I receive calls every day from U.S. Citizens living abroad who have recently learned that they are not compliant with U.S. tax filing and reporting obligations. They are angry, confused and frustrated. They’ve never heard of these requirements before getting the bad news that they could be subject to draconian penalties for not filing an obscure FBAR form. They are incredulous and dumbfounded by this news. After a while most calm down and opt to deal with the problem. Below is testimony from one U.S. expat living in Canada who eloquently expresses this universal frustration with the system and opts-out by renouncing her U.S. Citizenship. This may be a viable, although not less expensive solution, for many Canadian expats. But, the many living in less stable or more exposed parts of the world, may find a bid scary surrendering their U.S. Passport and safe-haven security blanket. After all only 75 years ago, Europe was in flames and people there would have given all that they owned for a U.S. Passport. The world today is not a bastion of stability and peace. In any event, I’m sure many of my readers will identity with the problems and feelings expressed below.
Testimony of Marilyn Ginsburg before the United States Senate Finance Committee
International Tax Section
April 9, 2015
Good morning and thank you for the opportunity to speak with you today. My name is Marilyn Ginsburg. I will be 70 years old next month and I renounced my U.S. citizenship, with great regret, in my 69th year.
I was born in St. Louis, grew up in Denver, and moved to Canada when I was 26 years old. My husband and I left the United States in June, 1971, a month after we had both finished graduate school, I with a law degree and my husband with a PhD. in American history. We both obtained jobs teaching in our fields at a Canadian University. We assumed we would stay in Canada for a few interesting years, living in another country, and then return to hearth and home. One thing led to another and this never happened, and we have now lived in Canada for 44 years.
In 1977 our daughter was born in Toronto and we registered her at the U.S. consulate as an American citizen. In 1985, in order to become a member of the Ontario Bar, I was required to become a Canadian citizen. I delivered an affidavit to the U.S. Consulate indicating that I did not intend to relinquish my U.S. citizenship by the act of acquiring Canadian citizenship. Eventually my husband also became a Canadian citizen because it was clear we were there to stay and he wanted to be able to vote in Canadian elections.
However, he and I also continued to vote in U.S. elections and we traveled on our U.S. passports. We have never failed, in 44 years of living outside the country, to file U.S. tax returns. I don’t remember why I knew to do this, but clearly we were among the lucky ones. In other words, we have been model U.S. citizens in every way. Nevertheless, all three of us have since renounced our U.S. citizenship. Why?
First, there is the expense of continuing to be tax compliant. We have to use the services of a specialized and expensive tax accountant who can complete and reconcile our tax returns for both countries. This service is not cheap. As a matter of fact, our accountant estimates that it costs at least twice as much for Americans living in Canada to file their U.S. returns than an American living in the U.S., due to the complexity and number of forms that must be filed.
Last year I had to retain the services of a second highly qualified tax accountant because we owned Canadian mutual funds. I had no idea this was an issue, and apparently neither did my first tax accountant. I chose not to be the one to pay him to do his first IRS form 8621, which according to the IRS website can take 41 hours to complete. Therefore, I found the second accountant, with experience in completing this form, to bring us up to date. Of course, we also must pay taxes to both countries.
Since we are both retired now, and the tax treaty does not address pension income in the same way it addresses employment income, we now owe taxes to the U.S. in addition to our sizable tax bill to Canada. Some of this is covered by the foreign tax credit on our Canadian returns, but not all.
If we combine the cost of accounting fees, and U.S. taxes, including the higher tax rate on any gains from our Canadian mutual funds, we estimate that just to remain U.S. citizens would cost us more than $125,000 of our retirement money over the next 15-20years.
Please note that we are not entitled to any U.S. Social Security or Medicare. We moved to Canada when we were too young to have accumulated sufficient credits, so we have been filing tax returns all those years for no future economic benefit whatsoever. The second reason we renounced our U.S. citizenship was because we felt the U.S. was treating us unfairly. I will cite one example of many.
Why should our Canadian mutual funds be treated as Passive Foreign Investment Corporations, requiring us to pay higher taxes on any gains than my sister in New York pays on her U.S. mutual funds?
Why should I have to pay an accountant for 41 hours of work to try to figure out how to report my small gains on every Canadian mutual fund I own?
Mutual funds are an important part of most peoples’ retirement savings because they spread the risk, and, as a resident of Canada, I am not allowed to own U.S. mutual funds. The law makes no sense.
I live in Canada so a Canadian mutual fund is not a foreign investment for me; it is a local investment like a U.S. mutual fund is for my sister. Is it fair for the United States to make it more expensive and more difficult for its citizens living abroad to save for their retirements than citizens living in America? That is discriminatory treatment and one reason why U.S. citizens living abroad feel like they are treated as second class citizens.
The third reason that I renounced is because I wanted to sleep better at night. I am not saying this jokingly. I am quite serious.
When I read that the penalty for a non-willful failure to properly file our FBAR forms was $10,000 I decided it was simply no longer worth the worry. These forms require me to give our tax account very detailed information for every bank, retirement, savings, checking and investment account we own. My accountant relies totally on what I tell him. What if, as I get older, I forget? Some days I go to our downstairs pantry and can’t remember why I went. However, no one is fining me $10,000 for forgetting that I went downstairs for a bag of sugar.
These forms are filed with the Financial Crimes Enforcement Network of the Department of the Treasury. They were originally, in 1970, intended to uncover criminal activity by those who were using secret bank accounts for money laundering, securities manipulation, insider trading, and other illegal activities. But ordinary Americans living abroad are not criminals using secret bank accounts to hide illegal activity.
I was recently made aware of the horrendous experience of an American woman, living in Canada, who, in an attempt to be totally tax compliant, entered into an IRS “amnesty” program. This was not because she was a tax cheat, or was hiding money off shore; it was just because she had not known, when filing her yearly U.S. tax returns that she also had to file the annual FBAR form. The manner in which this woman was treated by the IRS is enough to make one weep.
Any member of Congress who truly wishes to understand the damage being done to Americans abroad by the present tax regime, and the way in which it is being enforced by the IRS, must read Ms. d ’Addario’s complete letter to House Representatives Adrian Smith and John Larson.
While discussing the disproportionate nature of fines under FATCA, including the filing of these FBAR forms, Nina Olson, the U.S. Taxpayer Advocate, asked in October, 2014, “…why are we doing this to folks? Why are we tormenting them in this way”?
I wish I knew the answer to that question. What would have happened if I hadn’t, by chance, read in a seniors’ magazine that Americans living in Canada, who own Canadian mutual funds, are in big trouble? I lost sleep about that until I found our second accountant who brought us into compliance on that form, the IRS instructions for which are 13 pages long/ .I just can’t afford this amount of time and money and this level of anxiety trying to remain tax compliant any longer.
I have never been anything other than a loyal and law abiding American and yet I really began to worry. I have read horror stories about how the IRS treats people and frankly, I did not ever want to be one of those people. In 2014, even former IRS Commissioner, Steven Miller, when discussing his cost benefit analysis of FATCA and its reporting requirements, concluded that the costs may well outweigh the benefit.
Americans all over the world are doing their own personal analyses and they are not just about dollars and cents. They are about the stresses involved for non-American spouses, for children who have inherited American citizenship and must now make important tax and citizenship decisions; they are about fear and feelings of being treated unjustly.
I have many American friends living in Canada, most of whom have or will be renouncing their U.S. Citizenship. Others would like to, but for one reason or another, find it impossible to do so. I can tell you today that not one single dual citizen I know is hiding money off shore or has ever knowingly cheated the United States out of a single penny. Most of them didn’t realize, until recently, that they were still U.S. citizens, or they did know, but did not understand they had to file U.S. tax returns while living abroad. They are now caught in the cross hairs of a tax weapon that was meant to catch wealthy Americans hiding money outside the country, not my lovely neighbor, who married a Canadian 45 years ago and is now a retired teacher living on a pension.
Was it easy for me to renounce? I cried when signing the renunciation oath at the U.S. consulate in Quebec City, where we flew because the wait time to renounce at the consulate in Toronto is now over a year. It hurt then and it still hurts. My mother, who is nearly 93, was terribly upset that I renounced my citizenship, other relatives didn’t understand, and I am bitter and angry that a country my family has lived in since before the Civil War is treating its own citizens abroad like criminals and tax cheats and making their lives miserable because of an unfair tax regime. I believe that my earliest known American ancestor, who settled in Bowling Green, Kentucky in 1848, would understand my predicament.
Ms. Olson, the U.S. Taxpayer Advocate, when speaking about the possible future consequences of FATCA and all of its related reporting requirements, said, I don’t think we’ll know [what they are] for years. And by that point we’ll actually be a little too late to go, ‘Oops, my bad move, we shouldn’t have done this,’ and then try to unwind it.” In the meantime, how many Americans living abroad, who have represented this country proudly all over the world, will have renounced their U.S. citizenship?
Is this what you want?
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The above testimony was first published by John Richardson in American’s Abroad as “Testimony: The Effects of the Current Tax System on Americans Abroad.”.
For most expats renouncing U.S. citizenship is an unwise decision. Apart from the reasons stated above, the initial cost of tax compliance to renounce can be greater than the cost of coming into compliance and remaining a citizen. Once an expat has caught up with filing, annual U.S. filings are not too burdensome for most.
For most expats, the safest path to come back into the tax filing system or correct errors in previous filings is through the Streamlined Filing Compliance Procedures. The advantages and disadvantages are fully explained in other blog posts which can be found by searching under “Streamlined Filing Compliance Procedures, or, Streamlined Filings.”
It is important to remember, however, that each case is unique. The specific facts and circumstances of your particular situation need to be reviewed and evaluated by an experienced offshore tax attorney. Only then can the safest path to follow be determined.
Robert S. Steinberg, Esquire www.steinbergtaxlaw.com firstname.lastname@example.org