The U.S. Supreme Court has lately polarized Americans with controversial verdicts on abortion, guns, climate change and more. Another case on its docket, by contrast, will get intense scrutiny mainly from millions of Americans living abroad.
Alexandru Bittner v. United States is about some of the tax and compliance rules the U.S. slaps on its own expats. These can be so draconian as to amount to criminalizing the sheer act of living outside the U.S.
Bittner is a businessman and a dual citizen of the U.S. and Romania. He used to live and work in Romania and, naturally, had to open financial accounts there. What he apparently didn’t know—many expats don’t—is that he had to declare all these accounts every year to the U.S. Treasury’s Financial Crimes Enforcement Network, on a form colloquially known as the FBAR.
All parties in the case agree that Bittner’s failure to make timely and proper disclosures was “non-willful,” meaning unintentional. Even so, the penalties are stiff. One appeals court assessed his fine at $50,000, or $10,000 for each of the five years in which the FBAR was omitted. Another court put the punishment at $2.72 million, or $10,000 for each account that should have been on each FBAR, each year.
The first amount is painful, the second ruinous—and, frankly, insane. The Supreme Court now has to decide which is lawful.
This question mark about penalties is one of many ambiguities about FBARs. But even FBARs are just the tip of the iceberg.
Americans abroad suffer a long list of indignities in trying to comply with U.S. laws. Most of them don’t owe the IRS any actual tax (because they usually pay at higher rates to their host countries, and subtract those amounts from their American liabilities). But they must still fill out incomprehensible forms demanding information that’s often unavailable or ambiguous—at great cost of time, worry and money.
Some expats, for example, find themselves owning plain-vanilla mutual funds registered in their host country—employers sometimes put such investments into occupational retirement schemes by default. To the IRS, these are PFICs, or “passive foreign investment companies”—a synonym for toxic. The resulting paperwork is considered the most complex in the entire American tax code, and the taxation tantamount to confiscation.
Depending on what an American expat does next, there’s more misery to come. If she marries a “foreigner” (the reason why many Americans move overseas in the first place), she may face nightmares about joint accounts, inheritance and more, even before considering any children. More punishment awaits those who own a foreign business or do pretty much anything interesting.
U.S. expats may also struggle to open—or keep open—financial accounts abroad. Foreign banks and brokers must report on “U.S. persons” (citizens or Green Card holders) to the U.S. Rather than run the risk of American retaliation for errors and omissions, many financial institutions prefer to have no American customers at all. This particular problem is a consequence of the Foreign Account Tax Compliance Act (FATCA), notorious Obama-era legislation that has upended the lives of many U.S. expats.