Paul L. Caron

Thursday, September 17, 2015

WSJ: Is The IRS Undercounting Americans Renouncing U.S. Citizenship?

Passport (2014)Wall Street Journal, Is the IRS Undercounting Americans Renouncing U.S. Citizenship?:

Attorney Andrew Mitchel, an expert in U.S. citizenship renunciations, asks in a blog post today: ‘Is the IRS Missing Names From Its Quarterly Publication of Expatriates?’

He writes that recent State Department and FBI data show an estimate of about 6,000 Certificates of Loss of Nationality applied for or issued in the fiscal year ending Sept. 30. Yet, he adds, in the first quarter, the IRS published 2,857 names, which would lead one to expect around 3,809 for the full fiscal year. “Based on this factor alone, the IRS would appear to be missing roughly 2,000 names,” Mr. Mitchel writes.

Moreover, he says, the State Department recently gave an estimate of 5,986 applications for CLNs for the 2015 fiscal year, and forecast 559 citizenship relinquishments — a total of 6,545 that far outstrips the IRS’s count.

Mr. Mitchel contends that the IRS is failing to count people relinquishing their green cards  – 18,000 between 2008 and 2012 — and argues that the IRS’s renunciation tallies should at least include relinquishments by long-term green card holders.

Tax | Permalink


Many of the comments here are spot on.

The best London based tax preparer (imho) charges £838 ($1305) plus £168 VAT for a total of £1006 ($1565) to do just a US return (usually owing nothing) – and you need to use them for your UK return too – which costs less, but is still over $1000 (the US and UK returns need to work together.) It still can take a day or more to pull together the materials they need to do that return. Imagine a teacher, on a typical UK teacher’s salary, or a researcher coming up with £1000 – plus the cost of the UK return that they normally do not have to do. Remember the tax years do not align – the UK runs from April to April (as do several other countries.)

Then you have the basic problem with pension systems. The basic US pension system is Social Security – and despite widespread complaints it is pretty generous – a full Social Security pension is $2,663. The basic UK state pension is £502.45 per month - $784 – after 30 years’ contributions. The reason is a difference in philosophy (one that is common outside the US) that beyond a basic pension, what you get is based on your pension savings. As a result the UK and many other countries have a very large deduction for pension contributions – in the UK it is currently £40,000 – or $62,000 p.a. (there is a lifetime cap of £1.5 million, say $2.25 million in contributions to stop people building up massive pension pots), while the US limits contributions to $5500. It makes it very hard for a US expatriate to set up a pension – and you cannot contribute to Social Security if you are also contributing to the UK or another social insurance scheme (damned if you do, damned if you don’t.)

The pension issue then meshes with the AMT issue. If you make a substantial pension contribution in any given year (which for self employed people and those with volatile earnings is not unusual) you can get whacked with AMT. Worse, AMT is not recognized by a number of tax treaties, and the foreign tax credit does not typically apply to AMT liability – because moronically, congress and the IRS think you would actually pay tax to evade/avoid tax. So if you have to pay a lot of tax in your foreign country of residence, you can get hit with AMT. I had a senior US executive of a non-US company call me up in tears – she had just been presented with her US tax bill, and that plus her UK taxes was more than she had taken home in pay that year – she did not have the money to pay it! I sent her to the accountants I described above.

Which by the way raises another point – a lot of the Big-Four accounting firms do expatriate tax filings for their corporate clients – uniformly badly. It is not uncommon for a departing US overseas executive to find that they get hit with a tax bill because the Big-Four accounting firm screwed up – you need to find one of the small specialist firms. In banking it was/is not uncommon for some of the bankers (and in some other companies the senior execs) to get net-salary contracts, in which their salary was stated net of all tax liability – particularly if they are a US Citizen or Green card holder – but this is considered a “big ask” today.

Getting a bank account in the non-US country you work in is now a problem. I know several dual nationals who have been “fired” as customers by their non-US bank and opening a new account is a nightmare for someone with a US passport (and by the way the same rules apply to a “green card” holder.)

I don’t think many in congress realize that this is a serious issue – it is undermining “soft power” for the US that its citizens are deterred from working abroad, or that employers won’t do it for less than a senior exec, or that green card holders worry about the impact of taking up US citizenship. Whereas US citizens were fairly common in overseas schools and universities, as junior execs in companies, their numbers are dwindling … to a large degree because of these policies. Moreover, at a certain point the US expatriate needs to sort out the Social Security problem – returning to the US to have enough FICA contributions to qualify for Medicare and a decent Social Security pension – or stay long enough to build up a heavily taxed non-US pension.

There really needs to be some intelligent reforms – addressing the tax burden, the pension issue and also making it easier for US expatriates and those liable for US tax to make social security contributions (I would try to make it count as part of the overall pension contribution ceiling in the UK.)

It’s a mess and needs better thinking.

Posted by: MacK | Sep 21, 2015 1:52:23 AM

First they came for the expats and I said nothing, because I was not an expat...

Posted by: AMT buff | Sep 18, 2015 1:37:03 PM

There are many sets of citizenship and tax facts.

The State Department Published in the Federal Registrar all of those who have given up their US Citizenship in the formal citizen renunciation process.

The number of green cards being renounced is another number – but one has to have a balanced view. One must calculate how many green cards are renounced versus how many are issued as it is the net number that matters - just as with US Citizenship.

There a category of US Citizens who have no interest in filing back tax returns and have chosen not return to the US. This is a very large number. This does not mean they owe any taxes, but to be compliant you must file a tax return each and every year as well as an FBAR. Most of the pensiandos in Panama or Mexico cannot simply not afford the cost of $2,000 to $5,000 in professional fees each year to file their tax return and the FBAR.

There is a category of people who have dual citizenship but have lived and worked in Mexico or Canada and really have not given a single thought to filing anything. Many citizens of Mexico, Canada, KSA and many more have US citizenship as an accident of birth. Their parent were here studying and gave birth. Now 20 years later they find they have dual citizenship and did not even know it. Over 250,000 in KSA alone have dual US KSA citizenship in a country where dual citizenship is not allowed.

Another category that is most unfortunate are the number of US citizens studying abroad. At about 500,000 full and part time student, they are not filing tax returns and, unfortunately, have no clue they might need to file an FBAR. They are focused on grades, not tax or FBARs. A few client’s students can back from overseas and were greeted at US Immigration and asked if they filed an FBAR while they were overseas? As they had no idea what an FBAR was the answer was no, and they were held very briefly for additional questioning.

I get the tax collectors dilemma from a few years ago 9 million living overseas and only about 186,000 FBARs filed! The first assumption is everyone who has not filed is a tax cheat.

FATCA is going to be the database of databases that will collect all of the information – much of it duplicative to tax returns and FBARs so the IRS can figure out who is making money and not filing returns. FATCA will be the global exchange of information allowing the Chinese to find out who is stiffing them and Austrians to know if money is made and not reported etc… It is also, singlehandedly, had more bankers either fire there US clients or charge a $250 per year account fee for US / IRS compliance paperwork costs.

Sorry I went on so long – but it is not as simple as one number or one view – it is messier and more frustrating.

Posted by: Burke | Sep 18, 2015 11:36:13 AM

There is a lot of misinformation in the comments.

To renounce you need to be US tax compliant and show a number of years of compliance. These people are not stateless most have lived overseas for even decades and have citizenship, family, etc in the countries which they call home.

The vast majority of those renouncing have lived outside the US for many years. They moved either by curiosity, career, or love. Many thought that they may just be away for a few years but ended up staying for much longer. Many may not identify as Americans as they have lived their whole life overseas.

In comes Uncle Sam with increasingly intrusive, burdensome, and costly tax and compliance laws with a tax code that penalizes anything foreign as in you live in the US yet have a foreign account - lots of paperwork, penalties, and compliance penalties at stake. Yet if you live overseas and happen to be a US person all your accounts and assets are "foreign" and happen to attract such US treatment.

What appears unfathomable to US persons living in the US, is that if you live in another country such as Canada, Australia, or the UK you pay taxes to these countries already because you are resident there. These are relatively high tax countries compared to the US. But wait, the US requires tax and compliance of you as if you live in the US. The compliance may easily cost thousands each year even if you owe no tax, compared to $50 TurboTax do it yourself if you live in the US. As the penalties may be bankrupting and the overlay of tax systems may be undecipherable (unless you are a CPA), you may pay thousands each year for specialized tax assistance - and the many more forms required for "foreign" accounts and assets. Then there are tax treaty gaps that you get to pay any tax that the US has but your country of residence does not. This flows on top as double taxation without any credit for US tax paid against your tax liability in your country of residence (tax treaty gap), as double taxation. There is a "Foreign Earned Income Exclusion" yet this is only on earned income, with noting said about a range of other US taxes such as on retirement accounts on money earned overseas, that are taxed as "unqualified pension funds."

It gets much worse. The US wants you to report all bank accounts you have signature authority over. This causes a major conflict say if you work for a nonUS company (CPA, bookkeeper, manager, treasurer of local girl scouts), it involves reporting of company confidential information and lots of paperwork for the company and major fines for you if not done right, to the extent that it is all career limiting.

For all the US tax and compliance lets remember the US provides $0 in services such as unemployment benefits etc, other than those provided on a fee basis - passport for example. Some like to say, the US will come rescue you send in the Marines etc. When is the last time that happened in Canada, Australia, and the UK? Lets not forget the recent example of Yemen where the US did not evacuate US persons. If you do get evacuated the US charges a fee for this.

US policy in regards to US persons living overseas is highly discriminatory compared to what is required if you live in the US. It is anti-American and Unconstitutional! Living overseas if you happen to be a US person this should be about being treated by the US as 1st class, instead the US has made citizenship about being 2nd class to nationals in your country who are not US persons, all to the extent that people in increasing numbers are taking the drastic step of paying thousands or even tens of thousands to renounce US citizenship which has become toxic living outside the US.

The Democrats think they get advantage by branding and treating the 8.7 million US persons living overseas as tax cheats, guilty until proven innocent. The Republicans claim this is unconstitutional. Politics has failed the 8.7 million US persons as there is no representation - as in representative only representing those outside the US. So people are giving up and renouncing, or fighting back supporting legal action now both in Canada and the US.

Any US persons living overseas caught up in all this must visit the messages boards of The Isaac Brock Society.


Posted by: JC Double Taxed | Sep 17, 2015 5:30:25 PM

Daniel: I've lived over 8 out of 37 years of my life outside the US. There are many countries with less corruption, more freedom, less taxes, better services than the US. The U.S. Is a terrible place to live now.

Posted by: Jared | Sep 17, 2015 1:53:10 PM

See: The Man Without a Country.
My US citizenship is precious, and in no way could I be inveigled to surrender it. America is still the best nation on God's green earth, despite the attempts by the liberals to transform us into another France.

Posted by: Jim B | Sep 17, 2015 9:48:03 AM

Mac, please tell us what countries these people find more liberating than the US. Are they upset with Obama because he has not given us universal healthcare like so many other 1st world countries?

Posted by: Daniel | Sep 17, 2015 8:03:54 AM

Interesting, but getting your money out without a big tax hit is probably keeping others from following suit.

Posted by: PD Quig | Sep 17, 2015 7:57:50 AM

I'd be amazed if the real numbers are anything like that low. I know a lot of people who have U.S. citizenship who have no intention of ever coming back to the U.S. Most of them despise Obama and the IRS and can see there is damned little in the U.S. that can't be bettered in a number of countries elsewhere. I strongly doubt that most of these people file. All they have for the U.S. is an erect middle finger.

Posted by: mac | Sep 17, 2015 5:59:26 AM