Bittner is a businessman and has dual American and Romanian citizenship. He lived and worked in Romania and naturally had to open financial accounts there. What he apparently didn’t know — many expats don’t know — is that he had to report all of these accounts annually to the US Treasury’s Financial Crimes Enforcement Network, on a form known as FBAR.
All parties in the case agree that Bittner’s failure to make timely and appropriate disclosures was “unwilling”, that is, unintentional. Even so, the penalties are severe. An appeals court assessed his fine at $50,000, or $10,000 for each of the five years the FBAR was omitted. Another court set the penalty at $2.72 million, or $10,000 for each account that should have been on each FBAR, each year.
The first amount is painful, the second ruinous – and, frankly, insane. The Supreme Court must now decide which is legal.
This question mark over penalties is one of the many ambiguities surrounding FBARs. But even FBARs are just the tip of the iceberg.
Americans abroad suffer a long list of indignities trying to comply with US laws. Most of them owe no actual taxes to the IRS (because they typically pay higher rates to their host countries and subtract those amounts from their US debts). But they still have to fill out incomprehensible forms requiring information that is often unavailable or ambiguous, costing time, hassle and money.
Some expats, for example, find themselves holding regular mutual funds registered in their host country – employers sometimes place these investments in workplace pension schemes by default. For the IRS, they are PFICs, or “passive foreign investment companies” – a synonym for toxic. The resulting paperwork is considered the most complex in all of the US tax code, and taxation is tantamount to confiscation.
Depending on what an American expat does next, there’s more misery to come. If she marries a “foreigner” (the reason many Americans move abroad in the first place), she may face nightmares about joint accounts, inheritance and more, before even considering children. More punishment awaits those who own a foreign business or do just about anything worthwhile.
American expats may also find it difficult to open — or keep open — overseas financial accounts. Foreign banks and brokers must report “US persons” (citizens or green card holders) in the United States. Rather than risk US retaliation for errors and omissions, many financial institutions prefer to have no US customers. This particular problem is a consequence of the Foreign Account Tax Compliance Act (FATCA), notorious Obama-era legislation that has upended the lives of many American expats.
But the original reason for all the hairball of complexity is the particular American way of taxation, which is actually unique in the world (only Eritrea has something vaguely similar). This approach is called citizenship-based taxation (CBT). This means that a person’s passport or green card, not place of residence, determines tax status and liability.
The unintended consequences are legion. One is to trap “accidental Americans” in the nets of the IRS and FinCEN. These are people who – usually because their parents were in the United States when they were born – have US citizenship but have no connection to America. One day they might receive a letter informing them of bureaucratic torment on a scale that would impress Franz Kafka.
This (largely fortuitous) intertwining of citizenship law and tax law over the decades has made the United States unique. Every country wants to crack down on tax evaders who hide money in offshore accounts – that’s why more and more governments agree to share financial information with each other. But only the United States hits millions of expats with modest assets and few clues whenever they target wealthy and sophisticated tax cheats living in the United States.
In a sign of growing desperation, a guerrilla insurgency of litigation is now forming from Canada to Israel to Europe. In the UK, a woman named Jenny Webster, who was born in the US but British, has sued UK authorities for sharing her financial information with the US, arguing it amounts to breaches of her privacy. data.
In France, Fabien Lehagre, born in the United States but French by training, founded the Association of Accidental Americans. He has ongoing court cases in several countries. With his input, the French National Assembly recently passed a measure that would force its government to stop sending citizens’ financial data to the United States in accordance with FATCA, unless the United States reciprocates by sending return of information on French taxpayers. But the bill was rejected in the French Senate.
In the Netherlands, a court recently banned a local bank from closing the accounts of accidental Americans in the country. And the European Parliament sent a delegation to Washington, DC to discuss the problems caused by FATCA.
But all of these efforts only address the symptoms of the underlying aberration, which is citizenship-based taxation. So another group of lawyers – including Marc Zell, an Israeli-American, and John Richardson, a Canadian-American – want to challenge the constitutionality of the TCC as such, at least in its current form. They are now building their case.
There are many reasons why people born in the United States at some point find themselves living abroad. It should not be the policy of the US government, even by implication, to make these lives unnecessarily difficult. America must treat all of its citizens equally, whether they live at home or abroad.
The nine robed judges now have the opportunity to send the first small sign that they have received this message. Alexandru Bittner shouldn’t be financially ruined just because he made unintentional mistakes while living abroad. Nor any other American – or even anyone at all.
More from Bloomberg Opinion:
• Golden passports, citizenship and identity in times of war: Andreas Kluth
• Inflation is pinching even the middle class now: Andrea Felsted
• Russian dissidents are not in France for the food: Lionel Laurent
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Andreas Kluth is a Bloomberg Opinion columnist covering European politics. A former editor of Handelsblatt Global and a writer for The Economist, he is the author of “Hannibal and Me”.
More stories like this are available at bloomberg.com/opinion
