Exile from the ‘Land of the Free’

“Just because you’re paranoid doesn’t mean they aren’t after you” 

- Joseph Heller, Catch 22 

Exile from the “Land of the Free”

by Victoria Ferauge, Franco-American Flophouse

republished with the permission of the author

passport2It’s no much fun being an American abroad these days.  It seems like every time we open a newspaper, read the headlines on the Net,  or talk with other Americans in our host countries, it’s bad news followed by more bad news.  Even the most level-headed and loyal are beginning to wonder if the U.S. government and  the American homelanders really are after us.

The latest is a little amendment that two U.S. senators decided to slip into a U.S. immigration reform bill (S. 744: Border Security, Economic Opportunity, and Immigration Modernization Act).  Guess they decided that while they were working on immigration that they might as well strike a blow against emigration.  Kind of implies this mentality:  once we’ve got them (migrants and their children), the U.S. needs a way to make them stick around and never EVER leave.

It is called the Reed Schumer Amendment and it adds a brief section to the immigration bill entitled “Inadmissibility of individuals who renounce citizenship to avoid taxes.”  Full text can be found here at the Isaac Brock website.  It says that if the US determines that someone has renounced US citizenship to avoid US taxes, then that person can be barred from the US for life.

Who could possibly vote against such a worthy purpose with such a catchy title?  If Americans don’t like the U.S. system of citizenship-based taxation and want out, well, at least the U.S. can spank them and then close the door on them forever.

A Catch-22:   It’s a classic catch-22.  If this amendment passes then American emigrants facing double taxation, the high cost of compliance with U.S. reporting requirements, loss of access to banking services outside the U.S, and limited business opportunities abroad (all of which are happening right now) run the risk of never being allowed back into the U.S. to visit family and friends if they renounce U.S. citizenship.

Rock shake hands with hard place.

Allow me to anticipate the arguments in favor of this amendment.  It only applies, some will say, to the rich who made their money in the United States and then fled the country to low-tax jurisdictions.  I would ask these people to read the text again because that interpretation is not at all what the amendment actually says.

Who is Inadmissible?:  Read the first paragraph very carefully.  There are two groups here that can be sanctioned.

I) Any alien who is a former citizen of the United States who officially renounces United States citizenship and who is determined by the Secretary of Homeland Security to have renounced United States citizenship for the purpose of avoiding taxation by the United States.

    (II) Subject to clause (ii), any alien who is a former citizen of the United States and who is a covered expatriate.

The first section should already make us all very nervous because it’s a U.S. government agency that would be tasked with determining if someone renounced to avoid taxes.   That means that exile is going to be based on a ruling by the bureaucrats – they get to decide who is and isn’t a “tax evader.”  What fun for them.  And what fun for the renunciant.  The onus for proving that one did not renounce U.S. citizenship to evade taxes is on the person renouncing – literally he is “guilty until proven innocent.”

What would that person have to provide in way of proof that he is not a tax evader?  Hard to know.  Look, because of the U.S. system of citizenship-based taxation just about everybody who renounces is going to save money on taxes or on fees.  Even those Americans abroad who don’t make enough money to pay income taxes still may owe capital gains on property, pension plans and other investments.  That makes us all very vulnerable – from the expatriate entrepreneur in London to the English teacher in Korea.

Covered Expatriates: In the second section, the key term here is “covered expatriate.”  Not many people know what that term means but it’s important to know because it broadens the scope of this amendment to include a very large number of American emigrants (6-7 million people).  A “covered expatriate” can be someone who is “rich” (owes a substantial amount of U.S. tax or has over 2 million USD in assets)

OR:

Someone who–regardless of net worth or prior Federal income tax liability–cannot say under penalty of perjury that the prior five years of Federal tax obligations are fully satisfied. Finally, a covered expatriate is someone who is late filing the exit year income tax return on time.

This means anyone who hasn’t done the paperwork (filed all the U.S. income tax returns, FBAR’s and the like) for the past five years.  So that nice American lady in Paris who works as a secretary for a little NGO making the Smic (French minimum wage which is 1425.67 Euros per month) but who never filed U.S. tax returns because she didn’t know she had to is a “covered expatriate” unless she hires an international tax lawyer and back-files.

For those of you who are wondering why in the hell this woman was supposed to be filing in the first place given that she earns what little money she has abroad (not in the U.S.), please note that this is a requirement for ALL U.S. citizens and Green Card holders wherever they live and work (Belize, Mexico, China, Indonesia, Thailand, France….).  This includes (but is not limited to) secretaries, server monkeys, small business owners, teachers. musicians, au pairs and many other professions that are not particularly well paid.  They all must report their worldwide income (the money they earn in those countries) to the U.S. every year. “It’s the law.”

In her case, if she is married to a Frenchman and her tax status in the U.S. is “Married filing separately, she must file a U.S. tax return if she makes over 3,800 USD in a year (about 2,900 Euros, or 114,000 Thai Baht).  This woman would probably owe no U.S. taxes but she is still in trouble because she didn’t file and report that income.  Under the amendment, if she doesn’t get into compliance, she will automatically be barred from the U.S. for life.

Impact:  Would the U.S. really force this woman to pay the exit tax and then exile her permanently from U.S. soil for not filing a few pieces of paperwork?

A few years ago I would have said, “no way” – my country is better than that.  These days I have doubts.  The rhetoric around the issue of emigration and tax evasion in the U.S. is pretty harsh these days.  What if she falls afoul of one person in the Department of Homeland Security who holds a rather negative view of American women who marry Frenchmen and live outside the U.S. permanently?  What if he decides that her actions should have consequences?  The law would be on his side if he chose to apply it.

Senator Reed said recently in support of his amendment: “American citizenship is a privilege. But it seems that a privileged few are trying to game the system by accumulating wealth and benefiting from the greatness of the United States and then renouncing their citizenship to avoid paying their fair share of taxes.”Let me count the ways that this statement is horse manure.  As we’ve seen “the privileged few” includes an awful lot of people who are not particularly well off.  Most Americans abroad are not rich and many have “accumulated their wealth” in the countries where they live and work, not in the U.S.  There is no distinction made here between those who get rich in the U.S. and leave and those who leave the U.S. and make their money elsewhere.

As for Americans abroad “benefiting from the greatness of the U.S.”  well, that right there is enough to send many of us into hysterical giggles.  Let’s see, what is it about living abroad and holding a U.S. passport and on that basis being denied banking services, business opportunities and employment, or having our foreign spouses threaten to divorce us, that just screams the greatness of the United States and “Aren’t you lucky to be a U.S. citizen?”Right now the last thing that many of us feel is “privileged.” On the contrary that U.S. passport is turning us into pariahs in the societies in which we live, at our places of work and at home. And that is a terrible thing not only for Americans abroad but Americans at home as well.  What is becoming clear is that U.S. citizenship is a very heavy burden with some duties and responsibilities that are unique and it is not clear that the benefits outweigh the risks.

Just as many Americans abroad are beginning to question the value of their U.S. citizenship (and there are some like me who are just so damn tired of being slapped around by people like Reed), immigrants are going to question the wisdom of taking on this kind of obligation which has serious penalties and risks and who, in a globalized world, don’t want to be disadvantaged if they decide to live and work outside the U.S. at some point in their careers.In that context it is rather ironic that the Reed Schumer Amendment is being introduced as part of an immigration bill.  On one hand they are trying to rationalize the immigration process in the U.S. and on the other they are proposing something that will give immigrants further cause to think twice about becoming U.S. citizens, residents or Green Card holders.As for those who are already U.S. citizens and are considering renouncing, this amendment (and the one before, the ex-Patriot Act and the one before that, the Reed Amendment) it says that these lawmakers are not going to give up until they get what they want:  punishment for those who leave the U.S.

Today the threshold for the exit tax is 2 million dollars but what will it be tomorrow?  1 million?  200,000?  Or even 20,000?  If this amendment passes how many people with small to middle-class incomes abroad who have aging parents and other family in the U.S. will be trapped into keeping a citizenship they no longer want, or can no longer afford, because the risk of exile has them scared?  That’s enough to make many of us very paranoid indeed.  Some of us are even wondering if it might be better to, in the words of Phil Hodgen, “Get out while you still can.”

And last there is an impact on U.S. citizens in the homeland.  It is their citizenship that is devalued by this system and it is their ability to be global that is at stake here.  Do people in the homeland understand how repelling it is when the U.S. punishes people who live and work abroad or who decide they wish to be citizens of another country?  This is not “greatness.”  This is petty and vindictive.  It is unworthy of a great country that calls itself “the land of the free” and I can find no excuse or grand purpose good enough to justify it.

Update:  Just Me reports:

“This amendment has now been pulled from the Immigration bill and moved to a second-degree amendment to Patrick Leahy (D-VT)’s border security amendment S.A. 1183.
The number of this latest amendment to an amendment is S.A. 1609. It appears at page S5075 of the Congressional Record for Monday, 24 June 2013.  Here is the actual direct link to where it is now buried to be sure that NO ONE sees it, so it can just slip on through…” 

Keeping track of the shenanigans of U.S. lawmakers is indeed, as Marvin calls it, a game of “whack the mole.”

01 July 2013 – More on Exile from the ‘Land of the Free’ – The Franco-American Flophouse.  This is something that has us all scared.  We’ve seen three attempts already to exile the expatriates:  the Reed Amendment, the Ex-Patriot Act and now the Reed-Schumer Amendment.  Remember, folks, that the first, the Reed Amendment, actually passed and is U.S. law.  However the way it was written made it unenforceable so the law exists but there are no regulations to implement it.  I believe that they will keep trying until they can make it stick.

05 July 2013The U.S. Congress and FATCA ReciprocityThe Franco-American Flophouse.    An unexpected development on the FATCA front.  Congressman Bill Posey, a representative from the state of Florida and member of the House of Representatives Financial Services Committee, has sent a letter to the U.S. Treasury about the promises of reciprocity that Treasury is making to foreign governments as they try to negotiate agreements to implement FATCA worldwide.

09 July 2013 – American Citizens Abroad: Proposal For Residence-based Taxation – The Franco-American Flophouse.  a proposal that the tax bureaucracy in America use a common sense approach to tax collection of citizens overseas.

12 July 2013 – Japan signs FATCA Implementation Agreement – Thomson Reuters – The first (and only, at this point) Asian country to fall completely into line with the IRS and obey the demands of the US Federal Government.   Americans expats and American business no longer have a welcome mat in Nippon.  Let’s hope other Asian nations will have a stronger backbone.

15 July 2013 – FATCA: A Project Audit – The Franco-American Flophouse.  Awareness of the implications of the U.S. law, FATCA is growing.  For FATCA supporters the past few weeks has seen both domestic (US) opposition to reciprocity and the Intergovernmental Agreements (IGAs), and yet another delay in implementation.

15 July 2013 - Has the IRS ‘gone fishing’? – International Adviser - the IRS today announced that due to overwhelming interest from countries around the world, a six-month extension to the start of the Foreign Account Tax Compliance Act (FATCA).

17 July 2013 – How to Lose Friends, Citizens and Influence – Wall Street Journal - The U.S. Foreign Account Tax Compliance Act seeks to co-opt foreign banks as long-arm enforcement agencies of the IRS, while destroying American overseas business relationships.

victoria picVictoria Ferauge is American expat in France and maintains a blog of the trials and tribulations of an expat living in the Republic called The Franco-American Flophouse.  Victoria has been a beacon of information on FABAR and other issues that have affected Americans living abroad.

 

Many Americans are already well aware that the US government is essentially unique (and not in a good way) in how it treats its citizens living and working in foreign countries. No other country in the developed world imposes and effectively enforces as many burdens on its citizen abroad (and those that would do business with them) as does the US government.

Whether it is filing and paying taxes to both a foreign government and the US government, the reporting of foreign financial assets (FBAR and Form 8938), or saddling foreign financial institutions with extra compliance costs for dealing with US citizens (FATCA), among others, the root cause of these burdens is a system of citizenship-based taxation (CBT).

 

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10 thoughts on “Exile from the ‘Land of the Free’

    • Yes, and shame on Blumburger for reporting a story with such a headline. 6 million Americans living overseas. 3600 of them to give up passports this year vs 235 in 2008? Is that even a scientifically significant number, 3600 out of 6 million, or 0.0006? No, it is just a BullShit number.
      The only conclusion you can draw from the article you cite is that Bloomberg writers are Shty at science, and fail at determining significant numbers.
      But I would never give up my US Passport. NEVER.

      • If you were earning a pretty big income (like over USD $93K) which would require you to pay local Thai income taxes plus pay IRS income taxes to the US (double taxation), would you feel the same about never willing to give up your passport? Many wealthy expats are in that situation (I am not, however) with double taxation, no representation in Congress, never requiring any services from the US federal government and no intention of ever moving back to America. In that kind of situation, an expat has to decide what is really the best thing to do for his family. I understand why there are big increases in the number of American expats giving up their citizenship to America and adopting their new homeland’s citizenship.

        • @OldChinaHam, I used to say exactly the same thing and I didn’t understand why anyone would ever renounce.

          I’ve learned a few things in the past few years and I’ve talked to people in situations that are just heartbreaking. I’d say very few WANT to renounce but if you were in their shoes? A few examples from Americans abroad around the world:

          1. A guy was on the verge of losing the mortgage on his house. Yep, they were going to pull his mortgage because he is a US citizen. It was his house or his citizenship.
          2. A retired fellow in New Zealand who went into the IRS tax amnesty program. He owed less than 20,000 USD in back taxes over 6 years – they wanted to fine him 172,000 USD for not filing the damn forms. He’s not rich and that would have gutted his retirement. Took him over a year to get some relief and he only got it because he fought like a demon for over a year. He still paid 25,000 in fines on top of the tax owed. And this for a guy who just didn’t know he was supposed to be filing.
          3. Women and men married to foreign nationals who say “I married you, not the American government”. In some cases those spouses are refusing to allow the joint accounts to be reported to the US (thus putting the American spouse in a terrible situation). Others have insisted that the American spouse’s name be removed from all joint accounts (thus making paupers of them). A few have even said, either you dump your US citizenship or I want a divorce.

          I’m worried about #3 myself. My French husband is not amused by any of this. I am also concerned that my French bank will close my savings accounts. Some US banks won’t take us anymore either. Where am I supposed to put my money – under my mattress?

          I’ve thought about this a lot over the past few years and I decided that I was going to fight what’s happening tooth and nail. I will only relinquish my US citizenship as a last resort (only when all efforts have failed) and until that dark day (which I hope will never come) I will do everything I can to change things.

        • So, yes, we should consider ourselves the lucky ones because we don’t have much of an income. I do agree. When we figure out how to take it with us to Saturn to be with Vonnegut, then I will start to worry about taxes, since death will no longer be final.
          I am basically of an existential nihilism frame of mind, usually. And I do not see much point in hoarding money or seeking out pleasures in this life.
          The only pleasure I am grateful for now is being in beautiful Chiang Mai, practicing my Phassa Thai, and looking at girls in short skirts.
          Who cares about taxes these days!

          • I know what you are saying, and it is a valid argument about taxation in the US, and I remember the UK guys in HK who did not need to pay any taxes on income made there.
            But most people here are ready to retire or retired, and so I say, don’t sweat it. If you are making a billion a year, or 30 million a year, then get a good accountant and figure out the easy ways to pay no taxes no matter where you live. I have all my gold cemented into my walls, anyway, like most of the other corrupt officials in China.

          • OK, for us low income, low asset old timers, we will can stick to the more simple pleasures in life for now, as you say. But we have to understand others have a different situation. Fortunately, Thailand is not signed up yet as a FATCA participant yet, but if they do and banks just don’t want to do business with American citizens, a lot of us on a Retirement Visa will be in a bit of trouble. We are required to have 800,000Baht in a Thai bank or have a high retirement income. If we don’t have that high retirement income and we cannot have a Thai bank account, we won’t have a Retirement Visa (hello Cambodia?).

          • Oh and just while I have you, the US renunciation numbers are BS.

            There are actually two lists: the one from Treasury and the other from the FBI. the numbers are different with the latter being much higher. Eric has been following this here:

            http://isaacbrocksociety.ca/2013/08/08/huge-jump-in-number-of-published-expatriates-in-federal-register-but-the-list-still-isnt-complete/

            When a paper in Canada tried to get more information under the FOIA they were rebuffed. Apparently it’s OK to publish the names of renunciants but they don’t want to give out any more information than they have to:

            http://globalnews.ca/news/782020/why-are-so-many-american-expats-giving-up-citizenship-its-a-taxing-issue/

            And finally last year I owed 9,000 USD in US taxes on top of my French taxes. Was I making big bucks? No, in fact I was unemployed and made practically nothing. We had sold an apartment in Toulouse (a typical small investor investment in France) and while we didn’t make much money in Euros, the currency gain, when the amount was converted to USD (using the IRS rate) I owed big (for me anyway). So much for my retirement saving….

  1. Cambodia? No. Burma, though, I would not mind because it would be darn exciting. Still, I do not think things are as dire as you paint them for retirement qualifications and bank accounts. Do you really think the government here would allow that to happen, that tens of thousands of retirees would be suddenly forced to leave and spend their millions of dollars, maybe hundreds of millions, in Burma? I do not think so.
    The tax laws of the US are terrible. Agreed! But they will not change much without a basic fundamental change in the type of democracy which the US has. I think I have told you before that I have completely given up on any hope the US will again become freer like it was before the 1970s, at least in my lifetime. So what, me worry? No. If the Americans want to screw up the country, then I will live in Thailand, or I will live elsewhere, just as I have been doing for over 35 years. The USA gets worse each year, and Asia gets better each year.
    What, me worry?
    Not like all of you seem to be worried.
    Try it my way. We are living a finite number of days.
    To hell with taxes!

    • Another argument could be made that the US now has a two tier system, one for the wealthy elite, and one for us commoners. The reason this is allowed to persist is that democracy in the US has failed and is completely broken.
      If the US can have a true democracy, then all these things that are making us sick of the present status quo in today’s USA will gradually be put right. We should trust in democracy because that is the only system that has a chance of working.
      How does this apply to the tax problems which Victoria will fight tooth and nail over? With democracy we will not have an elite with a separate tax system. Nothing is perfect, but with democracy we will have a much more equitable tax structure for all, without so many planned in loopholes to help an elite escape their fair tax share.

      But wait! Democracy in America? Shudder, Shudder!
      That would mean liberty for all.
      Never happen,
      I’m outta there —- and over here.

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