Taxation without representation
Being a US citizen brings rights and obligations — some of them onerous and unwanted
Eveline Zwikker lives near Arnhem. She spent four decades believing she was Dutch. But a letter from her bank five years ago confirmed she is also American. It’s been life-altering—for the worse—and could cost her thousands. Like Hamlet, she feels “a dagger looming above my head”. Born in Maryland in 1972 (her father worked for the Dutch government), Zwikker left with her family before she was two. Her American passport, issued so she could leave the country, expired in 1978. She has no family, financial or emotional ties to the US.
She is among the estimated 300,000 Europeans known as “accidental Americans” who were born in the US and left in childhood, or who have an American parent but never lived there. Many are oblivious of their citizenship. The US is one of only two countries—the other is Eritrea—that taxes its non-resident citizens. They must file their income, estate and gift tax returns annually with the Internal Revenue Service (IRS). Accidental Americans have long endured dual taxation and bureaucratic obstacles with their bank accounts. But the pressure worsened under the 2010 Foreign Account Tax Compliant Act (FATCA), designed to catch wealthy American tax-avoiders hiding money in offshore foreign accounts. This law requires financial institutions to list their American clients, including their Tax Identification number (TIN), which for many is their Social Security number (SSN). Institutions that refuse face 30 per cent fines on their dollar transactions. The banks, says Professor Peter Spiro, an expert on dual citizenship at Temple University, are now in effect IRS agents.
This hits ordinary people like Zwikker, a divorced mother working in customer services. She initially ignored her bank’s request for her identity numbers, believing them to be mistaken. In response, it threatened to block both the joint account she shared with her ex-husband for child support payments, and their seven-year-old son’s savings account, crippling their daily life. She, like most accidental Americans, left too young to have been allocated a TIN or SSN. Only in 1986 did it became mandatory for parents to register their children as dependents. Obtaining these numbers can be laborious—particularly for people with limited English. Even then, the options are daunting. Zwikker plans to renounce her American citizenship but cannot afford the $2,350 (£1,825) fee plus the €5,000 (£4,300) an accountant told her it would cost to become tax compliant.
That process means obtaining identity numbers, and then assessing and paying any back taxes. The US fiscal jungle means that for most people, this is not a DIY process. You pay an accountant for that, and for annual tax returns in future if you keep your citizenship. Renunciations have skyrocketed since FATCA, from the hundreds annually in the 2000s to a record 5,133 in 2017; numbers dipped last year.
One of them was Tom Carpenter, a 50-year-old businessman living in Bury St Edmunds, born in Ohio to a British father and American mother. He left the US aged 15 months and has spent all his life in Britain. He ignored letters from his savings platform, Interactive Investor, asking for American tax ID numbers which he did not have. He assumed they had been sent in error. The platform then froze an account holding his life savings.
Carpenter chose simply to renounce his citizenship and hope the IRS will not pursue him. The sense of limbo, he says, is worth the risk. Interactive Investor unfroze his account after a three-month delay. In a statement, the platform said it tries not to resort to blocking accounts, but FATCA regulations “leave little room for manoeuvre”.
In France, Fabien Lehagre, a 34-year-old Parisian working in the energy sector, was so incensed by his predicament that in 2014 he created the Association Americains Accidentels, to represent the estimated 40,000 French citizens affected. One member of his 800-strong group is a 69-year-old widow who lives in the French countryside near Paris. Marilyn, who doesn’t want her full name published, was born in Georgia to an English father and French mother. She left after a month but in 2014 her banks, HSBC and ING, demanded her details.
She was certain of their mistake. Her American passport expired when she was 21 and she says she signed documents renouncing her citizenship at the American embassy in Paris when she was 25. The State Department said it had no record of this. She was still an American. Her accounts were threatened with closure. ING ended her life insurance policy worth around $100,000. When she obtained a SSN, HSBC backed off. Neither bank provided a comment about their FATCA policies. But Marilyn, who lives alone with her cat and who does not want to pay the steep renouncement fee, is livid that she now has to file returns and the IRS can demand tax payments: “How dare you disturb my life, and why? It’s none of your business what I’m doing here.” The problem upended her life and her retirement plans. She wants to sell her house but is concerned that America will tax her on the capital gains. “My whole life savings are under scrutiny.” Rather than tending to her garden and its fruit trees, she spends most of her time helping Lehagre’s association. “We are considered pariahs,” she says. “We are not allowed to have all the bank services that all the French people are entitled to. It’s very stressful for us . . . we feel abandoned by our government.”
Zwikker’s bank, ASN, backed off after she told them she was trying to obtain identification numbers. A spokesperson said they are “forced to terminate” their contracts with customers who hold accounts with more than $50,000 and have not submitted a TIN. Those with less money still need to obtain the numbers.
In September, the Dutch finance minister Menno Snel said he confirmed with US tax authorities that sanctions will only be considered in 2023. The IRS didn’t respond to a request for a comment but last month issued updated guidance on its FATCA website, indicating that banks won’t be required to “immediately close or withhold on accounts that do not contain a TIN beginning January 1, 2020”. Instead, there will be a 120-day “error notice” period and then an 18-month grace period to resolve the issue and no fines for the banks in the meantime. But campaigners say this changes little; the grace period was already built into the small print of the inter-governmental agreements signed with the US, to give the banks some leeway. And it does not resolve the fundamental issues surrounding FATCA. Lehagre says because the IRS only changed their web page without formally announcing it, many banks are unaware of the update and accidentals are still just as vulnerable to their accounts being closed at any point.
Some action is being taken. Earlier this month the European Parliament’s Petitions committee held a public hearing with participants including 25 accidental Americans. The committee’s chair, Dolores Montserrat, admitted more needs to be done. “This needs to be solved. We need to give an answer to EU citizens on this matter . . . we cannot turn our back.” She said she’ll ask the European Commission to find a solution and offer them proposals. “It’s high on the agenda of the parliament but certainly not enough is being done by the Commission,” says Jude Kirton-Darling, a Labour MEP. “People are being fobbed off.”
Lehagre’s association filed a suit against France with the European Commission, saying FATCA violates EU laws on data protection and privacy. A similar lawsuit has been filed in Britain by a US-born complainant who has raised over £70,000 on a crowd-funding website to support her legal fees. Some of the estimated tens of thousands of Britons in this predicament hoped Boris Johnson, who renounced the US citizenship he gained by being born in New York, might take action. The Financial Secretary to the Treasury, Jesse Norman, says that officials are speaking with their US counterparts on the matter. Britain’s banking lobby group, UK Finance, urges “greater clarity” on FATCA. Nothing has happened yet.
The benefit for the US is tiny compared with the bureaucratic and diplomatic cost. Most of those caught in FATCA’s net owe little if anything in taxes. The IRS has changed its rules to scrub the obligations for those owing less than $25,000. The stress is huge because “there’s so much reporting to do”, says Michael Lewis, a specialist in US tax compliance. Accidentals are the number one call he takes. But an upheaval of the system to reduce the burden on ordinary people appears unlikely. “Most accidental Americans don’t have much political power in either America or their country of residence,” explains Spiro.