Tax compliance bill drives expat to despair of US
By Vanessa Houlder in London
Cindy, an industrial chemist who left Pennsylvania for Germany more than 30 years ago, is facing a bill for $42,000 – equivalent to eight months of her take-home pay – in penalties from the US tax authority even though she does not owe a cent in tax.
The fine was imposed after she voluntarily came forward to tell the Internal Revenue Service that she had failed to file returns, even though the taxes she had paid in Germany meant she had no further tax to pay in the US.
Her “outrageous” treatment angered her so much that three months ago she gave up her citizenship. “I have lost interest in being an American,” she says.
Her predicament is likely to be shared by a growing number of US expatriates.
Cindy’s discovery that she was expected to file tax returns arose by chance when she surfed the IRS website in early 2009, after hearing an item on the radio about missed tax payments by Tim Geithner, the US Treasury secretary.
From January 2013 many other US citizens living abroad will have woken up to their responsibilities as a result of an offshore compliance crackdown mounted in response to evasion scandals in Switzerland and elsewhere. Under this initiative, known as the Foreign Account Tax Compliance Act, banks across the world will be required to hand over details of accounts containing at least $50,000 belonging to US clients or face a withholding tax.
The legislation is designed to prevent the evasion of more than $8bn of taxes over the next decade – some involved with the programme think it will yield much more – but is also likely to catch many US citizens who had no idea they were breaking the law.
It will also affect those who knowingly ignored the filing rules but could not afford professional advice to fill in the forms, which averages about $2,000 per form, according to American Citizens Abroad, a Geneva-based representative body.
The penalties facing those who are forced or decide to come forward are daunting.
The voluntary disclosure initiative that Cindy used charged penalties of a fifth of the money in the account.
In a new voluntary disclosure initiative, launched in February, which the IRS described as “the last, best chance for people to get back into the system”, the penalty was increased to a quarter of the account.
At the start of this month, the IRS quietly set out a set of new concessions on its website.
It reduced the penalty rate for failing to file to 5 per cent of assets for many US citizens living overseas, although that may not be available for Americans living in the UK and Hong Kong with offshore income.
Anxiety about Fatca extends even to those US citizens who have nothing to fear from the IRS.
Many are concerned that banks are going to shed their US clients to cut their compliance costs.
That was another factor in Cindy’s decision to sever her links with the US.
Marc Destito of American Citizens Abroad said he knew of dozens of US citizens who had had their accounts closed by banks.