Accidental U.S. citizenship – does it stay with you for life?

Introductory comment added June 1, 2013.

This is an incredibly important issue for the reasons given here.

Born outside the US to #americansabroad ? Do NOT presume you are a US person – you may or may not be! http://t.co/tHNjXBdAKM

— U.S. Citizen Abroad (@USCitizenAbroad) June 1, 2013

Since the Obama/Geithner/Shulman assault on U.S. citizens abroad began, I have observed people attempting U.S. tax compliance when they are NOT U.S. persons. The following post is neither fun nor all that interesting. Remember, for those unlucky to have it:

“U.S. citizenship is a problem to be solved.”

You may not need to solve it at all!

Hang in for a long read.

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Once upon a time  people wanted to be a U.S. citizen and were proud to be a U.S. citizen. That changed in 2011 when the IRS began to “hunt” U.S. citizens in all corners of the world. This affected many people who were and are paying huge taxes in “high tax” jurisdictions and did not know that they were also required to file U.S. tax returns.  People were also introduced to Mr. FBAR. Mr. FBAR is a particularly nasty guy who had the potential to subject them to huge penalties.

And just when you thought you had seen and endured it all the U.S. enacted FATCA. With the advent of FATCA – America’s Berlin wall:

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Looking for Mr. FBAR – In Search of FBAR Fullfilment and Consciousness

“FBAR  – One Small Step For Man, A Giant Step For Mankind!”

All great advances in civilization spawn new industries. FBAR has spawned “FBAR Lawyers”, “FBAR Historians” and “FBAR Scholars“. When history is written, 2011 will be remembered as the “year of the FBAR.”  In 1983 Time Magazine made a computer the “man of the year”. Perhaps for 2011, the FBAR should be regarded as the “man of the year”. In 2011, tax lawyer Phil Hodgen, recognized the importance of FBAR in an excellent post titled:

“What had God Wrought – FBAR Edition”

Mr. Hodgen explains how something that started as part of finding tax cheats in Switzerland is now impacting Ambassador Jacobson’s  “70 year old Grandma” in Canada.

All kidding aside, the FBAR  is likely to spawn a new type of  “therapist”. Yes, it will be called the “FBAR Therapist“. Read further and you will see why.

U.S. Passport specifically informs citizens about tax requirements but is silent about FBAR

In a recent post I suggested that there were two big obstacles to U.S. living abroad being in compliance with tax and reporting requirements. I identified the cost of tax and FBAR compliance as being one. I suggested that the second was the lack of clear guidelines and procedures from the IRS. This post generated a few comments. One of the most interesting was the following:

“Just Me” comment on Susan Tompor – Detroit Free Press – Some foreign accounts must be reported to IRS

FBAR Consciousness Moving Closer To Canadian Border …

is the title of a post that I wrote yesterday on the Isaac Brock site. Susan Tompor of the Detroit Free Press wrote an interesting article about how the IRS reporting rules affect ordinary folks. Not those “high rolling tax cheats”. Not those wealthy politicians. No, just ordinary people. You can find the article here. I suggest that you read it and make some comments. As an incentive to make some comments, what follows is a comment about this article from “Just Me”. Hope it provides encouragement and motivation!

Attorney, CPA, EA or Registered Tax Preparer – Your choice of dance partner

An inside perspective – Stacie Kitts, CPA:

“Choose A Tax Preparer That Has a Clue

Here it is, what all un-registered (non CPA’s, attorneys, or enrolled agent) tax preparers have been waiting for.  The specs for the competency test  that will award those who pass the title of  “Registered Tax Return Preparer.”

Wowwee doesn’t it just give you the chills….

No – well maybe that’s because CPA’s and attorneys can sign tax returns even if they don’t have a single clue what they are doing.  They get to do this without passing a test (other than the initial licensing exam which he/she could have taken a hundred years ago – so not even relevant today) or taking a single hour of tax related continuing professional education.  You know, training that would keep you up to speed on the actual tax laws that apply to tax return preparation.

So what do you think the odds are that  many of these licensed “professionals” would have a difficult time passing the new competency test?

Ya, scary jacked up regulation that leaves out a large number of people who are trusted to prepare your tax return.

Fixing the mistakes of these so called professionals is a large part of my practice.  I guess I should be grateful instead of loosing my mind over the absurdity of it all.”

http://staciesmoretaxtips.com/2011/09/07/irs-releases-specifications-for-registered-tax-return-preparer-test-doesnt-it-just-give-you-the-chills/

Gives you food for thought doesn’t it. Not all tax preparers are created equally and the one you choose better “have a clue”.

The IRS is the biggest obstacle to tax compliance for U.S. citizens living outside the United States

We need direction and guidance!

Let’s begin with an excerpt from a comment from a U.S. citizen living outside the United States.

“I have not been able to get advice from the IRS, from the IRS Tax Advocate, from my financial planner, from my government representatives, from the US Ambassador to Canada – it all goes in a circle and the easy answer – ‘get advice from a US tax accountant’. I do get my US taxes (and Canadian taxes) prepared through a cross-border CA and it is probably my mistake to not have asked the right questions in the first place, but here I am, as are many others, in trouble and also called by the US and even many in Canada, tax evader.”

What’s a poor expat to do?

U.S. citizenship has been priced out of the market

The costs of U.S. tax and reporting compliance

I have written a number of posts on the problem of compliance with U.S. tax and reporting requirements . Most people want to be and remain in compliance. My previous posts have opined that: the IRS and lawyer fear mongering coupled with  complexity have made compliance  difficult. The simple fact is that most people don’t know what to do. Taxpayers do NOT trust the IRS. Furthermore, the “not knowing what to do” is having a terrible effect on people’s lives (to the extent that they still have one). These views are echoed by the Taxpayer Advocate Report to Congress.

Interestingly, I realize that none of my posts has focused on what may be the single biggest obstacle to compliance.

It’s the cost stupid!!

Citizenship-based taxation, the U.S. trade deficit and the destruction of U.S. capital

Trade deficits destroy capital!

Trade, Deficits and Trade Deficits

Let’s begin with the basics.

Q. What is a “trade deficit”?

A. A “trade deficit” occurs when a country buys more of a country’s products than it sells to that country. What would be an example? The United States trades with China. The U.S. buys goods from China (check out Walmart). The U.S. also sells goods to China. It’s just that the U.S. spends more buying goods  from China than it receives for goods sold to China. Is this a problem? I don’t know, let’s figure it out.

Let’s consider a simple household budget. What happens if you spend more than you receive (income)? What happens if your expenditures exceed your income. It’s not good. You first use your savings to finance your life style and then you go bankrupt. (Ask your neighbor who is maxed out on credit cards.) So, it is a good idea for your expenditures to not exceed your income. (Governments generally have trouble understanding this  basic principle.)

Here is an everyday example for everyday folks.

Imagine two neighbors. One is an electrician. The other is a plumber. The plumber says to the electrician. “I will trade you a plumbing job for an electrical job”. The electrician agrees. Both are happy. Their trade is in balance. Each sells to the other but receives enough from that other to pay that other. The trade is in balance.

What happens when the trade is out of balance?

Imagine that the plumber now thinks that his work is worth $100 more than the electrical job. The electrician must now go out and find  another $100 to pay the plumber. Perhaps he can get that out current revenues. In many cases he will just get the additional $100 from revenues from another job or from another revenue source. But, if he can’t get that additional $100 from another revenue source, he must get it from his savings. He has to erode his capital. This is a bad thing.

Trade deficits and the erosion of capital

What is bad for a small business is bad for a government. Governments cannot run  deficits forever. In fact, it would be preferable to run surpluses. (Sell more than you buy) China is a trading nation. It trades with Germany, the U.S. and many other countries. What is the status of U.S. trade with China?

To quote from Roger Conklin:

“There was a 11.6% increase in the 2011 US trade deficit with China over 2010 while China’s world trade surplus decreased by 14.5%. Rather than the Obama Administration appointing a commission to “monitor Chinese trade practices” it would be much more productive to appoint a commission to determine why the US does so poorly selling our competitively priced agricultural and high tech products in China. If it were not for the US trade deficit with China, that country would have ended the year with a $47 billion world trade deficit. While the rest of the high-wage industrialized nations are going gangbusters in racking up trade surpluses with China, the second-largest import market in the world, the US trade deficit continues to skyrocket. If such a commission were appointed its report delineating the reasons for our massive trade deficit would take about 5 minutes to prepare. It is a direct result of our unique world-wide and citizenship-based tax policies. They punish companies that export and our citizens who live and work abroad. This is what has destroyed the export mentality of US industry and made it impossible for Americans to compete for overseas jobs. The real loser is the US economy. Our $700 billion world trade deficit represents 7 million destroyed American jobs and $130 billion in tax revenue that these destroyed jobs fail to generate. Every other nation practices Territorial taxation.”

US runs trade deficit with China. Countries with territorial taxation run a trade surplus http://t.co/kGRiwsqs – Think territorial tax!

— U.S. Citizen Abroad (@USCitizenAbroad) November 1, 2012

By causing trade deficits, citizenship-based taxation destroys U.S. capital

Therefore, we can see that (unless there is another source of income to make up the difference) citizenship-based taxation is directly responsible for the destruction of U.S. capital.

Here is a question you should ask yourself? Would you adopt an economic policy that forced you to “eat your house” to pay your bills?

That is exactly what U.S. tax policies are doing.

This is another way that:

U.S. citizenship-based taxation is causing economic harm to the United States.

It’s the 11th hour! Do you know what your Congressman is thinking?

U.S. citizenship-based taxation harms U.S. economy

The result of citizenship-based taxation

We are living in interesting times. During all the years of my tax consciousness I have lived with the assumption of U.S. citizenship-based taxation. When the IRS began its “reign of terror” on U.S. citizens living  outside the United  States and many people learned about their tax filing obligations, the discussion about citizenship-based taxation began. The U.S. is the only Western democracy and of one two countries (Eritrea being the other) which taxes on the basis of citizenship. The rest of the world taxes on the basis of residence  or what is commonly referred to as “territorial taxation”. In a global world where:

– professional mobility is the norm;

– citizenship  be nothing more than an “accident of birth”

– there is a consciousness of human rights and the right to remain or renounce citizenship is protected

– standards of common sense and decency are desirable objectives

Citizenship-based taxation is not a good idea! It costs the U.S. economy lots of money!

Canadian RRSPs and the OVDI Penalty Base

Part of the OVDI penalty base?

Those who entered OVDI understood (hopefully) that they were paying a fine based on a percentage of a base of assets. Obviously the lower the base, the lower the amount of the penalties. An interesting thread on this appeared on the Jack Townsend blog.

For Canadians who entered OVDI (for whatever reason) there has much been much concern over whether RRSPs would be part of the base for which the OVDI penalty was calculated. People have been asking: will RRSPs be included or not? Why won’t the IRS take a position? Now, what follows is just my thinking and interpretation. It is not legal advice (or any other kind of advice). But, here is how I think you should view this and the arguments you should make.