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Wednesday, June 26, 2013

Exile from the 'Land of the Free'

"Just because you're paranoid doesn't mean they aren't after you."

Joseph Heller

It's not much fun being an American abroad these days.  It seems like every time we open a newspaper, read the headlines on the Net,  or talk with other Americans in our host countries, it's bad news followed by more bad news.  Even the most level-headed and loyal are beginning to wonder if the U.S. government and  the American homelanders really are after us.

The latest is a little amendment that two U.S. senators decided to slip into a U.S. immigration reform bill (S. 744: Border Security, Economic Opportunity, and Immigration Modernization Act).  Guess they decided that while they were working on immigration that they might as well strike a blow against emigration. Kind of implies this mentality:  Once we've got them (migrants and their children) the U.S. needs a way to make them stick around and never EVER leave.

It's called the Reed Schumer Amendment and it adds a brief section to the immigration bill entitled "Inadmissibility of individuals who renounce citizenship to avoid taxes." Full text can be found here at Isaac Brock.   It says that if the U.S. determines that someone has renounced U.S. citizenship to avoid U.S. taxes, then that person can be barred from the U.S. for life.

Who could possibly vote against such a worthy purpose with such a catchy title?  If Americans don't like the U.S. system of citizenship-based taxation and want out, well, at least the U.S. can spank them and then close the door on them forever. 

A Catch-22:   It's a classic catch-22.  If this amendment passes then American emigrants facing double taxation, the high cost of compliance with U.S. reporting requirements, loss of access to banking services outside the U.S, and limited business opportunities abroad (all of which are happening right now) run the risk of never being allowed back into the U.S. to visit family and friends if they renounce U.S. citizenship.

Rock shake hands with hard place.

Allow me to anticipate the arguments in favor of this amendment.  It only applies, some will say, to the rich who made their money in the United States and then fled the country to low-tax jurisdictions.  I would ask these people to read the text again because that interpretation is not at all what the amendment actually says.

Who is Inadmissible?:  Read the first paragraph very carefully.  There are two groups here that can be sanctioned.
I) Any alien who is a former citizen of the United States who officially renounces United States citizenship and who is determined by the Secretary of Homeland Security to have renounced United States citizenship for the purpose of avoiding taxation by the United States.
(II) Subject to clause (ii), any alien who is a former citizen of the United States and who is a covered expatriate.
The first section should already make us all very nervous because it's a U.S. government agency that would be tasked with determining if someone renounced to avoid taxes.   That means that exile is going to be based on a ruling by the bureaucrats - they get to decide who is and isn't a "tax evader."  What fun for them.  And what fun for the renunciant.  The onus for proving that one did not renounce U.S. citizenship to evade taxes is on the person renouncing - literally he is "guilty until proven innocent."

What would that person have to provide in way of proof that he is not a tax evader?  Hard to know.  Look, because of the U.S. system of citizenship-based taxation just about everybody who renounces is going to save money on taxes or on fees.  Even those Americans abroad who don't make enough money to pay income taxes still may owe capital gains on property, pension plans and other investments.  That makes us all very vulnerable - from the expatriate entrepreneur in London to the English teacher in Korea.

Covered Expatriates:  In the second section, the key term here is "covered expatriate."  Not many people know what that term means but it's important to know because it broadens the scope of this amendment to include a very large number of American emigrants (6-7 million people).  A "covered expatriate" can be someone who is "rich" (owes a substantial amount of U.S. tax or has over 2 million USD in assets)

OR:
Someone who–regardless of net worth or prior Federal income tax liability–cannot say under penalty of perjury that the prior five years of Federal tax obligations are fully satisfied. Finally, a covered expatriate is someone who is late filing the exit year income tax return on time.
This means anyone who hasn't done the paperwork (filed all the U.S. income tax returns, FBAR's and the like) for the past five years.  So that nice American lady in Paris who works as a secretary for a little NGO making the Smic (French minimum wage which is 1425.67 Euros per month) but who never filed U.S. tax returns because she didn't know she had to is a "covered expatriate" unless she hires an international tax lawyer and backfiles.  

For those of you who are wondering why in the hell this woman was supposed to be filing in the first place given that she earns what little money she has abroad (not in the U.S.), please note that this is a requirement for ALL U.S. citizens and Green Card holders wherever they live and work (Belize, Mexico, China, Indonesia, France....).  This includes (but is not limited to) secretaries, server monkeys, small business owners, teachers. musicians, au pairs and many other professions that are not particularly well paid.  They all must report their worldwide income (the money they earn in those countries) to the U.S. every year. "It's the law." 

In her case, if she is married to a Frenchman and her tax status in the U.S. is "Married filing separately", she must file a U.S. tax return if she makes over 3,800 USD in a year (about 2,900 Euros).  This woman would probably owe no U.S. taxes but she is still in trouble because she didn't file and report that income.  Under the amendment, if she doesn't get into compliance, she will automatically be barred from the U.S.

Impact:  Would the U.S. really force this woman to pay the exit tax and then exile her permanently from U.S. soil for not filing a few pieces of paperwork?   A few years ago I would have said, "no way" - my country is better than that.  These days I have doubts.  The rhetoric around the issue of emigration and tax evasion in the U.S. is pretty harsh these days.  What if she falls afoul of one person in the Department of Homeland Security who holds a rather negative view of American women who marry Frenchmen and live outside the U.S. permanently?  What if he decides that her actions should have consequences?  The law would be on his side if he chose to apply it.  

Senator Reed said recently in support of his amendment: "American citizenship is a privilege. But it seems that a privileged few are trying to game the system by accumulating wealth and benefiting from the greatness of the United States and then renouncing their citizenship to avoid paying their fair share of taxes."

Let me count the ways that this statement is horse manure.  As we've seen "the privileged few" includes an awful lot of people who are not particularly well off.  Most Americans abroad are not rich and many have "accumulated their wealth" in the countries where they live and work, not in the U.S.  There is no distinction made here between those who get rich in the U.S. and leave and those who leave the U.S. and make their money elsewhere.  As for Americans abroad "benefitting from the greatness of the U.S."  well, that right there is enough to send many of us into hysterical giggles.  Let's see, what is it about living abroad and holding a U.S. passport and on that basis being denied banking services, business opportunities and employment, or having our foreign spouses threaten to divorce us, that just screams the greatness of the United States and "Aren't you lucky to be a U.S. citizen?"

Right now the last thing that many of us feel is "privileged." On the contrary that U.S. passport is turning us into pariahs in the societies in which we live, at our places of work and at home. And that is a terrible thing not only for Americans abroad but Americans at home as well.  What is becoming clear is that U.S. citizenship is a very heavy burden with some duties and responsibilities that are unique and it is not clear that the benefits outweigh the risks.  Just as many Americans abroad are beginning to question the value of their U.S. citizenship (and there are some like me who are just so damn tired of being slapped around by people like Reed), immigrants are going to question the wisdom of taking on this kind of obligation which has serious penalties and risks and who, in a globalized world, don't want to be disadvantaged if they decide to live and work outside the U.S. at some point in their careers.

In that context it is rather ironic that the Reed Schumer Amendment is being introduced as part of an immigration bill.  On one hand they are trying to rationalize the immigration process in the U.S. and on the other they are proposing something that will give immigrants further cause to think twice about becoming U.S. citizens, residents or Green Card holders.

As for those who are already U.S. citizens and are considering renouncing, this amendment (and the one before, the ex-Patriot Act and the one before that, the Reed Amendment) it says that these lawmakers are not going to give up until they get what they want:  punishment for those who leave the U.S.  Today the threshold for the exit tax is 2 million but what will it be tomorrow?  1 million?  200,000?  Or even 20,000?  If this amendment passes how many people with small to middle-class incomes abroad who have aging parents and other family in the U.S. will be trapped into keeping a citizenship they no longer want, or can no longer afford, because the risk of exile has them scared?  That's enough to make many of us very paranoid indeed.  Some of us are even wondering if it might be better to, in the words of Phil Hodgen, "Get out while you still can."

And last there is an impact on U.S. citizens in the homeland.  It is their citizenship that is devalued by this system and it is their ability to be global that is at stake here.  Do people in the homeland understand how repelling it is when the U.S. punishes people who live and work abroad or who decide they wish to be citizens of another country?  This is not "greatness."  This is petty and vindictive.  It is unworthy of a great country that calls itself "the land of the free" and I can find no excuse or grand purpose good enough to justify it.

Update:  Just Me reports:

"This amendment has now been pulled from the Immigration bill and moved to a second-degree amendment to Patrick Leahy (D-VT)’s border security amendment S.A. 1183.
The number of this latest amendment to an amendment is S.A. 1609. It appears at page S5075 of the Congressional Record for Monday, 24 June 2013.  Here is the actual direct link to where it is now buried to be sure that NO ONE sees it, so it can just slip on through..."

http://www.gpo.gov/fdsys/pkg/CREC-2013-06-24/pdf/CREC-2013-06-24-pt1-PgS5030.pdf#page=46


Keeping track of the shenanigans of U.S. lawmakers is indeed, as Marvin calls it, a game of "whack the mole." 

21 comments:

Anonymous said...

Bravo. This is very scary (terrifying) for all of us living abroad. Thank you for your posts.

Daniel Kuettel said...

One minor correction. It is not "loss of access to banking services outside the U.S", but rather "loss of access to banking services worldwide"

American expats are being denied financial services inside and outside of America.

Victoria FERAUGE said...

@Anonymous, Thank you for reading. I really appreciated your comment over my 10th cup of coffee this morning. :-)

@Daniel, I've heard that US citizens are being denied accounts in the US as well. Could you tell me more?

Christophe said...

@Victoria, I read that US banks take the same approach of closing accounts of Americans living abroad.

http://www.international-adviser.com/news/tax—regulation/us-institutions-to-expats-take-your-retirement

I don’t understand how this can happen…
That quote is disturbing:
“that banks will feel that the advantages in keeping even small retirement accounts outweigh the potential downside of getting caught with criminals for clients.”

You’re a potential criminal just because you live abroad.

Given the penalties for closing such accounts, I don’t understand how it can be legal for a bank to force someone to close a retirement account.

I hate to see what the US has become. This is sad and depressing.
And on this one, I don't know if there is anything else to blame than the arrogance and paranoia of those in power. This has nothing to do with 9/11.
I am just depressed.

Anonymous said...

Thanks for drawing attention once again to what the US is doing to it's own citizens abroad.

I would just like to react to one aspect: often people seem to say that these laws and ideas are perfectly ok if applied only to "rich" people. Indeed, that group of "rich" scoundrels includes anyone who is lucky / talented / hardworking / prudent/ budget conscious enough to possess 2 mio dollars of assets at the moment of renunciation (which may be at the end of their working life). Many bloggers are justifiably outraged when the Reed amendment applies to "poor" people but find it justified if applied to retirees who are perhaps just over the covered limit?

I would like to ask why ANYONE should be denied the right to emigrate ANYWHERE he chooses for WHATEVER reason be it taxes or otherwise, as long as he does so in a legal manner and fulfilling all his past obligations as doing so.


Why does everyone seem so OK with this scandalous treatment of part of the population, just because of the size of their bank account!

Perhaps my grief is that 2 million dollars of assets does not mean that you are rich enough to hire a team of private tax lawyers on an annual basis and get them to go through a costly tax ruling in your favor when you renounce. 2 million assets could be made up of your residence, your vacation home a car or two plus reasonable retirement pension account. It does not mean you have a private jet and a team of tax advisors following you around night and day.

P. Moore said...

Victoria,
All of this makes one wonder how poor the political choices have become. That the 'exulted' leaders like Schumer, Levin, Obama, etc. can allow or indeed cause such a deterioration in the American brand is stunning. Then I think about the 2008 election alternative: McCain/Palin? Its all looking pretty sick. Other countries have lots to complain about in their politicians, but it seems the US will not be outdone!

Just Me said...

This amendment has now been pulled from the Immigration bill and moved to a second-degree amendment to Patrick Leahy (D-VT)’s border security amendment S.A. 1183

The number of this latest amendment to an amendment is S.A. 1609. It appears at page S5075 of the Congressional Record for Monday, 24 June 2013

Here is the actual direct link to where it is now buried to be sure that NO ONE sees it, so it can just slip on through...

http://www.gpo.gov/fdsys/pkg/CREC-2013-06-24/pdf/CREC-2013-06-24-pt1-PgS5030.pdf#page=46

Ellen said...

US banks are not opening accounts for US citizens who live abroad and that's been the case for many, many years. Some are now adding restrictions on money transfers, for existing accounts.
US brokerages are currently closing are severely restricting brokerage existing accounts and not opening new ones for US persons living abroad. It depends on the country of residence and France is hard hit.
In France, many institutions will not allow US persons to have investment-type accounts.
So, if I were to decide that, to live a normal life and invest my money in anything other than a savings account, here, in France, I needed to give up my US citizenship, it would be for these banking restrictions, not for tax reasons. But would I be asked before some homeland security person decided otherwise? After all, some of these restrictions come from tax laws.

Victoria FERAUGE said...

@Anonymous, I'm with you. I realize that 2 million USD sounds like a lot but as you point out it's not unusual for a middle class individual (or even my grandparents who were working class) to have at the end of their working lives. "Rich" is relative.

@P.Moore, Yep, these days I'm not sure who to vote for.

@Just Me why am I not surprised. Thanks for the tip - I will update the post.

@Ellen, that is beyond depressing. So where are we supposed to bank? China?


bubblebustin said...

America's desperation is showing, and it's anything but attractive.
When the cost of something far exceeds its benefits, that ‘something’ loses value. Citizenship is no exception. The USG itself is responsible for this cheapening US citizenship, not the victims of their masochistic policies.

Just me said...

In my last comment, I should have acknowledged a "tip of the Hat" to Eric who consistently digs out these gems of the "whack a mole" game that is played with amendments in Congress.

http://isaacbrocksociety.ca/2013/06/26/jack-reed-tries-again/

James Wattengel said...

Was this amendment in the version that the Senate passed?

Victoria FERAUGE said...

@James I looked for it in the immigration bill the senate passed and I don't see it. http://thomas.loc.gov/cgi-bin/query/z?c113:S.744:

As Marvin points out Eric at Isaac Brock reports that it was moved under senate amendment SA 1183 and is now called SA 1609. From what I can tell SA 1183 was approved

http://thomas.loc.gov/cgi-bin/bdquery/z?d113:SP01183:

I'm now looking to see where it is in the full text of the bill the senate passed: http://thomas.loc.gov/cgi-bin/query/D?c113:3:./temp/~c113akJcS4::

Thus far I haven't found anything. Anyone else checking?

Capt. Jay Grant/expert said...

US of A Stick a fork in it folks. We're doomed

Lucy Laederich said...

Excellent post, Victoria...

There is a strange irony in the fact that, now pulled from the "immigration reform" bill, the amendment has been shifted to "homeland security"... protecting the homeland against its own citizens is, I guess, the rationale.
In a sense, no more strange than the people who insist they need guns to protect themselves against their own government...
:-(

Victoria FERAUGE said...

@Captain, You may be right. I know that I'm losing my cautious optimism and moving straight into pure pessimism. I'm not going down without a fight though....

@Lucy, Oh yes, the irony of it all. Don't Reed and Schumer have better things to do?

Anonymous said...

Dear Victoria,

You mention Phil Hodgens saying "get out while you can".

Could you please give a little more insight on this.

I am a stay-at-home expat Mom, and after much soul searching and heartbreak I was forced to choose between my marriage and the life I had built for 30 years abroad, or my US citizenship. In addition, being faced with increasing discrimination, refusal of services, and other issues I sadly renounced US citizenship several years ago for reasons, of course, completely unrelated to tax evasion.

Many people in my situation are being refused banking services including life insurance and mortgages, including re-financing of existing mortgages. European and foreign spouses often can not understand or endure the infringement on privacy, the annual 2000 dollar+ cost of hiring an international expert to fill in ZERO TAX due paperwork and confiscatory penalty threats associated with this process. European / expat families that have no US assets, no US income, never worked in the US, etc are forced to endure this and if they give that as a reason for renouncing they are barred from re-entry into the US. Housewives either have to renounce or else divorce and give up their share of the household savings as their husbands argue that giving them signing authority puts the household security in jeopardy. As a stay at home mom they may have no claim on the household savings in case of divorce. Those that do not divorce may decide it is more prudent to not have any signing power over anything, and even not to own their own home, which may put them in danger in case of their husband dying or leaving them.

Ever since my renunciation, we have not returned to the US, annual vacations there no longer happen, my children no longer get to go visit grandparents in their country (my elderly parents must travel abroad to see their grandchildren). I know that technically I should be able to go back if I travel with my CLN but I fear some unpleasantness at the border which I don't see why I should endure, and I prefer to spend my vacation euros elsewhere.

I was in compliance and I renounced cleanly and legally. I appeared on the federal register, was not a covered expatriate, did not trigger the exit tax, but I hear rumors that if later in life you exceed the limits (or if the exchange rate goes down or if the limits get lowered), you could be considered "covered" in the future even if you were not when you renounced.

My question is, would the Schumer amendment apply to people who have renounced in the past, or only those going forward. What if the person becomes "covered" at one point in their life ( or if they lower the limit, if the dollar crashed, etc...)

Can the Schumer amendment be applied retroactively to those who "got out before"? And can they re-evaluate your covered status later in your life?

I fear having to make a trip or two in the future, to care for my elderly parents, to get them installed in a care facility, to nurse them after a hospitalization... will I have to send someone in my place to do these things? I am not going to spend a fortune on international lawyers to get a ruling from the IRS to clear my name so I can go and care for my US citizen parents who may need family help.

Anything you can provide would be very helpful, I'm clinging to the few lines where you cited Hodgens in the hopes this means that those who renounced before the bill passes are clear from this law.

Needless to say I have lost all belief in fairness and justice especially coming from the country that claims to be "for liberty and justice for all". I no longer expect to be treated fairly or decently but still I would cling to some hope if you could answer my questions!

Kind regards.

Victoria FERAUGE said...

@Anonymous, I have the same fears and I'm living what you experienced before you renounced.I just filed my FBAR this weekend and my spouse said, "Well at least we won't have to pay US taxes this year" and I had to reply, "Hon, I just don't know yet." That went over like a ton of bricks.

I am so sorry that you had to make this decision. There is only so much we can take. I'm feeling pretty vulnerable right now because I'm not working and I still have health issues. Some days I feel like giving up just to be done with it - one less thing to stress over.

You ask a very good question. I think it merits a post which I will write today. Let me see what I can dig and I'm sure the Brockers will chime in as well.

All the best to you,

Victoria

Anonymous said...

@Anonymous. 9:09 AM.

From what I have read the Amendment barring covered expatriates is indeed retroactive.

They have not (yet) redefined covered expatriate. For instance, the forex value does not change but is the value on the day before you renunciate. So, if you were not a covered expatriate when you renounced, then you are still not one, and you will still be able to visit the U.S. even if this Amendment gets passed in its present form.

OTOH perhaps they will redefine covered expatriate retroactively in the future. Who knows?

Anonymous said...

@Anonymous. 9:09 AM.

I would just like to add that for every shield there is a new sword.

If the U.S. does in fact go all hog-wild about barring people, then these same people can simply obtain a passport where their name is changed slightly and the birthplace isn't mentioned or is mentioned obliquely (city only, no country) or is just given incorrectly. There is no international ID card, and the US has not yet asked for biometric data on renunciation, so for those of us who have already renounced, we should be in the clear to enter the US should we want to. Now do we want to? is another question entirely. I know I plan to go only in emergencies, even though I am (currently) allowed, just to ensure the US is losing all the money that I used to spend there.

(I haven't actually looked for other passports at this point, or changing my current one so that it is unrecognizable to US authorities, so maybe it will be harder than I am making it sounds.)

Amanda said...

This is cool!