Recently, Mr. Brian Mahany on a TaxConnections Worldwide Tax Blog discussed costs of filing U.S. tax returns for duals living abroad and took issue with some statements on tax preparation fees made by Allison Christians in a CBC article.
Here is the CBC “Myth,” according to Mr. Mahany, followed by the Mahany “Fact”:
CBC “MYTH”: The annual cost of filing U.S. taxes can be “astronomical,” tax expert Allison Christians notes. Accounting firms estimate the cost of filing personal U.S. taxes can be anywhere from $500 to several thousand dollars.”
Mahany “FACT”: “I suppose if I were Bill Gates or Warren Buffet, the cost to prepare my tax return might be in the thousands. There are many very qualified CPA firms and expat tax services that prepare returns for dual nationals, including FBAR filings, for about $300. [We don't prepare returns but can certainly send you to folks who do.]”
I was also intrigued with Mr. Mahany’s statement that the U.S. has special rules on “trusts” such as RESP, RRSPs, and TFSAs, implying that these should be easy to deal with.
Several commenters took issue with Mahany, with one saying:
“Please, show me a competent accountant that will do a US tax return for $300 when RESPs. TFSAs, and Canadian mutual funds (outside of a RRSP) are involved. There is no such animal.”
I decided to pursue this question and asked Mr. Brad Smith, who might or might not be a composite character, to follow up with Mahany on this inexpensive $300 tax service. Brad is a 27 year old single Canadian resident and Canadian citizen living in Toronto who just discovered that he is a U.S citizen. Mr. Smith insists on entering into IRS tax compliance in order to pay, as he says, his “fair share”. He is unwilling to file returns on his own and refuses to renounce his new-found U.S. citizenship.
I selected Brad as he has a very simple tax situation: very low self-employment income ($19,000 annual), a single share of a Canadian mutual company (value $100), and $200 in a Canadian tax free savings account (TFSA).
—Brad corresponds with Mr. Mahany:
On the Tax blog, Brad asked Brian Mahany:
“Hi Brain [sic],
I just found out that I am a US person. You say that you can find a qualified CPA firm that will prepare my tax return for only $300 (including FBARS). This sounds pretty good to me.
What is the name of this CPA firm?
Thank you for your help. I will sleep a lot better tonight knowing that I can become IRS compliant at low cost.”
Mr. Mahany then sent Brad a private email disclosing the names of two tax professional companies that will be called below “Yellow Jacket” and “Boll Weevil.”
Brad then responded in a comment on the blog with lots of thanks, but Mr. Mahany removed from the response the personal details of Brad’s income and savings (TFSA, mutual fund) mentioned above. Brad’s response of thanks to Mr. Mahany:
‘Wow! Many thanks for getting back to me so quickly with the names of two companies, I will call both CPA companies on Monday and get quotes for preparing my tax return. You mentioned that the price depends on the situation, but my tax situation is simple [PERSONAL DETAILS DELETED BY TAX BLOG ADMINISTRATOR].
I will let everyone know on this post what I am quoted by the two companies. I really thought that the cost would be so much higher and thank you for helping me out.
I don’t ever want to be accused of being a tax cheat. I left the U.S. when I was two years old and have never returned but I am happy to pay my fair share.”
—Brad discovers the true filing costs of IRS compliance:
Mr. Smith phoned both tax companies and obtained quotes over the phone. Yellow Jacket also has some costs listed on-line. You can imagine Brad’s disappointment when he discovered that costs for yearly U.S. citizenship compliance, given Brad’s very simple financial situation, were much higher than Mahany’s $300 estimate.
The costs from the two companies were similar and are shown below:
Yearly compliance cost Yellow Jacket Boll Weevil
Basic cost IRS 1040 $357 app. $400
TFSA (2 trust forms) $357 app. $400
Mutual fund (PFIC form) $149 app. $250
FBAR $67 app. $100
TOTAL $930/year app. $1150/year
Mr. Smith also insisted on entering into one of the IRS “disclosure” programs. Both firms suggested that a “Quiet” IRS disclosure approach might be the way to go, but the cost was the same for “Quiet” and “Streamline” disclosures.
[Note, IRS helpfully advises: “Those taxpayers making “quiet” disclosures should be aware of the risk of being examined and potentially criminally prosecuted for all applicable years.”]
The costs for the disclosure were:
Yellow Jacket: basic return three years ($915), FBAR 6 years ($402), TFSA ($357 X 3 = $1071), Mutual Fund ($149 x 3 = $447) for a total of $2835 U.S.
Boll Weevil: basic return three years ($1200), FBAR 6 years ($600), TFSA ($1200), Mutual Fund ($750) for a total of $3750 U.S.
The costs of five years IRS compliance to exit the IRS system as an expatriate will be higher but this is not relevant for Brad.
—What are Brad’s options given the cost of IRS tax filings?
This is not a random sampling of tax firms but it does prove that using the companies Mr. Mahany has selected, and a Canadian-U.S dual who all must admit has a simple (impoverished) tax situation, US tax returns for people like Brad cannot be done cheaply.
What is striking is the high penalty (confiscation of savings) that must be paid by Brad for owning the tiniest of two harmless Canadian (i.e. “foreign”) retirement vehicles for which, in Brad’s case, the cost of compliance is actually more than the value of the TFSA and mutual fund FOR EVERY YEAR OF COMPLIANCE.
[But could any of us ever be comfortable in suggesting to Brad that he should give away his small retirement savings just because IRS deems it to be toxic---or in helping Brad become IRS compliant?]
Brad wants to be IRS compliant, but with his meager income knows that he will never be able to afford these costs, yet he refuses to part with his toxic Canadian mutual fund and TFSA because these were given to him by his family to help him in his retirement.
Brad is also unwilling to take a stab at filling out the IRS forms himself because he does not want to make a mistake. Even if Mr. Smith wanted to renounce U.S. citizenship (he tells me that he will never renounce) and exit the IRS system legally, he would never be able to afford the costs of five years IRS compliance.
Given Brad’s financial situation, IRS compliance costs, and his wishes, what are Mr. Smith’s options?