Tom Wallis has lived in France since his birth 40 years ago in Grenoble, a city located in the country’s southeastern region. Yet despite spending a lifetime in Europe, Wallis now owes approximately $115,000 in unpaid taxes to the Internal Revenue Service (IRS) – an agency of the U.S. government. This scenario may seem implausible, the consequence of a misplaced comma or misspelled surname on somebody’s paperwork – yet the troubling reality is that there are estimated to be thousands of people like Wallis, so-called “accidental Americans” who face financially burdensome U.S. tax laws despite spending decades overseas. Our international tax attorneys explain how Wallis, and others like him, can become entangled in America’s unusual web of income disclosure laws.
The stories share a common thread: dual citizenship. For Wallis, it was obtained through an American father; for 33-year-old Parisian Fabien Lehagre, an American mother; for British Foreign Secretary Boris Johnson, who previously served in the U.K. government as mayor of London, through his American birthplace of New York City. All three of these men have spent most of their lives abroad – and all three have struggled with liability for U.S. taxes.
This begs an obvious question: why? The answer lies in how the United States imposes tax on foreign income.
Most countries impose tax on the basis on residency, meaning individuals are taxed based on where they live. A resident of Mexico owes taxes to the Mexican government, a resident of Italy owes taxes to the Italian government, and so forth. Today, this system of taxation is used almost universally around the globe.
The United States, however, is unique. Alongside the small African nation of Eritrea (which, in stark contrast to the U.S., is home to fewer than 5 million people), the United States is the only country on earth which imposes tax not simply upon its residents, but rather, upon its citizens – thousands of whom, like Wallis and Lehagre, have virtually no connections to this country, save for distant childhood memories. Neither Wallis nor Lehagre vote, work, receive government benefits, or attend school in the United States; yet both are facing hefty tax bills due to holding dual citizenship. Because they are technically citizens of the United States, both are subject, under American’s system of citizenship-based taxation (CBT), to the IRS’ requirements for reporting – and paying taxes on – worldwide income.
Though CBT is not new to the United States, foreign income disclosure requirements were pushed to the forefront of U.S. tax law by the Foreign Account Tax Compliance Act (FATCA), which was passed by Congress in 2010 after a wave of investigations revealed that major Swiss banks, notably UBS, were engaging in widespread offshore tax evasion by helping American account holders conceal taxable income and assets from the IRS. This led not only to the implementation of FATCA, but also to an aggressive campaign to ensure that foreign banks – Swiss, French, or otherwise – were complying. Foreign banks – or, as they are referred to by the IRS, “foreign financial institutions” (FFIs) – can be heavily fined for failing to report information about accounts held by U.S. citizens. This motivates FFIs who provide banking services for U.S. citizens – including “accidental Americans” like Wallis and Lehagre – to collaborate with the IRS.
Of course, dual citizens retain the option to relinquish U.S. citizenship – but even that is not without financial consequence. On the contrary, rescinding one’s citizenship can cost thousands of dollars, making it difficult if not impossible to find a truly low-impact solution.
Lehagre’s frustration with this scenario propelled him to establish L’Association des Américains Accidentels (AAA): the Accidental Americans Association. According to a translation of the AAA’s website, “The Accidental Americans Association (AAA) was created in April 2017 on the initiative of Fabien Lehagre, its president. Its purpose is to defend and represent the interests of persons of French-American nationality residing outside the United States, against the harmful effects of certain parts of US extraterritorial legislation.”
Unfortunately for Lehagre and others like him, the AAA will be pushing against the full weight of America’s longstanding CBT system – a system some feel should have been overhauled under the Tax Cuts and Jobs Act (TCJA). One of the strongest proponents for change is American Citizens Abroad (ACA), a non-profit organization that has been working to convert the United States to a system of residence-based taxation since at least 2013, when an ACA report, submitted to the International Tax Reform Working Group of the House Committee on Ways and Means, made the following argument:
“CBT is very complex and costly to administer for both the taxpayers and the IRS. CBT is grossly unfair as Americans abroad can pay taxes twice, while the U.S. provides them little or no services (education, infrastructure, healthcare, etc.). Furthermore, due to the Foreign Account Tax Compliance Act (FATCA) and the Foreign Bank Account Report (FBAR) combined with CBT, overseas residents are being denied access to banking and other financial services as well as employment and investment opportunities, to the point that increasing numbers are compelled to renounce their U.S. nationality to be able to lead a normal life.”
Depending on their income, U.S. citizens – including those who have little if any financial connection to the United States – are subject to a host of IRS tax requirements, including requirements to disclose and pay taxes on global income, FBAR (FinCEN Form 114) filing requirements, Form 8938 (Statement of Specified Foreign Financial Assets), and other documents. Compliance is essential to mitigating penalties and keeping double-taxation to a minimum.
If you are a U.S. citizen with foreign income, regardless of where you physically reside, it is crucial to develop a clear understanding of how you are impacted by American and international tax laws. For a reduced-rate consultation with an experienced FBAR lawyer or tax attorney for expats, contact the Tax Law Office of David W. Klasing online, or call our tax firm at (800) 681-1295 for a consultation by phone.
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