What Lessons Can Be Learned from the Sad Stories of “IRS Compliant” Australians Shaun and Mary?

cross-posted from Brock

by Stephen J. Kish

Karen, on her fixthetaxtreaty.org blog, just posted the sad stories of Australians Shaun and Mary, who did their best to be tax compliant with a foreign country (United States) and then ended the relationship by renunciation of U.S. tax citizenship.

The emotional and financial damage done to these Australians was a direct result of their decision to enter or maintain tax compliance, to the best of their ability, with a foreign state.

We have heard similar stories before, but are there any lessons to learned regarding, for example, whether citizens-permanent residents of countries outside the U.S should ever enter into “IRS tax compliance”?

If Shaun and Mary could go back in time, would they still have entered into the IRS tax system? Is $50k plus emotional distress (post-traumatic stress; stress exceeding that of chemotherapy) a reasonable tradeoff for the renunciation of, divorce from, US tax-citizenship?

What would they now recommend Australians to do in the same situation?

For those persons abroad who do want to become IRS compliant, how could they ever find a trustworthy tax compliance expert? Can tax compliance persons purporting to be cross-border experts be taken to task for their incorrect advice? Does this ever happen?

Is it really possible for any human living outside the U.S. to become IRS tax compliant?

Is it ever ethical (e.g., in this post) to advise the unknowing of their tax “obligations” to a foreign state and by doing so cause them harm?

USCitizenAbroad comments: “It is painfully obvious that Shaun would have been far better if he had NEVER entered the U.S. tax system. This is hindsight. He could never have understood where this was going…” and “…this story is a sad sad reminder that those who have been most hurt by the predatory and immoral practice of U.S. “place of birth taxation” are the ones who tried hardest to comply…”

Karen says: “…the majority of the people profiled on the Our Stories page have already renounced/relinquished. Those that haven’t yet renounced likely will, eventually.* From all the people I’ve spoken to here – including some who are not comfortable sharing their story (even anonymously) – the ones who suffered the most were the ones who tried hardest to comply…”

Shaun’s Story:

I have lived solely in Australia for 3 decades. I kept my US Citizenship thinking that there was no drawback from doing so. I was told I had to continue to file US Tax returns and I would just send the US based CPA my Australian Tax Return & they would send me a huge document saying “No Tax Due” & I would sign it. It was incomprehensible to me how the Australian Tax return was converted to the IRS Tax return. I just thought I would never owe anything due to the tax paid in Australia.

This went on for many years until one year the USA Accountant said I had a huge Tax bill. I couldn’t understand this as all of my US Returns never owed a cent, but it seems that they had been preparing my returns incorrectly and all my deductions in Australia were not deductions in the USA. This was the start of my long intense problem that lasted from for several years

I was never told by the USA CPA that my Self-Managed Superannuation account here in Australia was not considered by the IRS as SUPER, it was considered a Foreign Trust and hence had been reported incorrectly; so all of my Super Savings here & interest income in it was treated by the USA as STRAIGHT INCOME and taxed as such going back 8 years. I lost all the benefit of my Super Savings. Then because the US CPA didn’t fill out the single page Foreign Trust Form the IRS Penalised me 30% of the total amount of my Super Balance. I had hired very good tax lawyers in the USA to handle all my dealings with the IRS & instead of getting me a fair result they were predatory in their billing & let things drag on & on.

The other large issue was all of the money I gave to Charities in Australia over the 8 years were not allowed my US Tax returns because “They were not recognised as USA Approved Charities”. This is another issue that the US CPA never advised me about. So between losing my SUPER & my Charitable deductions I owed a huge sum to the IRS, then add on USA Tax Lawyers & Australian Tax Lawyers fees.

I was so distraught ( I was also being treated for a blood cancer at this time ) I decided to give up my USA Citizenship & all the hassles that entailed. The day I had to give that final statement I was in tears at the counter at the US consulate in Sydney, I felt I had been betrayed & abused by the US. Then I had to file the final IRS form 8854 which again looks at all your assets as Capital Gains at the value the day you gave up your citizenship.

This whole situation was like having a second full time job, the lawyers who were supposed to help & protect you become part of the problem. If I could have chosen between Chemotherapy & dealing with this legal situation, I would have chosen Chemotherapy because at least you would know when the end would happen & the worst thing would be that you could die. With the legal matters months turn to years & I felt totally helpless that it would be resolved before I died.

I made one mistake & was willing to take responsibility for that & I did but all the above things I mentioned were so unfair that I couldn’t cope with it.

So I feel a huge responsibility to help publicise this situation so that other people don’t suffer as I had to for nearly 5 years. Australia is supposed to be the USAs’ best friend; how can best friends treat each other like this?

– Shaun”

Mary’s Story:

“I came to Australia over 45 years ago, and have also been an Australian citizen for more than 25 years. I only found out I should have been filing tax returns to the US three years ago. Since then my life has become a nightmare of uncertainty, fear, marital stress, financial paralysis, and a mixture of threatening and sloppy treatment from the IRS. Previously I saw myself as a strong, capable and competent person, but as a result of this experience I have become hypervigilant and fearful. I ruminate and strategise at night which affects my sleep and mood, and I have been told by a Clinical Psychologist that I have PTSD. I have developed two auto-immune conditions that are considered to be possibly stress-related.

It all started with some innocent internet searching on an unrelated subject, which threw up the need to be US tax compliant. When I approached my local accountant, he said he knew nothing about US taxation requirements, and referred me to a big city accountancy firm. After six months of dealing with them, it became evident that they really had no knowledge of US/Expat tax compliance, and the “overseas affiliate” company they used did not know much either. Six months later, they were still unable to tell me even basic things like what entities I had to file returns for (e.g., personal, small business, self-managed super fund). When I asked them whose assets were at risk (eg., just mine or those of my Australia spouse) they helpfully told me that only my assets were at risk, “unless it became a bankruptcy situation”! Imagine our shock – the thought of being moved from a situation where we owned all our assets and were on the cusp of retirement, to the suggestion that I could be driven bankrupt to become US tax compliant!

In the meantime I investigated how I could come into compliance using one of the amnesty programs available. At that time entry to the Streamline program was very restrictive and I think I was ineligible. During the six months I was dealing with the abovementioned firm, the Streamline program was amended to become more inclusive, although the accountancy firm did not advise me of this and I had to find it out myself. And during that time I also read many horrific stories about how others had fared under the OVDP, and of massive penalties that the IRS could impose for even inadvertent failure to file FBAR.

All of this uncertainty and threat put my marriage under extreme stress and my spouse, fearing a major loss of assets, started coming up with ‘shoot from the hip’ suggestions which, had I followed them, would have changed me from being someone who accidentally failed to lodge US returns into someone who was committing intentional tax fraud. I did not take up these suggestions, but it put a great deal of pressure on life at home.

Eventually I found a US-based firm dealing with Expat Tax Returns, sacked the Australian big-city accountancy firm, and lodged under Streamline. And I found that much of the financial advice we had been given over the years by Australian financial planners was exactly the wrong advice for a US/Australian citizen – in particular the ownership of real estate and superannuation which could easily have been arranged differently if I had received the right advice. This has proved very costly, and in the case of self-managed superannuation it is like opening up Pandora’s box.

Then I started to learn what it is like to deal with the IRS. Initially I tried to get some confirmation that my Streamline submission has been received and accepted. Nothing doing. In the end I traced the cheques through our bank and got confirmation they had been cleared.

Shortly thereafter I started getting letters saying I owed a large amount of money, when I believed I had paid everything that was due. It was difficult to obtain transcripts, but I eventually did, and found that the IRS had allocated one large payment to the wrong year, even though the year had been written on the back of the cheque as instructed. And while they were very quick to tell me I owed them money and make threatening statements as to what they could do if I did not pay it, they did not bother to tell me that I had a large credit in a different year due to their misallocation of the money. And every time they sent any correspondence it took about six weeks from the date of their letter until I received it in Australia, and the envelopes showed they had been routed via Royal Mail (UK-???). If my family sends me a card from the USA it gets here in around ten days.

During the time I was trying to find out whether my submission had been received, I sent the IRS a fax asking that question. Seven months later I received a response via a Form letter, stating that they’d had no record of my submission, even though I had transcripts showing that my returns had been processed. The letter included a laundry list of possible reasons why it was not accepted – and many of those letters related to a Form that was not in existence at the time my submission was put in. I think they were supposed to delete the lines with reasons that were not relevant, but they had left every one in. I had to chase the IRS on several occasions to get to the bottom of this, and in the end I managed to find the department dealing with it – Large Business & International! So this is who deals with Expat tax returns – I believe the trigger is if you have five or more overseas bank accounts. Pretty hard not to with personal banking, a business and a self-managed super fund. I believe this is now sorted out, although the IRS will not tell you your submission has been ‘Accepted’.

Because the six-week delay in receiving any IRS correspondence was happening every time, meaning that any time they sent something with a response deadline, it arrived already overdue, I had to go to the additional expense of setting up a virtual mailing address in the USA.

Over and above my Australian taxes, in a three-year period I have now spent over $50K to be US compliant, about ? of this being on professional fees. The tax owing relates to investment property income, super fund earnings, and changes in value in the superannuation fund (you are taxed on the exchange-rate gain from year to year even if not a cent was earned. But if it makes a loss – like during sharemarket setbacks – you can only claim $1500 of the loss in any one year, even if the loss is much greater). Although there is a generous non-taxable allowance for earnings such as salary, this does not apply to investment or superannuation income which is treated differently. and taxed from the first dollar.

Now, every time I receive any correspondence from the IRS, or from the people who handle my tax paperwork, my heart starts racing and all the ruminations and sleeplessness start up again, even though I believe I have done everything right. And I am continually reminded that the US owns me – FBAR deadline, extension requests so that I can get my Australian financial-year end statements and convert everything into US calendar years, then the actual filing, quarterly payment of estimated taxes – I can never flush it from my mind.

In the end I decided the only way to end this nightmare was to renounce my US citizenship – not because of the actual tax I have to pay, but because of the ongoing compliance headaches and the continual stress and uncertainty at a time in my life when I really need to make my affairs more simple.

I liken the decision to renounce US citizenship to that of finding myself in an abusive relationship:

I used to love the US and valued our relationship;

I was willing to accept some things I did not like – to take the good with the bad;

Due to the way I believe I have been mistreated, I came to feel angry, frightened, uncertain, harassed and betrayed.

In the end the mental stress, threatening behaviour and just plain incompetence got so bad, that a decision had to be made: do I keep taking it and learn to live with the abuse for the rest of my life, or do I divorce the bastard? I decided on the divorce.

All I want is to have the security I thought I had before all this started – as an Australian citizen complying with the Australian law, organising my finances and retirement security like any other citizen of this country.

– Mary”

2 thoughts on “What Lessons Can Be Learned from the Sad Stories of “IRS Compliant” Australians Shaun and Mary?

  1. We can add Gramp’s Story to the Australia saga.

    It’s now affecting three generations. Six businesses employing 120 people in Australia. Impact on superannuation, retirement and wills. Huge money spent on accountants and lawyers.

    “A very large emotional and financial impact on our lives, with no end in sight.”

    It’s never ending.

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