As any student of American history can tell you, one of the reasons behind the American Revolution was "no taxation without representation." Since then, America has striven to ensure that the government is responsive and fair.
Sadly, the United States seems to be straying from her heritage, as millions of unrepresented American expats are being subjected to extra reporting requirements simply because they live overseas. All Americans, regardless of their address, need to file U.S. taxes. That responsibility comes with honor of citizenship. Pending tax treaties between different nations, Americans living abroad may or may not have to pay taxes to America too. But that is nothing new.
The newest change in expat reporting is that not only must they file income tax forms, but Americans living abroad are also required to report all of their overseas assets to Uncle Sam. Though resident Americans would have a similar requirement, they rarely have offshore accounts. People living and working outside the mainland would naturally have checking, savings, investment, and pension accounts which would require an added layer of documentation to the U.S. Government.
To add insult to injury, the American government isn't the only body discriminating against Americans living overseas. Banks (both foreign and American), insurance companies, and credit/debit card companies are joining in.
These unfair tax reporting laws are the source of several problems most often faced by Americans currently living overseas. Here is a list of the four most common difficulties:
- Incomprehensible tax forms
Even though FATCA and FBAR regulations are fairly universal for American expats, they are not easy to follow. The forms are so complicated that the average person needs the help of an accountant or tax specialist to fill them out correctly. The cost of hiring these professionals to help you fill out the forms and avoid penalties for incorrect filing is in effect an additional tax imposed on expats. Tax professionals may try to avoid clients who require these forms (or charge higher fees for their services) since the forms are complicated and have high penalties for mistakes.
2. No more American insurance, credit, or debit cards
Many U.S. citizens are unaware of what will happen if they decide to apply for an American life insurance policy, credit, or debit card once they are living abroad. Once you move out of the United States, many American insurance companies will not insure you, simply because you no longer have a U.S. address. The same problem applies to American credit card companies. Many companies won't mail statements overseas, and watch out when your card expires - without a U.S. address, you won't be getting a new one anytime soon.
3. Forget about opening a new American bank account …
If you don't have a U.S. mailing address, American banks won't want to look at you, let alone open an account. That means that if you're ever paid in dollars, or Grandma Esther sends you a dollar check for Yaakov's bar mitzvah, you must deposit it in your local bank account, wait weeks for it to clear, and pay high transaction fees for depositing a foreign check.
Additionally, many foreign banks don't want American clients due to FATCA's requirement that financial institutions abroad report any holdings belonging to U.S. clients to the IRS. This creates a lot of bureaucracy and paperwork for foreign banks, who, in turn, may increase fees to customers in an effort to offset their additional reporting costs.
4. Inability to transfer assets
What happens if you inherit some assets in an American brokerage account and want to transfer them in kind to your current country of residence?
When it comes to witnessing signatures, it is usually necessary to use the services of a Notary Public. In most cases, it's sufficient to use a notary from another country as their stamps are recognized by international treaties - except when it comes to the transfer of securities. In the United States, the investment industry has created its own signature guarantee system known as a "medallion signature guarantee." However, the medallion program is almost exclusively in North America, meaning that you might have to take an expensive international flight just to sign your name on a piece of paper.
What can American expats do in the wake of all of these restrictions and demands?
As a financial advisor working with American expats who have U.S. brokerage accounts, I'm asked this question very often. The many questions raised and feeling of powerlessness against the Tax Man motivated me to embark on educating American expats (read: olim) on their American tax reporting obligations. For this reason, I recently wrote a book called The Expatriate's Guide to Handling Money and Taxes (ExpatGuideToMoney.com) including guest chapters from CPA Ron Zalben, international tax attorney Dave Wolf, and representatives of the ACA (American Citizens Abroad).
Remember - information is power, and until the United States changes its tax laws, you need to do your research very carefully. There are several options that may help you, but you will only know which one is best for you by doing your own research.