People have been asking me about a get out of Dodge plan. The fact is, the US government is making it increasingly difficult to get out of Dodge, and those that have not already done so may well have left it too late. The government does not want its citizens living overseas, nor do they want its citizens having assets overseas. Currently there are some 6 million Americans living overseas, and they have assets and incomes that are difficult for the US government to control and tax, and the US government does not like that.
The US is the only country in the world (except for Eritrea) that has citizenship based taxation. No matter where you live, and no matter where you draw your income, the US taxes it. Every other country has residence based taxation – you are taxed only if you reside in the country or earn income in the country. For instance, if you are a Canadian working in the US, you will have no Canadian tax obligations, unless you have income from Canada. If you are an American working in Canada, you are liable for US tax on your Canadian income. If you are an “accidental American” – and there are potentially millions of these around the world – born to an American citizen overseas, or born to a foreign citizen who was travelling through the US at the time of the birth – you are a US citizen, and may not know it. The US does not care – and will happily seek you out and punish you for failing to file and pay US taxes. No leeway is given.
The US has a whole range of laws that penalize US residents that live outside the US. One law is the FBAR law – that law requires that foreign financial assets be reported each year, and requires that all accounts where the citizen is a signatory be reported. Financial assets include bank accounts, mutual funds, CDs, gold, etc. Failure to report these accounts can, and does, result in draconian fines, from $10,000 for non-will failure, to 50% of the balance of all accounts, for failure to report even one account. Per year. Simple errors can, and do, result in the penalties being applied. The signatory provision effects persons who work for an overseas company and can sign business checks. They must report the balances of the account, even though it is not their account. And even though there may be privacy law issues – the US does not recognize the privacy laws of other nations, and can and will prosecute those individuals for failing to breach the laws of the nation in which they live. Note that citizens that live in the US have no such requirements.
Another law is FATCA. FATCA has two basic features. First, FATCA requires foreign banks to tell the US what US citizens have accounts with them. Any banks failing to provide such information will have 30% of any transaction with the US withheld as a fine for failing to tell the US what it wants to know. Banks are required to search their records and identify all US account holders, initially beginning with account holders having substantial deposits, but within a few years identifying all US account holders to the IRS. Any US account holder that does not agree to give the foreign bank his/her SS number to the IRS, along with balances and interest earned, will have their accounts closed. Many banks are simply closing the accounts of all US citizens, in order to avoid the reporting regime in its entirety. This is happening today in the UK and Switzerland especially. Americans are finding it difficult to open accounts overseas, as banks are refusing to deal with them.
The second feature of FATCA is it requires overseas Americans to report all of their assets each year. That means they must report the value of their homes, their bank accounts, their shares, their everything. Failure to so report, or to be accurate, can/will result in fines of 40% of the value of the assets. This is not, as yet, required by Americans not living overseas.
The IRS intends to make it mandatory that all of this reporting is done electronically. The IRS will then be able to instantly match an overseas person’s SS number against his/her bank account, his/her assets, etc. Any discrepancies or anomalies will be pursued.
Additionally, overseas residents are also subject to a range of other reports not required in the US – they must report any transactions with foreign trusts, they must report full financial reports on corporations where they have significant holdings, etc. Not all overseas Americans will have to do these reports, but failure to provide these reports can result in fines of 35% of the value of the asset/business for each year the report is not lodged. These reports have nothing to do with tax owed, but only have to do with failure to tell the IRS every detail about every financial asset the person owns or has influence over overseas.
To restate, an American citizen that lives overseas must report all of his or her assets, financial accounts, gold holdings, records of their business, any transactions with foreign trusts, all income received overseas, etc. Every single thing must be reported each year, or the fines approach 50% of the asset value each year. EACH YEAR. In two years, the fines can reach or exceed the person’s entire net assets.
I have been told by people who know that it is impossible for a US citizen living overseas to meet these reporting requirements in full, or to even be able to keep abreast and aware of all the reporting requirements, and that overseas residents will breach the law inevitably, and open themselves up to loss of great slabs of their wealth as a result, and potentially to criminal charges. The laws are too complex, and too pervasive to be followed, and are incredibly penal for even the most benign mistake.
Which brings me back to the get out of dodge question. An American citizen living overseas will find it very, very difficult to comply with the laws. Even if they are able to comply, the costs will be prohibitive in most cases – they will have two sets of taxes to complete and file each year – one for their country of residence, and one very complex one for the US. They will find it increasingly difficult, if not impossible to get a bank account overseas, which will effectively mean they cannot live overseas. Even if they can get a bank account, they will have to agree to be 100% monitored by the IRS. They will invariably breach a complex US reporting law, and their assets will be under threat. Most countries are falling into line, and will assist the IRS in seizing overseas assets, so hiding out and hoping the US cannot seize is not an option.
So what is an option? To me, there is really only one viable option if one wishes to remain inside the bounds of the law – the American must secure overseas citizenship (which in and of itself is not easy to do) – and renounce US citizenship, if he or she really wants to get out of dodge. The process is not easy, and the US is making it more difficult all the time. Many, many Americans are renouncing citizenship, as is their right. However, the US is making it difficult: there are long waiting lists (out over a year in many cases) to meet with a Department of State official to renounce citizenship, and it is the only way it can be done; there are exit tax regimes that affect anyone with capital gains that have not been chrystallized; there are potentially restrictions about re-entering the US after renunciation; etc etc etc.
To sum up then, the reality is that the US does not wish its citizens to leave, and is making it extremely difficult for its citizens to leave. It is also doing everything possible to penalize its 6 million citizens that have left, and to drain them of any assets that they have accumulated overseas via a vast myriad of laws that simply cannot be fully complied with, and subsequent draconian taxes for failure to comply, wilfully or otherwise. They are making it extremely difficult for citizens to set up bank accounts overseas, so as to limit or eliminate the ability of its citizens to move assets overseas. Anyone considering “getting out of Dodge” needs to fully educate themselves on the laws and realities of the situation, and make plans well in advance of the time they hope to get out of Dodge. And they also must begin to face the reality that it may no longer be possible to exit the US. The US does not want its citizens to leave, wants those overseas to return (with their assets of course), and is bringing to bear its full political power in order to prevent it.