Friday, May 23, 2014

Uncle Sam Versus the Tax Bear

I just put the finishing touches on my US tax return today and stuck it in the mail to Austin, Texas. Yes, that's my US tax return. Of course, as everyone in the States knows, the deadline for filing federal income taxes is April 15th, a date marked with hectic last-minute form-filling and inevitable anti-tax protests – also a date that we passed a few weeks ago. Luckily, us Americans living overseas get an automatic two-month extension, which I almost always take advantage of, since, well, why not?

Now, some folks might wonder why someone who has not lived or worked in the US for over thirty years would be subject to American income tax. Good question. This is why the United States often gets mistaken for Eritrea, the only other nation that requires its citizens to pay tax, no matter where they call home. It’s another example of American exceptionalism.

In reality, for Americans here in Finland, the possibility of having to pay tax to Uncle Sam AND to the Finnish verokarhu (“tax bear”) isn't necessarily that high, thanks to a tax treaty between the two countries. In practice, American expats here have to pay US tax only on income over a certain threshold, which is high enough (for 2013 it was $97,600) that I can essentially scratch US taxes from my list of things to worry about.

But, I still have to file a return. In my case, this has always been relatively simple. I am, after all, a simple man with a simple financial existence. In addition to the normal 1040, the only other tax form I need fill out is one (2555-EZ) to show that I qualify to have my income excluded from US taxes, in other words, that I really do live outside the US full-time and didn’t make over $97,600 last year (damn it!).

It’s always been an easy, though pointless, process. This year, it’s all becoming a bit more onerous. The reason is a new form called FBAR, the result of a new law called FATCA. They couldn’t have picked a more appropriate acronym than “FBAR”, which stands for “Foreign Bank Account Report”, but instantly brings to mind (my mind at least) the old Army slang, “FUBAR”, which – as I remember from my days of watching “Saving Private Ryan” – has a meaning that is completely different, but uncannily apt in this case. Look it up. 

The basic idea behind FBAR is that, not only do Americans have to report their overseas income; we also must report all the money we have parked in overseas accounts. As a liberal, happy to pay taxes myself and happier for rich people pay even more, I applaud the motivation here, which is to ferret out secret offshore stashes of untaxed cash.

However, there are other consequences, unintended to be sure, that have driven many American expats to renounce their US citizenship. And I’m not talking about cases of tax avoidance like Facebook’s co-founder Eduardo Saverin, who ditched his US passport and jumped ship, so to speak, allegedly to avoid paying capital-gains taxes on his huge wealth. (Or for that matter, former Frenchman Gerard Depardieu, who did the same when he fled, figuratively, to the tax haven of Russia. I guess that may be slightly off-topic.)

It’s one thing for middle-class Americans who happen to reside in another country, living ordinary lives, working at ordinary jobs, drawing ordinary salaries, to have to fill out one additional form in order to provide details about their local bank accounts to the Treasury Department. It wasn’t a big deal for me, though others surely have more financially complex lives that make the task actually burdensome.

But, declaring your accounts at the local banco, banque, or pankki is only part of it. The banks holding your accounts are also required to comply with the new law. Imagine the joy of a small-town bank in Poland when it is confronted with the need to file paperwork with Washington just because an American living down the street chose to open an account there.

You wouldn’t necessarily think this was a problem, but I have seen reports of some banks, faced with this unwelcomed hassle, turning away American customers or closing their accounts, no doubt causing all kinds of everyday aggravation. This is not a case of some Master of the Universe being unable to open a hidden account in the Cayman Islands (I’m all for that!), but rather some average wage-earner being unable to use the ATM at his local grocery store. The good news is that I’ve seen no indications of this happening in Finland. Not yet, anyway.

As I see it, a clear problem with what might otherwise be a reasonable law is the threshold for reporting. Americans must declare any bank account that has held $10,000 or more at any time during the year. That’s currently a little over 7,000 euros.

When I was living in Georgia in my 20s, working as a lab tech or studying, I couldn't imagine having that much money in my checking account. In the context of living in Finland, however, you don’t have to be Donald Trump to have a saldo of 7,000 euros, at least for some brief transitory period.

It’s as if, in order to catch tuna, you designed a net that also catches all the shrimp. It’s unfortunate that such a well-intentioned law might be forcing some average Americans rooted on foreign soil to choose between giving up ordinary bank services or giving up their US passport. Whether coincidentally or not, last year after the law took full effect nearly 3000 Americans chose the latter, a record increase of 221%.

That’s a drastic rise in Americans taking an equally drastic step. It’s a step I could never contemplate taking myself – at least, not as long as I’m able to deposit money somewhere safer than my own mattress.


  1. I tried commenting on this post several times and the responses vanished into the ether. Kind of like our tax dollars.

    1. That's weird. This one seems to have come through okay though. I wonder what the difference is.

    2. I don't know. Actually, it gobbled up two in quick succession. It was probably my fault, somehow.

  2. Well, the low reporting threshold does have the effect that it is really hard to hide large amounts of money and not violate the reporting clause, which is probably one of the starting points of an IRS inquiry. You'd need a shitload of bank accounts to do that. The thing is, it's probably incredibly difficult to claim accidental omission of any larger sums of money with these rules, which, assuming enough funding exists for the IRS, allows them to get easy convictions with the added threat of jail time, if they want to go there.

    1. This is true. The finer the net, the more tax cheats will be swept up in it. (You can argue this is the same strategy the NSA uses in its data collection.) No doubt, FBAR will result in less tax evasion, and that's a good thing. And as long as it doesn't cause my local bank here in Finland to close my account, I don't mind the extra hassle. There is a proposal to apply a "same country exception" to FBAR's implementation, which would mean you don't have to report your local accounts, only those that are "offshore". I think that would be a reasonable change in the law.

    2. I think it's a qualitatively different thnig with the NSA data collection, although I don't think I can make a coherent logical argument of that at the moment. It simply feels that way instinctively. A bit more thought would be required, but the difference is probably somewhere in the premise.