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Article about U.S. expatriates and the impact of U.S. tax law
Phil Hodgen
Attorney, Principal
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There is an interesting article in the latest edition of Tax Notes International: "U.S. Expats and the Offshore Crackdown," 58 Tax Notes Int'l 619 (May 24, 2010). I would link to it and give the author (David D. Stewart) a bit of public glory but it is behind the paywall at Lexis. And I can't copy/paste it here for obvious copyright-infringement reasons.Mr. Stewart raises all of the obvious points:
Misperceptions
U.S. expatriates are not all bloated plutocrats swilling champagne while helicoptering to their yachts in Monaco. They're ordinary people doing ordinary jobs and leading ordinary lives. These are the people getting unfairly hammered by the IRS and its "heightened vigilance" (heh, nicely understated, David).Foreign Earned Income Exclusion
The foreign earned income exclusion is critical to the expatriates' financial survival. U.S. taxpayers living abroad are taxable in the United States on their worldwide income, unlike almost every other country in the world. To offset this burden, the first $91,400 of earned income is non-taxable in the United States.A couple of Senators (Wyden, D-OR and Gregg, R-NH) have proposed a new bill which will delete the exclusion. The article quotes Paula Singer, an active member of the tax practitioner community, who is quoted as politely saying "I think they probably don't understand the rationale for the exclusion to begin with." The article indicates Ms. Singer's belief that elimination of the foreign earned income exclusion will lead to additional noncompliance.I think that's right. People who live outside the United States will face additional economic hardships due to the tax law, and will face these choices:- Pay income tax where they live, VAT where they live, and U.S. income tax as well (offset somewhat by foreign tax credit), and suffer a reduction in quality of life;
- Go through the formal expatriation process in the United States and give up their U.S. citizenship and log out of the U.S. tax system; or
- Simply and informally expatriate by taking themselves off the IRS's radar screen. *Cough*
Expatriation
I can tell you that our office sees an increase in the number of ordinary people who are going through the second set of procedures. There are no external statistics from the government on this. The only expatriation statistics are for people with net worth exceeding $2,000,000 per person. Still, let's look at the statistics quoted in this paragraph from the article:It appears that the administrative burden has become too much for some American expats. The number of U.S. citizens and permanent residents turning in their passports, while still small, has seen a significant increase in recent years. The New York Times reported on April 25 that 743 U.S. citizens and permanent residents renounced their citizenship in 2009 with 502 renunciations occurring between October and December alone. In 2008 only 235 expats turned in their passports.From personal experience I can tell you that the tax cost is not driving these decisions as much as the administrative burden and harsh rules for the FBAR, etc. Also, there is a definite undertone of expatriation as a statement that the United States is no longer the place that these people knew and loved.And I can also tell you that we see indications that a lot of people take Door Number 3.
Harder to open bank accounts
The article notes that citizens living abroad have difficulty opening U.S. bank accounts ("You don't have a U.S. address") and difficulty opening accounts abroad ("Americans cause too much compliance overhead"). This was a problem before the "heightened vigilance" of the U.S. government and with the new (as of March, 2010) HIRE Act, it is an even bigger problem for foreign banks. Expect this problem to get worse.Amusing anecdote about Timothy Geithner in the article:In 2008 and 2009, [Rep. Carolyn B. Maloney, D-NY] and [Rep. Joe Wilson, R-SC] sent letters to the Treasury Department seeking information on why U.S. expatriates were being prevented from banking in the United States. In a response dated February 24, 2009, Treasury Secretary Timothy Geithner said that "nothing in U.S. financial law or regulation should make it impossible for Americans living abroad to access financial services here in the United States."
Timmy, Timmy, Timmy. Let's see what our intrepid author, David D. Stewart says next:
That is an exceedingly polite paragraph suggesting that Mr. Geithner might be clueless about the way the world works (improbable) or might not give a flying finagle about the problems of ordinary citizens living abroad. Reminiscent of Foghorn Leghorn, isn't it? (Caution, brief sound clip, safe for work). (Remember to vote in November, people!)As experience has shown for domestic banks, the absence of a prohibition does not necessarily ensure access where banks perceive a risk or are concerned about rising compliance costs for a relatively small segment of the retail banking business. With current law effectively blocking expats from the U.S. banks and new rules such as FATCA increasing the risk and reporting burden on foreign financial institutions, Americans living abroad are either going to have to accept higher fees for basic services or take more drastic measures.