Imagine if both your parents were born citizens of Canada. Now, imagine that they moved to the USA over 30 years ago (before you were born) and became US citizens themselves. You are born in Texas, you have never been to Canada, and don’t have any plans to visit Canada. You are a red blooded American who can run for President. However, you get a letter from the Canada Revenue Department telling you that you are a tax cheat and owe Canada money. If you don’t pay massive penalties and fines for not “paying” your fair share of Canadian taxes over the past dozen years, they will prosecute you as a criminal. Even worse, they will get access to you bank accounts and financial data in the USA. If that happened to you, it would make you hate Canada, would it not? Well guess what. That is really happening. Except, the country doing it is not Canada, it’s the USA!
In the past 6 months, I have seen a high level of fear, apprehension, and outright anger with regards to this US policy amongst not only US citizens living abroad, but also people looking to become US citizens someday. Given really short sighted and poorly thought through decisions by congress and a overzealous IRS, I fear that some of the smartest people living in foreign countries who might have become US citizens will not opt to stay in their home country. Worse yet, many Americans living in foreign countries and in the USA might outright renounce their US citizenship thanks to current policies that are both confusing and fear inspiring.
A little background. The USA is the only country on the planet that taxes your entire worldwide income, regardless of where you live. If you’re a US citizen who has lived in Australia for 20 years, you will still have to file taxes and probably pay taxes to the good old USA every year. Japan used to have this policy as well. But they got rid of it several years ago due to the burden it caused its citizens. Given this US law and a recent crackdown by the IRS called the Offshore Voluntary Disclosure Initiative, many US citizens are going to be unfairly punished over the next several years. The Offshore Voluntary Disclosure Initiative allows “tax cheats” to come clean to the IRS by September 9th 2011 or face criminal prosecution. The original intent of this program was to get rich people with Swiss bank accounts to come clean and save the IRS the headache of catching them.
However, since the scope now includes everyone and anyone with any foreign ties, this is quickly going to become one big mess. Especially since many of these people and their CPAs probably thought they were doing everything according to law. Many of the laws that the US is using to enforce this policy have been recently created and in most cases, they were old laws that were never enforced and being interpreted by the IRS to their favor. Like the one where anyone born with US citizen parents is a citizen and has to pay taxes, regardless of the fact that they never lived in the USA.
Let’s take a look at how the upcoming September 9th deadline will affect US citizens.
USA Citizens Living Abroad: 4 to 5 million
Any US citizen living abroad, even those who have become citizens of other countries (and technically renouncing their US citizenship) are scrambling to figure out if they are going to be on Interpol’s most wanted list. If you read some articles like this one in the Vancouver Sun and this one in their editorial, you will see that US citizens living in Canada are really worried. When in fact, they never tried to do anything wrong and thought they were filing all the right forms. Even children of US citizens who were born in Canada are considered US citizens by the IRS and subject to these penalties. Does this even make sense to anyone? I’m all for going after real tax cheats with offshore accounts, but this is a scorched earth policy by the USA. They will cause tremendous harm to honest Americans living in foreign countries. I’m sure we will see the most people renouncing their US citizenship in the next few years ever.
USA Green Card Holders and Those Looking to Move to USA
In the past, it was not too difficult for smart well educated people from other counties to come to the USA for college, stay here, and build a better life for themselves and contribute to the country. However now, in additional to poor immigration visa laws, the new tax laws are making people come here for the education, but then take that skillset and go back home.
If I am a foreign born person who moves to the US and becomes a citizen or green card holder, every asset I had in my original country is subject to US taxation. For example, if you were born and lived in the UK for 25 years, but moved to the USA 10 years ago, you might still have some property in the UK, maybe even a bank account or two. Now, having lived in USA for 10 years and thinking you filed all the correct tax forms, the USA tells you that you evaded taxes by not properly declaring your UK assets and that they will prosecute you as a criminal. That is exactly what is happening to thousands of foreign born US citizens. Take a look at articles like this one by Time of India and you’ll see the gravity of the situation.
I have spoken with many people who have moved back to China, India, Europe, and even South America. They all had a few common themes about their reason to leave the USA. The top three reasons were bad economy, immigration laws, and poor tax policy with regards to people like them who might live between the US and their home country. In several talks, people said that even with an expired Green card, the IRS could come after them. In fact, several people I interviewed said they decided to NOT get US citizenship even though they got notices from the INS that they were eligible for it and to come and take the Naturalization Exam. They preferred to stay on a worker visa so that they would not be forced to comply with US policy for the rest of their life they decided to live someplace else later in life.
I’m all for the IRS going after people who hide hundreds of millions of dollars in foreign accounts and increase the burden on the rest of us Americans. But in this case, they are throwing out the baby with the bath water. The USA is still the greatest show on earth, but the cost and headache of admission is becoming high enough that many people prefer to stay home. We are going to get more people renouncing their US citizenship and even more people who were thinking about getting citizenship, instead deciding to go elsewhere.
We need our government to promote policies that incentivize smart, motivated, and hungry people to want to come to America, as opposed to giving them reasons to stay at home or leave altogether. By going after this policy with such vigor, the US will probably lose out on even bigger tax revenue that might have been generated by people who stayed US citizens and created companies and jobs.