There is no more likely time for the government branch that collects taxes to become aggressive than when its country is trying to dig itself out of massive debt. The IRS has stepped up its attack on taxpayers in many different areas, especially on both people who live outside the country or who have money in banks outside the country. I don’t want anyone to think that I support cheats who try and hide their money to keep from paying their taxes, that’s just not right. But, I find myself on the receiving end of some fairly new legislation that has been passed and also some legislation that has basically been ignored until now.
I’ll try and explain so you can understand a little better. The U.S. is one of two, and the only major country that taxes its citizens, no matter where they live and no matter where else they might pay taxes. They want a piece of money that wasn’t even earned in the U.S.. And they require that all citizens file a tax return, so their tax requirement is just being a citizen where most countries determine that from residency. The only way to reduce the taxes owing on what is called “worldwide” income is a credit that is allowed for foreign taxes paid. In other words, when I report my Canadian income on my U.S. tax return, I get credit for the taxes I paid here in Canada. But, if that doesn’t offset the taxes the U.S. charges on that income, I get to pay more taxes to the U.S. for income not earned there.
All U.S. Citizens
An area that has arisen out of the ashes during this push for collecting taxes is who is defined as a U.S. citizen. The most surprised group that has realized they should have been filing taxes for years is the group of people, living in a foreign country, who were born to a U.S. citizen, thus giving them citizenship. A large group of people here in Canada have discovered they should be filing taxes and are behind by 10-40 years, yet don’t have a social security number or have never lived or worked in the U.S.. Imagine the anxiety building in these people as they continue to hear about the exorbitant fines and penalties the IRS are charging.
As a result of the Foreign Account Tax Compliance Act (FACTA) that went into effect in March 2010, the law requires foreign financial institutions (FFI) like local banks, stock brokers, hedge funds, pension funds, insurance companies, trusts, etc. – to report directly to the IRS all their clients who are US persons starting in 2013.
Because of this, many banks in Europe are dropping their U.S. customers rather than comply with the stringent legislation. If any refuse to comply, they could face a punitive 30 percent withholding tax on all payments from the U.S.. The law is expected to increase tax revenues by $8 billion over the next 10 years. But what is it doing to people living in foreign countries with their husbands, children and just trying to earn a living somewhere besides the U.S.?
Big Brother Watching
Another requirement for living abroad citizens is to file Form TD F 90-22.1 i.e. the Foreign Bank Account and Financial Records (FBAF). It has a non-willful penalty of up to $10,000 for not filing and the onus is on the person to prove they were acting non-willfully. The FBAR must be filed every year if one has assets on deposit in foreign accounts (i.e., checking, savings, stocks, pension, etc.) that aggregate over $10,000. This is to be filed along with your 1040, yet most people are not even aware of the form’s existence.
What most people don’t realize is that this gives voluntary information to the U.S. government of joint bank accounts you have earned with your spouse, money in pension savings accounts like IRA’s and even investments you’ve made with your foreign earned income.
Now, directly resulting from the U.S. strong-arm tactics, record numbers of U.S. citizens are renouncing their citizenship. Over 1800 people renounced their citizenship last year alone, more than all the people who did so in 2007, 2008 and 2009 combined. This is mainly being done because of the threat of exorbitant penalties for not filing the proper forms with their 1040’s or not filing at all.
Living in another country, I know first-hand that you get conflicting advice from both countries on filing requirements and it’s only been in the last year that this has all come to light. I will also point out that all the news articles coming from the U.S. media are pointing fingers at citizens living abroad for renouncing citizenship simply to avoid paying taxes. Nothing could be further from the truth for the majority of people living abroad.
Legislation Without Representation
I hope this has given you a little insight into things that affect American citizens every day and could even affect you some day. It’s not something that most people stop to think about but it’s a good opportunity to expand your horizons. I leave you with the latest legislation sailing through the House of Representatives and have already passed Congress.
What are your thoughts on this or have you had a similar experience?
Here is another article that Mary thought you might enjoy on US citizens renouncing their citizenship.
[Photo Credit: DonkeyHotey]
Mary Cunningham would never claim to be a financial expert but has worked in the area of finance with personal taxes for over 15 years. Those personal taxes included all personal aspects, rental property and small businesses. She will be offering some Canadian insight to this venture but she came to live in Canada by way of Kentucky.