“Just because you’re paranoid doesn’t mean they aren’t after you.”
Joseph Heller, Catch-22
By Victoria Ferauge
The Franco-American Flophouse
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)
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…”
Victoria Ferauge is an American who has lived and worked outside the USA all of her adult life. She has a French husband and two teen-aged daughters who were born in France and who are dual citizens — like it or not.
Victoria was recently elected to the board of directors of the Association of Americans Resident Overseas.
You are encouraged to visit her website. She is a gifted writer and observer. She does not always write about taxes, but also describes her life as a long-term foreigner in France.