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
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.
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:
- 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
- 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.
- 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.
- 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.).
- Those who do not speak English know even less about U.S. tax laws and how they apply to them.
- 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.
- 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.
- 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.
- 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.
- 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, Sir Winston Churchill – Famous People. Did he become a U.S. citizen at birth via “derivative citizenship”? Did he file U.S. income tax returns?
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 Cook 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.
WSJ (18 Feb. 2015): London Mayor Boris Johnson to Renounce U.S. Citizenship After Tussle With Uncle Sam
Ironically, the outspoken London Mayor has decided to renounce his U.S. citizenship, according to an article published by the Wall Street Journal.
See, WSJ: (18 Feb. 2015) – London Mayor Boris Johnson to Renounce U.S. Citizenship After Tussle With Uncle Sam
This article reported that his U.S. tax bill was at issue – :
In case you missed it: London Mayor Boris Johnson has said he will renounce his U.S. citizenship following a high-decibel tax squabble with his country of birth. At issue: a tax bill U.S. tax authorities claimed he owed on some London property. The mayor will (of course) keep his citizenship in the U.K. as his political ambitions continue to play out.
A previous post in November 2014 discussed a news report of the London Mayor and his U.S. citizenship and hence U.S. tax residency status. See, According to news press, London Mayor, dual citizen, refuses to pay United States income taxes
Surely, he will be careful and thoughtful about the steps he is taking as part of his U.S. citizenship renunciation. His reported response to the news reporter last year could prove risky under U.S. law, to the extent he intentionally refuses to file U.S. income tax returns and pay taxes. The following line of questions and answers could be quite damning for him:
Presenter Susan Page then pressed him whether he would pay the bill, to which he said: “I think it’s outrageous.
“Well, I’m – no is the answer. Why should I? I haven’t lived in the United States for, you know, well, since I was five years old.
“I could but I pay – I pay the lion’s share of my tax, I pay my taxes to the full in the United Kingdom where I live and work.”
Here, the London Mayor has indicated he is not filing tax returns, yet knows he has a legal duty to file them and pay a tax owing under U.S. law. He goes further to say “I could . . . pay . . .” While rarely used standing alone by prosecutors (without other criminal claims brought), it is a crime that carries up to a 12 month prison sentence, to not file a U.S. return, supply information or pay tax; see, IRC § 7203. The relevant language of the statute is as follows:
Any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return, keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than $25,000 ($100,000 in the case of a corporation), or imprisoned not more than 1 year, or both, together with the costs of prosecution.
Here, the government has yet another stick it can pull from its bag of sticks to be used against current and former U.S. citizens residing outside the U.S. It is of course, very common, that individuals who have spent most of their lives outside the U.S. have not filed any U.S. tax returns nor paid any U.S. income taxes. At what point, might these individuals have U.S. civil tax liability and what facts are necessary to give rise to criminal tax liability?
The vast majority of U.S. citizens residing overseas owe little to no U.S. income taxes because (i) modest income amounts and the impact of the “foreign earned income exclusion” or (ii) they reside in a country with higher taxes and tax rates than the U.S. because of the “foreign tax credit”. See, USCs and LPRs Living Outside the U.S. – Key Tax and BSA Forms
A couple observations about London Mayor Boris Johnson. First, he would be well advised not to make public statements about filing [or not] U.S. tax returns or paying [or not] U.S. taxes. Second, he will want to carefully consider completing and filing accurate U.S. tax returns as part of his formal renunciation process; particularly for the year in which he sold his London home tax free under UK laws. Third, he will want to understand carefully, the details of what is and should be filed on IRS Form 8854, after he has visited the U.S. embassy and files his Form DS-4080, Oath of Renunciation of the Nationality of the United States.
Finally, the case could present a unique international political and public relations nightmare for the U.S. Department of Justice, if they decided to bring any sort of criminal tax charges against the London Mayor. It would seem highly unlikely in my opinion.
The government has a strict requirement that prohibits a United States Attorney (e.g., the high profile Preet Bharara, U.S. Attorney for the Southern District of N.Y. Attorney ) from unilaterally bringing tax charges against individuals. See, 6-4.200, Tax Division Jurisdiction and Procedures, which provides in relevant part:
“. . . The Assistant Attorney General, Tax Division . . . must approve any and all criminal charges that a United States Attorney intends to bring against a defendant in connection with conduct arising under the internal revenue laws, regardless of which criminal statute(s) the United States Attorney proposes to use in charging the defendant. See 28 C.F.R. § 0.70.
Also, only the Tax Division can authorize warrants of public officials, which presumably would extend to London Mayor Boris Johnson. See, See, 6-4.130, Search Warrants.
On a related post, see, How many former U.S. citizens and long-term lawful permanent residents have filed (or will file) IRS Form 8854? and Revisiting the consequences of becoming a “covered expatriate” for failing to comply with Section 877(a)(2)(C).
The Chinese actor Li Lianjie, who is better known by his stage name Jet Li, was born in Beijing. He was born in 1963 and his father died when he was just 2 years old and he “. . . was from a very poor family and . . . didn’t have enough money for a good school, so sports-school was good . . . ”
He is a huge star in China and throughout Asia and became famous in Hollywood.
As a teenager he became a master at Wushu, the full-contact sport from Chinese martial arts. His martial arts fame led to acting, first in China and also in the United States. His film debut Shaolin Temple (1982), helped make him a star.
He apparently became a naturalized citizen of the United States while working in Hollywood.
He apparently has also become a naturalized citizen of Singapore.
By the year 2009 he renounced his U.S. citizenship as listed in the U.S. federal government’s “Quarterly Publications of Individuals, Who Have Chosen to Expatriate, as Required by Section 6039G“
See here the list for the first quarter of 2009, where Li Lianjie is in the 2009 first quarter list of expatriates.
Presumably, Jet Li solicited timely and filed for a Certificate of Loss of Nationality (“CLN”) timely so he was not subject to the rules of 7701(a)(50) that went into effect in 2008 – See, Why Section 7701(a)(50) is so important for those who “relinquished” citizenship years ago (without a CLN). . .
Finally, the certification requirement that is available to those individuals who are born with dual national citizenship to avoid “covered expatriate” status, was presumably not available for Li Lianjie, since he was not born a U.S. citizen. Presumably, he could not satisfy each of the requirements of IRC Section 877A(g)(1)(B).
Yul Brynner was born as Yuliy Borisovich Briner in 1920 in Russia.
He started the process for naturalization of U.S. citizenship in 1943 according to the document, Declaration of Intention, filed with the U.S. federal district court in the Southern District of New York.
Note the photograph and prior residence identified as
as his last place of foreign residency; which is a major port city located in China in the Liaodong peninsula. Apparently, Dairem is popular with Russian tourists. He was Russian.
This is particularly interesting, since Yul Brynner was Russian and apparently moved to what was then known as “South Manchuria”?
He renounced citizenship in 1965 in Bern, Switzerland, apparently for tax reasons according to a biography about his life.
The highest U.S. federal income tax rate in 1965 was 70% (compared to today’s 39.6% rate). See, Personal Exemptions and Individual Income Tax Rates, 1913-2002. The income tax rate was substantially higher then, compared with the current rate, although it is a bit like comparing “apples” and “oranges”; since the tax deductions, exemptions and credits that existed in 1965, look little like the current law.
Social security taxes in 1965 were about 1/2 the tax rate as today, but it only applied to the first US$4,800 of income (which represents aboutin inflation adjusted dollars today). Current social security rates apply to the first $117,000 of income, without limits on the Medicare portion of 2.8%. For historical social security rates, see,
Thomas Stearns Eliot, who was better known as “T.S. Eliot” left the U.S. in the 1920s. He was recognized as one of the great writers of the early and middle 1900s. He published poetry, wrote plays and literature and was a social critic of his time.
T.S. Eliot received the Nobel Price for Literature.
He follows the lines of many other famous former U.S. citizens, in that he was not born on either the East Coast or West Coast of the U.S. He was born and raised in St. Louis, Missouri. Josephine Baker was also born in St. Louis, Missouri and Tina Turner in Tennessee, both famous individuals who shed their U.S. citizenship.
He either relinquished or renounced his U.S. citizenship as he became a naturalized British citizen in 1927. At the time, there were no adverse U.S. tax consequences for shedding U.S. citizenship. The first “expatriation tax” law was not adopted until 1966 as part of the The Foreign Investors Tax Act of 1966 (“FITA”) – The Origin of U.S. Tax Expatriation Law (Posted on April 6, 2014)
The highest U.S. federal income tax rate in 1927 was 25%. See, Personal Exemptions and Individual Income Tax Rates, 1913-2002. There was no Social Security tax at that time, as the Social Security programs were enacted in the Social Security Act of 1935.
Today’s highest marginal income tax rate is 39.6%, and the combined employer/employee portion of federal social security and medicare tax is 15.3%.
Prof. Daphne Barak-Erez was born in the U.S. and hence became a U.S. citizen by virtue of her birth in the United States pursuant to the 14th Amendment (Section 1) of the U.S. Constitution. She was appointed in 2012 to the Supreme Court in Israel. The Tel Aviv University website provides a summary of her impressive CV as follows:
|Faculty of Law, Tel Aviv University,
Prof. Daphne Barak-Erez recently left the Faculty of Law after being appointed to the Supreme Court of Israel. She was the Stewart and Judy Colton professor of law and held the chair of law and security.
She is a three time graduate of Tel-Aviv University: LL.B. (summa cum laude) 1988; LL.M. (summa cum laude) 1991, and J.S.D, 1993 (recipient of the Colton Fellowship). She was a visiting researcher at Harvard Law School, a visiting fellow at the Max-Planck Institute of Public Law, Heidelberg, an Honorary Research Fellow at University College London, a Visiting Researcher at the Swiss Institute of Comparative Law in Lausanne, a Visiting Researcher at the Jawarlal Nehru University in Delhi and a Visiting Fellow at the Schell Center at Yale Law School. . . . She was awarded several prizes, including the Rector’s Prize for Excellence in Teaching (three times), the Zeltner Prize, the Heshin Prize, the Woman of the City Award (by the City of Tel-Aviv) and the Women in Law Award (by the Israeli Bar). She is the author and editor of several books and of many articles in Israel, England, Canada and the United States.
There are important legal differences between “renouncing” and “relinquishing” U.S. citizenship. Specifically, the federal tax consequences that follow from one versus the other can be quite important. The principle point is the “timing” of when USC status terminates.
The federal tax reporting can be quite different for those who “relinquish” or “renounce” U.S. citizenship. For related background information see the following:
Certifying Under Penalty of Perjury – Meeting the Requirements of Title 26 for Preceding 5 Taxable Years
What could be the focal point of IRS Criminal Investigations of Former U.S. Citizens and Lawful Permanent Residents?
More posts to following regarding “relinquishing” or “renouncing” U.S. citizenship.
Proud Mary and the “keep on burning” lyrics is one of many mega hits of Tina Turner who was born a U.S. citizen in Tennessee.
According to The Washington Post, she became a naturalized Swiss citizen in April 2013 and then “relinquished” (not renounced) her U.S. citizenship in 2013 (and is married to a German citizen):
By Al Kamen
November 12, 2013 at 4:38 pm
The specific facts surrounding the citizenship of Elizabeth Taylor may never become public knowledge. She was not born in the U.S. and hence did not receive U.S. citizenship via the 14th Amendment. She was born in London, England in 1932 to U.S. citizen parents and hence obtained derivative U.S. citizenship via her parents.
Ms. Taylor apparently tried to renounce in Paris at one point, unsuccessfully when married to Richard Burton around the time she won the Oscar for Who’s Afraid of Virginia Woolf?.
There were various newspaper reports published in the 1960s about how she first attempted to renounce (unsuccessfully) and then later successfully renounced while married to Richard Burton.