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.