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Unintended taxing consequences

The Immigration Line
|Written By Jennifer Nees
Unintended taxing consequences

The United States is one of the only major countries in the world to tax its citizens regardless of where in the world they live. And the taxation issues with U.S. citizens who live abroad has never been a more active topic in immigration law than it is right now.

Several months ago, we began receiving a much larger volume than normal of calls from people who were afraid that they might be U.S. citizens, or who knew they were U.S. citizens but wanted to discuss relinquishing that citizenship. Why the upswing in people who want to ditch the U.S.? It wasn’t political, and the Internal Revenue Service managed what neither the Bush or Obama years could: it was causing people to rethink the value of their U.S citizenship.

Why the increase? In February of this year, the IRS announced the 2011 Offshore Voluntary Disclosure Initiative, a special initiative designed to bring offshore money back into the U.S. tax system. A deadline was given for U.S citizens living abroad to back file their taxes and, without penalty, tax related reporting documents such as the FBAR, or the Report of Foreign Bank and Financial Accounts. This was all part of a new wave of enforcement to, according to tax specialists, tax/track U.S. citizens who keep large amounts of money overseas.

Let me say right here, I don’t practise U.S. or Canadian tax law. I am not a tax expert and I don’t even try to do my U.S. or Canadian taxes on my own. I would never advise anyone on how to ensure compliance with any tax rule that may affect them. When faced with these requirements, as a U.S. citizen, I immediately contacted a local cross-border tax specialist and had all of my documents filed on time to ensure that I was compliant with the new requirements.

As an immigration lawyer, however, I was contacted (as were many of my colleagues) by countless individuals who wanted to rid themselves of the bane of U.S. taxation. They didn’t want to face penalties or a lifetime of filing requirements. They wanted their U.S. citizenship stripped from them immediately.

Despite what you may see on television, it’s actually not that simple to give up your U.S. citizenship. It’s not that complicated, either, but it does take time and it takes visits to the consulate to convince an officer that you really mean to give up a privilege coveted by people all over the world. But renouncing your citizenship is not an easy out on the tax front. There are still taxation issues that arise from giving up your citizenship. There are also penalties for renouncing U.S. citizenship to avoid taxation, though this is a difficult burden for the government to prove.

When approached with this sort of issue, my first piece of advice is to contact a tax specialist who can determine the actual taxation issues and plan a course of action. Once there are hard and fast financial facts, the more esoteric discussion begins. What does it mean to be a U.S. citizen? What does it mean to be a dual citizen? What does it mean to provide the U.S. with every detail of your foreign bank accounts? What does it mean if you renounce your citizenship?

This issue has polarized U.S. citizens living abroad who want to protect their personal financial information but who dearly hold onto their U.S. citizenship. Being a U.S. citizen for many people is a source of pride; the Red, White, and Blue waving over a picturesque ball field while eating hot dogs, drinking beer, and watching your favourite team. It’s the dream and the reality in equal measure.

The financial accounting part is the nuts and bolts. The bigger question that seems to be hanging heavily over many of the consults I have had on this issue is, “Who am I fundamentally and what do I really believe?” Heady stuff and I am sure a consequence the IRS never intended.

  • RE: Unintended taxing consequences

    Gerrit
    I'd say the larger unforeseen consequence is that of the pressure from foreign governments. What did the US government think was going to happen when they, in effect, asked for an upwards estimate of 2 million Canadians (one million US citizens living in Canada and their spouses joint accounts are subject to the law,) to turn over a full quarter of their bank balances? The question that I've not seen asked yet is whether a Canadian citizen married to a US citizen can sue to stop the US government from taking what amounts to 12.5% of their money... now that would make an interesting article!

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