From a correspondent today via email (and with permission):

I’ve just returned to [Country where I live now] from [New Country I am moving to].

I am amazed however, at the number of normal Americans with normal jobs abroad who have never heard of the FBAR witch hunt and have no intention of participating.  In addition, the fairly consistent message by Americans who have spent more than a few years abroad is that the benefits of holding the little blue book are hard to quantify and pale in comparison to the nightmare of compliance with the oppressive American tax regime.  Over 12 days in [New Country], I heard the words “renouncing my citizenship” over 20 times.

I am aghast that our government would continue to force intelligent Americans, who otherwise fully intend to move back to the US for their retirement – if not before – to this conclusion.  Clearly, the benefits of repatriating a group of internationally adept, high net worth citizens is preferable to losing them to “competing” economies.  [New Country welcomes people like that] whilst our government seems to be focused on forcing them away.

I appreciate you drawing to my attention the lengthy letter of objection from the Geneva-based American Citizens Abroad regarding the new legislation and penalties.  I plan to get involved with a similar interest group as soon as I settle in [New Country].  However, I’m beginning to think there really is little reason to fight the multi-headed IRS hydra when there are many other safe, beautiful, and tax-benign, places to live in the world than the US.

I too, may be having a blue book burning party soon.

best regards

[Name]

Clickable link: American Citizens Abroad

Well-written, accessible article about the negative impact of U.S. tax policy on U.S. workers abroad, from the Daily Aztec, the student newspaper at San Diego State University.

Hat tip:  Association of American Residents Abroad.

Americans Citizens Abroad has written a lengthy letter to the Internal Revenue Service about the detrimental impact of U.S. tax laws on U.S. citizens living abroad.  It is an interesting (and accurate, in my experience) description of the impact that current U.S. tax law and enforcement policies are having on U.S. expatriates.

Well worth reading.

There is a good article titled US tax deadline sparks expatriate ideas on swissinfo.ch. It describes real life problems faced by real life Americans living abroad. Check it out.

Listen here to an excerpt from an interview with Marie Louise Serrato, executive director of American Citizens Abroad.  On the website is an interesting tidbit:

“The Tages Anzeiger has an article today suggesting that the American embassy in Switzerland is overwhelmed by requests.”

Interesting anecdote, if true.  ”Overwhelm” can mean different things of course.  :-)

There is an interesting article in the latest edition of Tax Notes International:  ”U.S. Expats and the Offshore Crackdown,” 58 Tax Notes Int’l 619 (May 24, 2010).  I would link to it and give the author (David D. Stewart) a bit of public glory but it is behind the paywall at Lexis.  And I can’t copy/paste it here for obvious copyright-infringement reasons.

Mr. Stewart raises all of the obvious points:

Misperceptions

U.S. expatriates are not all bloated plutocrats swilling champagne while helicoptering to their yachts in Monaco.  They’re ordinary people doing ordinary jobs and leading ordinary lives.  These are the people getting unfairly hammered by the IRS and its ”heightened vigilance”  (heh, nicely understated, David).

Foreign Earned Income Exclusion

The foreign earned income exclusion is critical to the expatriates’ financial survival.  U.S. taxpayers living abroad are taxable in the United States on their worldwide income, unlike almost every other country in the world.  To offset this burden, the first $91,400 of earned income is non-taxable in the United States.

A couple of Senators (Wyden, D-OR and Gregg, R-NH) have proposed a new bill which will delete the exclusion.  The article quotes Paula Singer, an active member of the tax practitioner community, who is quoted as politely saying “I think they probably don’t understand the rationale for the exclusion to begin with.”  The article indicates Ms. Singer’s belief that elimination of the foreign earned income exclusion will lead to additional noncompliance.

I think that’s right.  People who live outside the United States will face additional economic hardships due to the tax law, and will face these choices:

• Pay income tax where they live, VAT where they live, and U.S. income tax as well (offset somewhat by foreign tax credit), and suffer a reduction in quality of life;
• Go through the formal expatriation process in the United States and give up their U.S. citizenship and log out of the U.S. tax system; or
• Simply and informally expatriate by taking themselves off the IRS’s radar screen.  *Cough*

Expatriation

I can tell you that our office sees an increase in the number of ordinary people who are going through the second set of procedures.  There are no external statistics from the government on this.  The only expatriation statistics are for people with net worth exceeding $2,000,000 per person.  Still, let’s look at the statistics quoted in this paragraph from the article:

It appears that the administrative burden has become too much for some American expats. The number of U.S. citizens and permanent residents turning in their passports, while still small, has seen a significant increase in recent years. The New York Times reported on April 25 that 743 U.S. citizens and permanent residents renounced their citizenship in 2009 with 502 renunciations occurring between October and December alone. In 2008 only 235 expats turned in their passports.

From personal experience I can tell you that the tax cost is not driving these decisions as much as the administrative burden and harsh rules for the FBAR, etc.  Also, there is a definite undertone of expatriation as a statement that the United States is no longer the place that these people knew and loved.

And I can also tell you that we see indications that a lot of people take Door Number 3.

Harder to open bank accounts

The article notes that citizens living abroad have difficulty opening U.S. bank accounts (“You don’t have a U.S. address”) and difficulty opening accounts abroad (“Americans cause too much compliance overhead”).  This was a problem before the “heightened vigilance” of the U.S. government and with the new (as of March, 2010) HIRE Act, it is an even bigger problem for foreign banks.  Expect this problem to get worse.

Amusing anecdote about Timothy Geithner in the article:

In 2008 and 2009, [Rep. Carolyn B. Maloney, D-NY] and [Rep. Joe Wilson, R-SC] sent letters to the Treasury Department seeking information on why U.S. expatriates were being prevented from banking in the United States. In a response dated February 24, 2009, Treasury Secretary Timothy Geithner said that “nothing in U.S. financial law or regulation should make it impossible for Americans living abroad to access financial services here in the United States.”

Timmy, Timmy, Timmy.  Let’s see what our intrepid author, David D. Stewart says next:

As experience has shown for domestic banks, the absence of a prohibition does not necessarily ensure access where banks perceive a risk or are concerned about rising compliance costs for a relatively small segment of the retail banking business. With current law effectively blocking expats from the U.S. banks and new rules such as FATCA increasing the risk and reporting burden on foreign financial institutions, Americans living abroad are either going to have to accept higher fees for basic services or take more drastic measures.

That is an exceedingly polite paragraph suggesting that Mr. Geithner might be clueless about the way the world works (improbable) or might not give a flying finagle about the problems of ordinary citizens living abroad.  Reminiscent of Foghorn Leghorn, isn’t it?  (Caution, brief sound clip, safe for work).  (Remember to vote in November, people!)

Lobbying

They’re trying.  The American Citizens Abroad group and the Association of Americans Resident Overseas have been working on this.  They are working with the Americans Abroad Caucus,

For those of you in this pickle, contact one or both of those organizations.  Choirs have more power than a solitary singer.

Yeah I’m internet famous.  Or something.

I was interviewed for an article that was published in TIME Magazine, Why More U.S. Expatriates Are Turning in Their Passports.  Thanks, Helena for this.

Our experience is that we are getting a lot of people who are looking to bail out of the United States.  By far the majority of those are permanent residents — green card holders.  But a significant and growing minority consists of people who are U.S. citizens.

Included in the “I want to give up my U.S. citizenship” category are people who acquired citizenship through naturalization.  Those people have an easy landing place if they give up their U.S. citizenship — their original home country.

But for the first time in my career, I am seeing a decent number of people who were born in the United States and have no other ties to other countries.  These people have a big job ahead of them to acquire a second citizenship before relinquishing their U.S. passport.  Yet they are methodically working through the action steps needed.

These people almost always cite taxation as one of the reasons for their decision.  Both the political changes we are seeing and the enforcement attitude of the IRS cause them to consider the drastic step of leaving the United States permanently.

You can denigrate them all you want.  Call them names.  Mock them.  But if you look with an open and nonjudgmental mind at what you see, there are some questions that pop up:

• Why are really smart, entrepeneurial immigrants — Ph.Ds, executives, etc. — now willing to leave the United States permanently?  Is this good for the United States?
• Why are plain old ordinary people willing to consider this radical step?
• Is this statistical noise or should we pay attention to these — and related — issues?

More people are giving up their green cards and U.S. citizenship, says the Wall Street Journal.

Two consultations in the last week from prospective clients on this very topic already.

Good business for our firm.  Bad, bad, bad for the United States.

Most of the people who are thinking of this are highly productive people — entrepeneurs, people with Ph.Ds, company-builders.

I’ll be in Saudi Arabia in two weeks.  On the topic list for discussion there — what to do about Saudi kids who were born in the U.S. (hence are U.S. citizens) and are approaching age 18.  (At age 18 they have an easy and tax-free way to give up citizenship.  I’m generally encouraging people to jump on that opportunity.)

Memo to Congress

Here’s a really useful question to ask yourself, honestly, inside your own head, when you’re contemplating a new law:  ”And then what will happen?“

• Static models of reality fail as soon as they include human beings and time.
• The hidden cost of what you can’t see (smart people no longer coming to the United States to go to school, start businesses, create technology, jobs, and launch new industries) dwarfs what you think you will get (tax revenues on the exit tax).

Startup Visa in reverse

Dave McClure and others are pushing for a startup visa — give nonresidents a visa to enter the United States and start a new venture.

The exit tax — and increasing evidence that entrepeneurs are fleeing the United States or choosing not to come here in the first place — is the anti-startup visa.  It’s like trying to fill the bathtub with water while keeping the drain open.

I wish Dave and his crew success in their efforts.  Unfortunately, they are asking Congress to be perceptive and forward-thinking, and that is unlikely.

This is another “inside baseball” post for the people in my all-day courses on Foreign Trusts and FIRPTA, taught in Pleasanton, CA on January 14-15, 2010.

Generally, no step-up in basis

The question came up about step-up in basis for assets when a person becomes a U.S. resident. The general rule is that no such step-up is given.

Example

Fred bought land in France for EUR 100,000 in 1996. In 2010 the land is worth EUR 400,000. Fred becomes a resident of the United States in 2010, then sells the land. For U.S. capital gain tax purposes, Fred has a capital gain of EUR 300,000 (converted to USD of course).

Exception for expatriates

Kate Leonard, who was on the webinar from San Diego, though — reminded me of a special exception to this rule. The exception is for people who are “covered expatriates” and give up their green cards or citizenship. (Thanks, Kate).

If you become a U.S. permanent resident, stay that way for at least eight years, then give up your permanent resident status, you are subject to the exit tax rules. The exit tax is basically a “mark to market” exercise — pretend you’re selling all of your assets and pay U.S. income tax accordingly (first $600,000 exempt, other exceptions, blah blah blah).

Strictly for the purpose of that “mark to market” calculation, you will get a step-up in basis for your assets at the time you get your green card.

Notice 2009-85

Notice 2009-85, Section 3(D) is the source for this position:

D. In-bound step-up in basis for nonresident aliens becoming resident aliens

Section 877A(h)(2) provides that, solely for purposes of determining the tax imposed by reason of section 877A(a), property that was held by a nonresident alien on the day that individual first became a resident of the United States (within the meaning of section 7701(b)) will be treated as having a basis on such date of not less than the fair market value of such property on such date. A covered expatriate to whom this basis adjustment rule applies may make an irrevocable election, on a property-by-property basis, not to have such rule apply. The election must be made on Form 8854, which must be filed with the covered expatriate’s Federal income tax return for the taxable year that includes the day before the expatriation date. See section 8 of this notice for information concerning Form 8854.

The IRS and Treasury Department intend to exercise their regulatory authority to exclude from this step-up-in-basis rule United States real property interests within the meaning of section 897(c) (“USRPIs”) and property used or held for use in connection with the conduct of a trade or business within the United States. Thus, if on the date the nonresident alien first became a resident of the United States, the nonresident alien held property that was a USRPI or was property used or held for use in connection with the conduct of a trade or business within the United States, then the basis of such property may not be stepped up to fair market value under 877A(h)(2). If, however, prior to becoming a resident of the United States, the nonresident alien was a resident of a country with which the United States had an income tax treaty, and the nonresident alien held property used or held for use in connection with the conduct of a U.S. trade or business that was not carried on through a permanent establishment in the United States under the income tax treaty of such country and the United States, then that property is eligible for a step up in basis to fair market value under 877A(h)(2).

Example 4. A first became a resident of the United States when A became a lawful permanent resident (green card holder) on April 1, 1995. On April 1, 1995, A owned Asset S with a basis of $ 400X and a fair market value of $ 700X and Asset T with a basis of $ 500X and a fair market value of $ 300X. Neither Asset S nor Asset T is a USRPI or property used or held for use in connection with the conduct of a trade or business within the United States. On June 30, 2010, the fair market value of Asset S is $ 1,300X and the fair market value of Asset T is $ 800X. On July 1, 2010, A ceases to be a lawful permanent resident and becomes a covered expatriate within the meaning of section 877A(g)(1)(A). A does not make the irrevocable election not to have the rule of section 877A(h)(2) apply. Therefore, Assets S and T will each be treated for purposes of the mark-to-market regime as having a basis of not less than the fair market value on April 1, 1995, so that Assets S and T will be treated as having a basis of $ 700X and $ 500X, respectively, on June 30, 2010, for purposes of determining the tax under section 877A(a). A will be deemed to realize $ 600X ($ 1,300X -$ 700X) of gain with respect to Asset S and $ 300X ($ 800X -$ 500X) of gain with respect to Asset T, for a total of $ 900X.

Example 5. The facts are the same as in Example 4. If A makes an irrevocable election on Form 8854 not to have the rule of section 877A(h)(2) apply with respect to Asset S because A does not want to incur the expense of having an appraisal conducted with respect to Asset S’s fair market value on April 1, 1995, A will be deemed to realize $ 900X ($ 1,300X – $ 400X) of gain with respect to Asset S.

Here is something you need to see and understand, just so you can comprehend the full cycle of events that will happen to you if you choose to give up your green card or your U.S. citizenship and fully log out of the U.S. tax system.

If you are someone called a “covered expatriate” (basically someone with a net worth above $2 million who is either a citizen of the United States or has had a green card for at least 8 years), you will go through a procedure with the Internal Revenue Service to terminate the ability of the United States government to tax you.  You pay an exit tax.  At the end of this process, your name will be published.

Here, for your reading enjoyment, is the list published by the IRS for the third quarter of 2009.  I’m not going to make this a regular feature of the blog.  The point is to show you what you will be temporarily famous when you terminate your U.S. residency or citizenship.

(If you don’t meet the criteria for being a “covered expatriate” you can get out of the U.S. with some paperwork but no tax cost and no publicity.  You won’t be on this list.)

The Notice is published after the jump.

Quarterly Publication of Individuals Who Have Chosen
To Expatriate, as Required by Section 6039G

Release Date: NOVEMBER 19, 2009

DEPARTMENT OF THE TREASURY

Internal Revenue Service

SUMMARY: This notice is provided in accordance with IRC section 6039G, as amended by the Health Insurance Portability and Accountability Act (HIPAA) of 1996. This listing contains the name of each individual losing their United States citizenship (within the meaning of section 877(a) or 877A) with respect to whom the Secretary received information during the quarter ending September 30, 2009.

Last name	First name	Middle Name/Initials
Alkalbani	Saeed	Saleh
Anderson	Stefanie	Andrea
Arnold	Richard	Lee
Batchelor	Nicholas	David
Bellm	Diane
Bellm	Mark	James
Berson	Alan	Charles
Bonelli	Ann	Pauline
Bosch	Maya	Giselle
Boutros	Joanne	Lee
Brennan	Michael	John
Bresnahan	Sean	Patrick
Bucher	Nicole	Shelley
Burns	Sara	Hamlyn
Chan	Andrew	Kwan To
Chan	Tung	Moe
Chang	Herman	Hsiu Guo
Chau	Puiman
Chazot	Christophe	Edge
Chen	Chih-Ming	James
Chen	Margaret	Sai Man
Cheng	Dorian	Pui Yin
Cheng	Kit	Heng Wong
Cheung	Allan	Chiwan
Cho	Kyu	Hwan
Choi	Joel	Will
Chung	Jane
Chu-Yip	Pancy	Siu Ling
Corbin	Susan	Loviska
Cornell	Wade	Hampton
Cornwall	John
De Cocinis	Mark	John
De Latour	Michael	Christopher
Effeney	Susan	Margaret
	Pond
Egli	Vanessa	Darcie
Ehrhart	Timothy	Lee
Feitknecht	Andreas	Jurg
Firmenich	Frederic	Alexandre
Fleming	Robert	Helmut
Flores	Eduardo
Fong	Cecilia	Foo
Foo	Allison	Wei-Qian
Forrer	Thomas	James
Fournier	Frances	Margaret
Ghani	Ashraf
Granger	Janis	Ellen
Guardia	Gilberto	Jose
Gutowski	Charles	Gregory
Hager	Edward
Han	Jin	Hee
Heitmueller	Jan	Christoph
Ho	Benedict	Sze Man
Ho	Warren	Weilien
Hon	Kenneth	Sau Yee
Hood	Russell	William
Hung	Hak(Nak)	Fu
Hung	Marvin	Ming-Kei
Hussey	Martin	John
Im	Kaiser
Islam	Anisul
Jen	Stephen	Li
Jeong	Daniel	Eui
Jessee	Derek	Talbert
Joseph	Emma	Catherine
Kim	Dong	Jin
Kim	Min	Soo
Kim	Sol	Ha
Kinne	Judd	Clark
Kirsch	Gorm	David
Lai	Aida
Langhammer	Mark	Richard
Larsen	James	Gregory
Laursen	Kristin	Leigh
Law	Wilson	Wai Shan
Lee	Andy	Hung Kee
Lee	Jae	Choon
Lee	Ki	In
Lee	Kihwang
Lee	Maureen	Lam
Lee	Norman	Tak Lee
Lii	Mark	Ming Shing
Lim	William	Ooi Lee
Lo	Lois	Yick Sze
Long	Stephen	Thomas
Machinena	Fernando
MacMeekin	Scott	Wright
Mahbubani	Kishore	Richard
Maira	Arun	Nath
Marrs Sr	David	Michael
Martin	Christina	Carol
Marx	Birgit
McCamish	Julie	Ann
Meersman	Jane	Gay
Morgan	Kate	Louise
Morgan	Miranda	Elvira
Moss	Max
Nakagawa	Makoto
Nauer	Philip	Jacques
Ng	Chun	Wah
Ng	Edwin	Sai Wah
Ng	Lily
Ng	Sarah	Ming-Yuen
Nylund	Richard	Alan
O’Donnell	Brian
Ofer	Olivia	Kate
Oren	Michael
Park	Sung	Soo
Peng	John
Persson	Bente	Dagny
Piasente-Foligno	Massimo
Pohan	Annisa	Larasati
Poon	Veronica
Portlock	Charles	Christopher
Potocki	Tomasz	Jan
Pu	Mark	Siao Hing
Pyen	Kum	Woo
Rebaczonok-Padulo	Michael
Renner	Scott	M
Roberts	Steve
Roux	Romulo	A
Rutledge	Gregory	Karl
Saba	Hafid	Mekki
Salas	Henrique	Fernando
Salathe	Heidy
Sandrin	Eric	Lee
Schindel	Peter	Hyde
Schneider	Kai-Niklas	A
Seo	Albert	Minwoo
Shen	Anita	Lai Luen Law
Shir	Bemellah
Sincebaugh	Yeon	Hee
Slater	Michael	D
Sroka	Robert	John
Stamp	Josiah	Richard
Stanton	Raymond	Clifford
Stemple	Stewart	David
Suh	Nam	Jin Maria
Takahashi	Makoto
Tam	Siobhan	Shiu Wun
Tenerelli	Dean	Philip
Thatcher	Marianne	Laura
Thompson, III	James	E
Tien	Osmund	Chung Yu
Udy	Anne	Benua
Venit	Alexander	Maria
Villalobos	Chun	Hui
Wang	Austin	Jesse
Weiss	Charlotte	Rubel
Wild	Roland	Oliver
Wong	Bill	Yim-Chi
Wong	Jeffrey	Mark
Woodburn	John	Andrew
Wu	Ingrid	G
Wu	Madeline
Wu	Veronica	Shao-Ching
Yang	William	Chunsu
Zhang	Wanjuen
Zukier	Hersz

Dated: October 29, 2009.

Angie Kaminski,

Manager Team 103, Examinations

Operations — Philadelphia

Compliance Services.