Yesterday I took a walk in or Blue Ridge woods thinking about the twists and turns that life send our way. There had been a huge storm and the creek was raging so there was a lot of water under the bridge.
Bridge at our North Carolina farm.
That’s sort of like life… so many events… problems and joys of the past are now… water under the bridge.
This led me to an important thought generated by letters from so many readers. The thought is “Don’t let water under the bridge leave you all wet or high and dry”.
The thought comes because many readers share with me their disappointment in the evolution of their nations. Americans… Canadians… British and Ecuadorians wrote telling me how fed up they are and they are leaving… finished… done.
If you decide to leave your homeland… there is little wisdom in burning bridges… especially when not necessary. If you emigrate… do so in a way so you can return.
This requires a bit of extra effort. Do it! Otherwise the costs can be high.
Waterfall on our farm.
When Merri and I left Naples, Florida and shifted our living to Ecuador and North Carolina… we expected to live that way for the rest of our lives… traveling north and south.
Then came a sick mom…new grandkids in England, Florida and Oregon and a real estate crash that created enormous value in the USA. Suddenly we found ourselves flying East and West and right now Ecuador does not fit into the family at this time.
Many readers leave their homelands expecting to never return. Never say never. Take Americans and their tax man as an example to see why.
Excerpts from an April 2012 article “Growing Numbers of Tax Refugees Exit USA Permanently” by Mark Nestmann explains why. That article says: Numerous additional obligations come with U.S. citizenship or permanent resident status. For instance, you must make detailed disclosures of your non-U.S. investments annually to the IRS and U.S. Treasury.
You face additional tax pitfalls with reference to your non-U.S. investments and business activities. U.S. tax provisions for interests in non-U.S.-registered mutual funds, controlling interests in non-U.S. corporations, and interests in non-U.S. trusts are but three examples of the many “tax landmines” that U.S. taxpayers may inadvertently detonate.
However, a much larger number of non-resident U.S. citizens and green card holders aren’t even aware of their ongoing obligation to comply with U.S. tax and reporting requirements. An estimated seven million U.S. citizens live outside the United States, yet only a few hundred thousand of them file U.S. tax returns.
Starting around 2008, the IRS began to enforce these rules much more vigorously, especially with respect to non-resident U.S. citizens. For instance, in Panama, armed IRS agents now roam the countryside looking for non-compliant U.S. taxpayers living or doing business there. In Austria, I recently learned of the IRS calling a U.S. citizen’s unregistered phone number to remind her of her tax and reporting obligations.
Here’s how it worked in one case related to me. A Mexican citizen, now well past retirement age, grew up in a tiny town in Mexico near the U.S. border. At the time of his birth, the town lacked any medical facilities, so when his mother went into labor, his parents drove to the nearest hospital, which happened to be just inside the U.S. border.
Fast forward 70 or so years, and this gentleman was longing for some relief from hot Mexican summers. So, he did what countless other wealthy Mexicans have done—he purchased a condo in San Diego. At closing, he encountered a strange anomaly. The closing documents listed him as a U.S. citizen. He tried to correct what he believed to be a mistake, but the broker assured him the documents were correct. Since he was born in the United States, he was indeed a U.S. citizen.
Our hero thought that was the end of it, but when he arrived in San Diego for the summer, he received a notice from the Internal Revenue Service. The notice informed him that he was obligated to file U.S. tax returns. And there was no record of him filing a U.S. tax return for the preceding three years. The notice invited him to respond immediately.
A few days later, he drove over to the local IRS office to see if he could resolve the situation. After a brief conversation, he was shocked to learn that the IRS had already commenced an examination. The agent started using terms such as “willful failure to file,” “criminal penalties,” and “jeopardy assessment.”
At this point, our hero hired a criminal tax defense attorney. He spent about $100,000 in legal fees, and eventually received a notice from the IRS informing him that he wouldn’t face criminal penalties. Still, he had to pay 25% of the peak value of his unreported non-U.S. accounts for the period 2003-2010. Unfortunately for him, the value of these accounts fell about 35% in the global economic turmoil of 2008-2009. The accounts that were once worth $2 million are now worth about $1.3 million. Nonetheless, he paid a $500,000 penalty to avoid criminal prosecution.
There are few constants in life… but one we can be sure of is change. Sometimes we hate the change we see and choose to escape it rather than change with it.
This is a time honored and often wise solution to problems created by change. Just don’t make the mistake of thinking that with a move… change will stop. Be sure wherever you live to maintain legal status back home. No sense in being up a creek like this without a paddle.
Little Horse Creek on our farm.
We will have two experts on pensions and filing taxes overseas at our October 5-6-7, 2012 Super Thinking + International Investing and Business Seminar.