Why Most U.S. Citizens Residing Overseas Haven’t a Clue about the Labyrinth of U.S. Taxation and Bank and Financial Reporting of Worldwide Income and Assets

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This post is written simply because so many U.S. citizens residing overseas are reasonably confused about the complexity of U.S. tax law.  The mere requirement to file U.S. income tax returns for those overseas often comes as a great surprise.  My non-U.S. born wife is an exception (as she also lives outside the U.S.) simply because I have repeatedly told her for our 20 some years of marriage.  IRS Form W-7 Highlighted

Some in the IRS erroneously think U.S. citizens residing overseas do and should understand U.S. tax law.  I posed one simple scenario to a very sophisticated IRS attorney not very long ago who specializes in the FATCA rules.

Her view is (hopefully was) that U.S. citizens throughout the world know or should know the U.S. tax laws because the instructions to IRS Form 1040 are clear.

This thought knocked me off my figurative chair onto the floor!  Smack. 

My surprise is based upon my own experience working with individuals and families throughout the world, in numerous countries.  I have noticed a number of notions, based upon these andectodal experiences as follows:

  1. A minority of U.S. citizens (unless they lived most of their lives in the U.S. and recently moved overseas as an “expatriate”) have no real basic idea of how the U.S. federal tax laws work; let alone to their assets and income in their country of residence.  See USCs and LPRs Living Outside the U.S. – Key Tax and BSA Forms
  2. There are indeed plenty of immigrant U.S. residents (certainly less than 50% by my own experience – especially when concepts of PFICs and foreign tax credits start being discussed) who even understand the basics of U.S. international tax law.
  3. If they reside in an English speaking country that has relatively strong family or historical ties to the U.S. (e.g., England, Ireland, Scotland, and Canada, etc.) they are likely to have a better idea of the U.S. federal tax laws, but still the majority don’t know key concepts.  See, Nuances of FBAR – Foreign Bank Account Report Filings – for USCs and LPRs living outside the U.S.
  4. Even those in English speaking countries that have less historical or family ties to the U.S. have a lesser understanding (e.g., New Zealand, Australia, Kenya, South Africa, India, etc.).US Passport
  5. Those who do not speak English know even less about U.S. tax laws and how they apply to them.
  6. Many individuals who learn of these requirements overseas are sometimes driven to great despair.  The message they receive is not a correct one under the law in my view: as they read IRS materials (for instance, see FAQs 5, 6 and and former 51.2 from the Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers 2014) and come to the conclusion they will soon be going to jail, criminally prosecuted or otherwise be subject to tens of thousands of dollars worth of penalties for their failure to file a range of tax forms.
  7. Literally, sometimes as a tax lawyer I feel more like a psychologist, when these individuals come to me saying they can’t sleep, they can’t eat, they are seeing a cardiologist for high blood pressure, etc. and even in a most extreme case they thought suicide was a solution.  See, How is the offshore voluntary disclosure program really working? Not well for USCs and LPRs living overseas.
  8. Individuals around the world (even tax professionals) and certainly laypeople, are not commonly reading TaxAnalysts (nor would they subscribe) or other tax professional publications that explain many of the intricacies of U.S. tax laws.
  9. Learning and understanding U.S. tax laws, including just the basics, requires a great deal of time, aptitude for nuances and details, literacy, patience and a level of aptitude for such matters that simply escape many people around the world (most I would say).  see, “PFICs” – What is a PFIC – and their Complications for USCs and LPRs Living Outside the U.S.  I can relate to this personally, as I am an international tax professional (indeed I even studied a post graduate law course outside the U.S. in a non-English language), have spent my entire professional career of more than 25 years in the area, and yet only generally have a very superficial understanding of tax laws throughout the countries where I am dealing with clients.  I don’t try to understand the details of those laws. Chart of Trends - US Citizenship Renunications Qtr 3 - 2015
  10. Many people are angry and frustrated (justifiably so, in my view, in many cases) after learning they are subject to these rules.  See comment above about being a psychologist.  Plus, USCs and LPRs residing outside the U.S. – and IRS Form 8938. In addition, see, Taxpayer Advocate Report on Burdens of Benign Taxpayers who Make Mistakes

Back to the intelligent IRS tax attorney.  My question to her was:  “Why would you, as a U.S. born individual not be reviewing the tax laws, tax forms and tax instructions of the country where your parents were born prior to immigrating to the U.S.?”  I asked:  “Are you not reviewing those laws in the original language of your parents (not English, but the other language of your parent’s country) to understand what tax forms and returns you should be filing?”

The IRS attorney’s response was:  “What:  of course, I am not reviewing such tax forms or filing information or tax laws, as I would have no tax obligations in that foreign country where I have no income, no assets or no bank or financial accounts!”

My follow-up question was a simple one:  “Don’t you realize that U.S. federal tax law (Title 26) and financial bank reporting laws (Title 31) do just that!”

“Hmm she paused: how can that be?”  I don’t recall if she said this out loud, or just said it with her puzzled expression.

The answer of course is that through citizenship (including derivative citizenship through a U.S. parent even though the child never spent a single day of residence in the U.S., let alone received any income or assets); that same individual in the mirror position as that IRS attorney is subject to a host of U.S. federal tax and financial reporting laws.  See,

Here is the big disconnect.    It’s not just among the ill-informed or those lesser educated on the fine points of law.  I had the pleasure this week along with my wife to host two educated, worldly and engaging individuals who have been married some 20 years together.  They are well read and highly educated.  Both are lawyers by training, one practices law that often pushes him fairly deeply into the tax law and his wife is a wonderful and experienced judge in the California state courts.

I asked them (as I like to ask people around the world) if they had ever heard or understood that the U.S. federal tax law imposes taxation and very detailed reporting on the worldwide income and assets of U.S. citizens who reside outside the U.S.  I discussed Civil War ImageCook v. Tait and the U.S. Civil War a bit.  See both Supreme Court’s Decision in Cook vs. Tait and Notification Requirement of Section 7701(a)(50) and The U.S. Civil War is the Origin of U.S. Citizenship Based Taxation on Worldwide Income for Persons Living Outside the U.S. ***Does it still make sense?

All of it was a great surprise to them! They were in utter shock and both are residents in the U.S., highly educated in the law and are like the vast majority of the world, including U.S. citizens who reside outside the U.S.

This is the common response for many U.S. citizens residing overseas.

6 thoughts on “Why Most U.S. Citizens Residing Overseas Haven’t a Clue about the Labyrinth of U.S. Taxation and Bank and Financial Reporting of Worldwide Income and Assets

    JC Double Taxed said:
    November 2, 2015 at 7:03 am

    The US Tax and Compliance laws on US persons overseas represents:

    * Double taxation without representation.
    * Without US government services and without a care by the US government for the wellbeing of those impacted.
    * With excessive compliance cost and excessive compliance cost if not done right.

    No US persons living overseas would have approved of such treatment.

    American Overseas said:
    November 2, 2015 at 7:40 am

    That is why we as Americans overseas and the associated affected populations MUST FIGHT THIS! What the US government is doing is immoral and unethical. The US government is ruining the lives of millions of people around the world. This is the reality!

    renounceuscitizenship said:
    November 2, 2015 at 9:21 am

    Nice post.

    I would add to this that there are VERY FEW, U.S. CPAs or U.S. attorneys who know anything about this stuff. Another thing worth considering is this:

    U.S. laws are very very big on penalties for non-compliance. I believe that this is a reflection of U.S. culture which operates on the assumption that everybody is a criminal. Honestly, the USA is a world unto itself.

    Also, the laws are not capable of being understood by any normal person.

    In any event, your post exactly why people are renouncing and why they should be renouncing. No ifs, ands or buts about it.

    Bottom line is that Americans abroad are being persecuted by the USG which is aided and abetted by the tax compliance industry.

      impuestosypatrick responded:
      November 17, 2015 at 7:36 pm

      U.S. citizens should get good advice on how U.S. tax laws (and other laws for that matter) apply to them. The idea the ” . . . USG which is aided and abetted by the tax compliance industry. . . ” misunderstands what “aiding and abetting” is as a matter of U.S. law.

      Certainly, U.S. tax professionals are subject to Circular 230 rules as set forth in Treasury Regulations. It is also fair to say that I am of the view that many U.S. tax professionals have not critically analyzed U.S. federal law, when they instead focus on what the IRS says or states. What the IRS says in a FAQ or their website may well NOT be the law. What the IRS says in instructions to their forms, is also NOT the law and may misinterpret the law. This is also true for the Internal Revenue Manual (IRM), on occasion.

      Normally, the IRS does a very good job at explaining the law well in both form instructions and the IRM. However, I am of the view that often times their FAQs and statements they have made over the last 5-6 years or so on the IRS website, regarding offshore accounts has in some occasions blatantly overstated or exaggerated the law. It has often misled taxpayers and unfortunately, many tax advisers have not been critical thinkers at the level they should have been; to distinguish between the actual law and statements made by the IRS. The Taxpayer’s Advocate has written extensively and analyzed many of these aspects during this same 5-6 year time frame.

    bubblebustin said:
    November 2, 2015 at 4:08 pm

    #3. I would say that living in countries most like the US would predispose someone to not “reasonably” know about their US tax obligations, as the countries they live in don’t exercise the same. The biggest mistake US citizens make, both in the US and abroad, is to assume that Americans are as free as other nation’s people. The look you saw in that IRS’s persons face and in the faces of your guests is nothing more than cognitive dissonance. The anger you feel from American abroad is the betrayal we feel when we learn that the image the US would like to portray of itself is nothing more than a lie.

    ExUS said:
    November 4, 2015 at 3:49 am

    Not only don’t those outside the US claimed by it as “taxable persons” not know about FBARs, etc. as applied to their ordinary everyday banking and accounts local to where they live (and many were BORN – outside the US) but many of those INSIDE the US didn’t and still don’t know about it either. I have met several. That can include accountants in the US who you’d think would know better. Or they have heard of the FBAR but don’t understand how broad it is – that it includes non-personal non-beneficial accts – ex. work accounts belonging to our Canadian employer, or church accounts – where a person who is merely an employee or a board member in a voluntary organization has only a co-signatory role, or just a potential signatory power – as in a power of attorney for future care – contingent on conditions that haven’t even happened yet and may never. The idea that a child ‘abroad’, or any other ordinary person is forced to report to a US Financial CRIMES ENFORCEMENT agency for our ordinary chequing account with which we receive our POST-tax wages and pay our rent and groceries is absurd and abusive. We live in places with just as much or more layers of legal and governmental oversight as the US. Canada isn’t the US Wild West or Prohibition era Chicago.

    We don’t bank in Kansas Dorothy, because we don’t live in Kansas.

    We’re not Al Capone. And we’re not US resident millionaires and billionaires hiding funds. And we’re not operating multimillion and billion dollar family trusts in the Caymans like the US Commerce Secretary. Using common sense, just how many US citizen billionaires could there actually be in the rest of the world?

    So it is entirely reasonable for us to assume that as we are not criminals, drug lords, money launderers, terrorists, etc. our ordinary Canadian savings accounts should be of interest only to the country we actually live in, are citizens and taxpayers of.

    It is absurd unreason for the rest of the world to have to wonder whether a foreign country – the US, considers us to be their taxpayers.

    No one else taxes on the sole basis of citizenship, birthplace or parentage. Why should we have for a second considered that such an asinine and exploitive system existed? And why should we for a second have considered that it could apply extraterritorially even if we’d never set foot in the US – much less had any economic connection.

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