In a recent article on LRC, tax specialist and Forbes columnist Robert Wood shared a letter that one of his clients, Marilyn, had sent to President Obama about the travails of being a US Citizen who lives outside of the good ol USA. In order to explain more fully what is going on with offshore citizens, I’ve taken the liberty of writing a response from President Obama. I’m in the same boat as Marilyn and have suffered from the same outrageously punitive and discriminatory rules that she has.
My staff mentioned that we received your letter and that you were considering ending your status as US citizen because of my rules on reporting foreign financial accounts and treatment of foreign mutual funds. I know there’s lot’s of folks just like you who live offshore, so we’ve come up with some responses to your concerns.
Yes, my FBAR form has draconian penalties if you don’t fill out the paperwork for all of your financial accounts correctly [rubs palms together]. To make things easier on you, I’ve instructed the IRS to institute a voluntary disclosure program for people who don’t fill out the paperwork correctly. You tell us everything and we’ll consider only taking half instead of all of the account balance and we’ll even consider waiving the 5 year jail sentence in most cases. According to a precise reading of the rules, we could fine you far more than the account balance, so be thankful.
And to further ease your burden of running to the post office and mailing in your account information on the FBAR form each year, the form is no longer accepted by mail. If you’re foolish enough to mail in the form in order to report your accounts, we’ll treat that form as evidence of non reporting, subjecting you to the draconian penalties. [smirks and covers mouth with his hand]. I’ve also given the form a more user friendly name. Instead of FBAR, it’s called FinCEN Form 144(a). Your high priced tax guy can send in the information via the internet, where you can be sure the information is safe. [giggles]
Figuring out how to disclose your financial account information every year can be difficult, so I decided to help you gain more practice by requiring another new form, the Form 8938 where you also have to disclose the offshore financial account information a second time. There are subtle differences in how the Form 8938 form and the FinCEN Form 144(a) need to be filled out that no one other than an expensive tax guy could ever possibly figure out, so be careful. [wags finger at you]
Not to overdo things, but my newly enforced FATCA rules will require that the foreign bank (financial institution) also report the same account information directly to the Treasury’s fraud division. That makes three separate reporting requirements for your bank or retirement account every year; don’t we also require mortgages to be reported? [shrugs and smiles self assuredly]. Just to make sure you fatcats don’t get away with anything, I also require you to disclose that you have foreign financial accounts on Schedule B of the 1040 form you file each year. I think reporting your foreign accounts four separate times each year should be about enough. [arrogantly and slowly spoken while nodding head]
Did you really buy foreign mutual funds? Didn’t you know that the IRS deems those to be PFICs? [frustrated sigh and eyes roll up] As you mention, those are subject to a much higher tax rate than normal when you sell them. But did you know that those foreign mutual funds will be deemed to have been sold in part every year during the holding period? That means you [points at Marilyn] will owe interest and interest on interest going back every year that you owned the foreign mutual fund. The effective tax rate could easily be 40% or even 50% or higher if you include the interest charges!
The rules for foreign mutual funds are CLEARLY described in section 1291 of the IRS code. The fact that the words “foreign mutual fund” are not mentioned and that section of the code has been proposed but never formally adopted is no excuse for you to not have known. [harrumphing noise] There’s got to be at least 3 tax attorneys in America who are expert and experienced in dealing with these PFICs. Go hire one and don’t worry about their hourly rate, its deductible you know. [phony politicians smile]
As you mentioned, there really is a wide gap between the tax on foreign mutual funds and the 15% capital gains tax rate on US mutual funds. I addressed this problem [boastful tone] and closed the gap by raising the capital gains rates so you rich people making over $200,000 a year will now have a 23.8% capital gains rate instead of 15%. That represents a small 58% increase that successful folks like you should be happy to pay for the privilege of being a US citizen. [condescending sneer] Real Dissent: A Libert... Check Amazon for Pricing.
So go ahead and give up your citizenship. Just beware that I have a new Exit Tax that you might be subject to. We deem, or pretend, that you sold all of your assets and charge you the capital gain tax on those pretend asset sales, though there’s a large exemption. And also [laughing hysterically and slapping his knee with the palm of his hand] when you really do sell the assets some day [falls out of chair laughing] you’ll have to pay the capital gains tax a second time in Canada.
Your Dear Leader, President Obama.
PS: I just decided to increase the fee for giving up citizenship from about $400 to about $3,500. This 400%+ increase should ease the burden of carrying around so much money that you earned. Cheers from Barry.