When Your Customers Flee Complexity

By Kevin Meyer

So it's that time of the year again, and I'm sitting down to write a nice big check to the IRS.  For the most part I'm ok with that.  Writing a check means that I haven't given the government an interest free loan and it means I made some decent money last year.  I don't mind paying to enjoy the benefits of living here, paying a little more because I'm a little more successful, even paying for some programs and policies I disagree with - that's a consequence, and benefit, of democracy.

Of course I do care a bit when my hard-earned tax dollars are paying for extravagant GSA parties, entertainment for the Secret Service, and $205,000 to move a $15 shrub.  But I bet some will still have the gall to say taxes are too low and should be raised to cover [growing] "necessary" services.  Or maybe I should put "services" in quotes?

But that's not my point.  And, perhaps surprisingly to some, neither is the subject of tax rates themselves and the like.  No, this time it's tax complexity.  And usually when I talk about tax complexity I mean the 40,000 pages of regulations that are such a social engineering patchwork that it allows loopholes and abuse, not to mention bazillions of hours to comply and enforce.  Not this time.

This time an article on Reuters showed me a different, and perhaps more disturbing angle of the problem.

On April 7, 2011, Peter Dunn raised his right hand before a U.S. consular officer in Toronto and swore that he understood the consequences of giving up his U.S. citizenship. Dunn, a dual U.S.-Canadian citizen who has lived outside the United States since 1986, says he renounced because he felt American citizenship had become more of a liability than a privilege.

Dunn, who blogs about expatriation, takes issue with being characterized as a tax evader. He says the taxes he pays in Canada are higher than what he would pay in the United States, and he says he had always complied with the IRS before renouncing. But, Dunn says, the IRS approach to enforcing compliance is misguided. "It's making life difficult for a lot of people," he says. "It's driving us away."

He's not dumping his U.S. citizenship to avoid taxes - in fact he will be paying higher taxes.  He's switching because of complexity and intrusion.  He's not the only one.

Last year, almost 1,800 people followed Superman's [long story - read the article] lead, renouncing their U.S. citizenship or handing in their Green Cards. That's a record number since the Internal Revenue Service began publishing a list of those who renounced in 1998. It's also almost eight times more than the number of citizens who renounced in 2008, and more than the total for 2007, 2008 and 2009 combined.  Many say they parted ways with America for tax reasons.

That's similar to the huge numbers of folks that are fleeing California for Nevada and Texas, or New Jersey and New York for Florida.  Wealth and income shift, and tax revenues go down.  Funny how that happens - across state lines and increasingly between countries and continents.

But again, in this story it's not because of high taxes, but because of complexity.

The United States is one of the only countries to tax its citizens on income earned while they're living abroad. The National Taxpayer Advocate's Office, part of the IRS, released a report in December that details the difficulties of filing taxes from overseas. It cites heavy paperwork, a lack of online filing options and a dearth of local and foreign-language resources.

And since it's not just about high taxes, those fleeing aren't just the rich.

During the last 25 years, a number of millionaires and billionaires have renounced their citizenship. Among them: Ted Arison, the late founder of Carnival Cruises, and Michael Dingman, a former Ford Motor Co. director. But those of more modest means renounce, too. They say leaving America is about more than money; it's about privacy and red tape.

What are some of the problems?  Complexity, ongoing changes that create significant liability if not monitored, and intrusion.

As an American, Dunn had to file tax returns and report all of his bank accounts - even joint accounts and his Canadian retirement fund. If he didn't, he would be breaking U.S. law and could face penalties of up to $100,000 or 50 percent of his undeclared accounts, whichever is larger. Dunn says he was tired of tracking IRS policy changes.  "Disclosing joint accounts I hold with my wife and anyone I ever want to do business with - that's just too much. My wife's account is none of their business."

And...

Marylouise Serrato, head of American Citizens Abroad, a nonprofit organization based in Geneva, says that many members feel scared about reporting requirements they did not know existed. "Americans abroad are terrified. We've had people pay tens of thousands of dollars in fines. We've had people … pay huge amounts of back taxes," she says.

And...

Francisca N. Mordi, vice president and senior tax counsel at the American Bankers Association, says she has received a number of calls from Americans in Europe complaining about banks closing their accounts. "They're going to drop Americans like hot potatoes," Mordi says. "The foreign banks are upset enough about the regulations that they're saying they just won't keep American customers, and it's giving (Americans living abroad) a lot of sleepless nights."

And...

In Europe, American women say they feel pressure to renounce even from their husbands. "American women married to non-Americans are only just now finding out that they have to disclose years and years of income and accounts," says Lucy Stensland Laederich, a leader of the women's club who lives in Bordeaux, France. Genette Eysselinck, a friend of Laederich's, renounced early this year. Her husband, a European Union civil servant, saw no good reason to share his account information with the IRS, she says. And after considering all her options, Eysselinck decided that renouncing was the best path. "It created a lot of tensions around here," she says. "Divorce seemed a little extreme, so I asked myself, 'What am I gaining as an American?' And the cons outweighed the pros."

How sad is that?  The cons outweighed the pros, of being an American no less.

As a head of any organization, what would you think if you had customers that would pay real money to leave you because you were such a pain in the buttocks to deal with?  Hopefully it would give you pause.  Perhaps it should.

Comments

[Isaac]

As I went back for the third round of "required fields" to submit a change record. now I have to wait for the change to be submitted back to me to approve. An activity I will do three times, after which I have to manually go in and change the state to close.

Yes a a multi-day, multi-step process to report that I replaced a piece of faulty equipment. Then reading this article it occurs to me what about "When your EMPLOYEES flee complexity?"

Organizations that have trouble keeping talented individuals around, because the process required doesn't add any value to your product?

[Blaze]

Excellent review of an equally excellent article.

You're right it's sad. Many of us who left the US due to family or employment reasons years or even decades ago. We often became citizens of other countries. Yet, we are now finding ourselves caught up in this IRS quagmire and invasion into our honest law-abiding, tax-paying lives elsewhere.

As a result, some are vowing to never again invest in the US or return there even for a visit. That won't help the US economy.

You said it best. How sad is that?

[Eric]

Living abroad today is like living with a Damocles sword over your head.

I, like so many others, had to put my life savings into my foreign spouse's sole name. Accounts on which I cannot even have signature authority, much less joint ownership.

When we wanted to help a friend by investing in his company, it had to be in my spouse's name alone due to the intrusive and complicated requirements now imposed by the IRS and Treasury on foreign controlled corporations.

The situation is even worse than this short article describes.

Living abroad now means you can never invest in local mutual funds. Often foreign banks, even the ones still accepting American clients, cannot comply with US reporting requirements and these investments fall under complicated "PFIC" tax regulations.

You cannot have a tax sheltered or tax defered retirement account (a US IRA account will be taxed by the country of residence, a foreign account will be taxed by the US.) Most Americans abroad (those with salaried income below the Foreign Earned Income Exclusion limit) are not ALLOWED to contribute to a US IRA account due to US tax regulations.

Many US citizens abroad cannot even claim their own legitimate and biological children as dependents (Foreign national/ non-resident children).

A number of Americans abroad are not allowed to vote in the US due to specific state regulations, yet they must register for the draft, declare all bank accounts, and file US tax returns.

I know specifically of an American in Switzerland who paid 61% of her income in Swiss taxes, and still owed US tax due to the type of Swiss tax (asset based, not income.)

Very many Americans overseas pay FAR MORE in tax preparation fees than they do in US taxes. (Minimum $300 fee even if you owe no US taxes.)

Being an American abroad today is fast becoming a luxury only available for the rich who can afford specialized lawyers and the consequences of inevitable double taxation.

Unfortunately, more and more middle class Americans will be forced to follow in Genette's footsteps as the mental and financial cost of US citizenship increases; all for gathering what is the equivalent of a fraction of a penny to the US's total tax revenue. (~3B USD vs. 1800B USD)

Is it pure coincidence that we are the OECD nation with the smallest per capita population of expatriates AND the country with the worst trade deficit? Let's hope so, otherwise the US economy can only get worse as our own policies decimate the population of Americans abroad.

[Wesley Connell]

Rather than just looking at tax code, I'd like to think about the general idea of complexity in business. I have been trying (mostly in vein) to convince my company they need to reduce the total number of SKUs offered to customers. The answer has resoundingly been "you're crazy" that's what we do, we serve our customer's needs, regardless what that need is. I asked (with the data already in hand) how much we spend on making a custom product for a 1 time purchase? How much of our client services groups time is spent trying to understand the minute details of completely unique customer requests. How many VOC studies have come back saying your company is too hard to deal with (too many). I believe the company could reduce the complexity of the offerings and also serve the customer better. Complexity down, profit up...