for the U.S.A. The second has to do with friction with foreign governments.
U.S. Expats As Ambassadors for the U.S.A.
- Everybody agrees that there have been a large percentage of U.S. citizens living abroad who didn’t know they were required to file a U.S. tax return.
- Of those who did know that they had to file a tax return, only a small percentage of them knew about the FBAR reporting requirements.
- Recent events have caused U.S. citizens living abroad to cower in fear that their savings and property will be confiscated. Whether true or not, that is the perception.
- The reaction of U.S. citizens abroad is anger and a feeling of betrayal. They have done nothing wrong. The most that could be said is they failed to comply with a requirement (of questionable moral validity) that they did not know about and had no reason to believe existed. (Many accountants and lawyers are just getting up to speed on this). Not only are many U.S. expats getting ready to renounce U.S. citizenship, but they are now extremely hostile to the U.S. Furthermore, many U.S. expats now understand (having been subjected to the arbitrariness, capriciousness, recklessness and irresponsibility of the U.S.) why the U.S. is so disliked throughout the world.
- These expats are now part of the world that dislikes the U.S. But there is more. Expats were (in most cases) the most loyal of American flag wavers. No more. They are now the strongest and most articulate U.S. bashers. This is not something the U.S. can afford. Imagine five million U.S. citizens who make “America Bashing” an obsession. It’s like this: You steal a person’s health, wealth and life and that is what you are going to get. Just imagine who much damage this will do to the U.S. over a long period of time. Five million U.S. expats outside the U.S. expressing their disgust with the U.S.
- The U.S. cannot afford to have five million U.S. citizens trying to renounce their citizenship and telling everybody they know why. The U.S. and Eritrea (a terrorist state) are the only two countries that tax on the basis of citizenship.
- In case you didn’t understand this from points 5 and 6, I will make it clearer. The U.S. government has turned U.S. expats against the U.S.
As was stated in a recent article in the Globe – “Washington talks about neighbourliness, then builds a higher wall”
“… consider the U.S. Internal Revenue Service’s aggressive pursuit of offshore tax evaders. The intent is to hunt wealthy tax cheats. Caught up in the sweep, however, is a much larger group of tax-paying dual Canadian-American citizens – the very people who help forge bonds between neighbouring countries.”
Friction With Foreign Governments
FATCA, the U.S. Berlin Wall and the neutron bomb of the financial system, will guarantee that foreign banks and countries will do their best and will learn how to avoid the U.S. financial system. Over the long run other countries do NOT have to “play in the sandbox” with the U.S. Of course, if they don’t want to play with the U.S., this will make it difficult for the U.S. dollar to maintain its status as the world reserve currency.
Leaving aside FATCA, the current assault on U.S. expats is going to be a problem for foreign governments of which the Canadian government is one example. The Canadian Finance Minister has made it clear how the Canadian Government views this unprincipled, immoral, vicious assault on Canadian citizens. If the IRS steals the retirement savings of Canadian citizens, this will become a long term burden on the Government of Canada. To put it another way: the IRS is stealing from the Government of Canada.
Bottom Line: In the short run, the current IRS assault on U.S. expats is an IRS tax issue. In the long run (and it won’t be too long), it is going to become a major diplomatic problem for the U.S. There is still time to change course, but the time is running out. The U.S. really can’t afford any more enemies. Hilary Clinton take note!
U.S. Persons Abroad - Members of a Unique Tax, Form and Penalty Club 
I agree.
I am going to repost this at my blog, with permission of course. Thanks for an excellent summary.
My only quibble is with the statement that only a small percentage of those who filed knew about FBAR. I would have to say that that is overstated. It would be more correct to say that virtually no one knew about FBAR.
Actually, I agree with you – I am must a bit more conservative in my writing.
Yes, please repost help get the word out on this!
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Count me as another who had no clue about the FBAR until very recently.
I did know about the tax returns only because years ago I went down to the Embassy to ask. At that time they were great – they said, well yes, just get them in as fast as you can and try to keep up. It really didn’t seem like a huge deal and they seemed pretty happy with a “best effort” since I didn’t owe anything and wouldn’t for many years (IT managers make decent money but nothing to write home about). It changed when I sold a small apartment that my husband and I had purchased for investment purposes and once we split the small gain and paid the French gov I discovered that *I* (the American half of this marriage) owed taxes. I spent weeks trying to figure out how much and finally I admitted defeat and hired a professional tax service to help me. I ended up paying far more than the tax due in fines (because I was late) in fees to the professional service I hired and in sheer stress. Could I have called the IRS office in Paris (or gone to see them?) Well, having figured out that I was not compliant with my FBAR’s I was too scared to go down and ask for help. I had this vision of going in there for a thousand in capital gains tax and walking out with TENS of thousand of dollars in FBAR fines. Too risky and so I muddled along as best I could, paid the tax and the fines and filed those FBAR’s.
And now for all my efforts I have the pleasure of reading the words of my fellow Americans back home (and their reps) that I am an evil person who has no business having overseas accounts in the first place and I should be dinged for having the nerve to live outside the US?
Ouch!