A Senior Citizen’s Story

My story details being the brunt of exceptional IRS harassment and unprofessional conduct over several years.

It began with an IRS standard form query in early 2016 to report so-called “unearned income” on superannuation; followed by an expatriation decision in 2018, and then an almost 18-month ordeal in 2020 & 2021 with a retrospective audit of our CY2017 filing and expatriation documentation.

Australia has been home close to 50 years with two of our children marrying locally and producing 6 grandchildren. We took up Australian citizenship in the early 1990’s.

Honest and complete US taxes were filed every year of our adult lives, and occasional substantial tax bills were paid without argument and fuss. We were never audited in a 55-year run until the 2017 story being related.

Bottom line is we thought our finances as self-funded retirees were well organized and correct in both tax jurisdictions as we entered our full retirement phase over 15 years ago. I stopped paying for tax preparation services about that time as I thought my affairs were very simple and would stay that way.

Then a boiler-plate IRS notice arrived mid 2016 asking if the earnings on our superannuation were being reported as unearned income? This was first time news for me and of course our total receipts were completely tax free domestically, and not even reportable.

Considerable investigation determined there was a plurality opinion but absolutely no consensus in the professional community on superannuation reporting issues vis a vis IRS.  Moreover, the approach to earnings calculations was quite individualistic in the professional community and the IRS regs were completely silent on specifics. For sure, the standard annual earnings statements from Australian Wrap providers were irrelevant.

By the by, it was also obvious proposed fees for US filing advice and service could be totally unreasonable (and quite possibly wrong) if you proceeded blindly. For example, at the outset of my investigations I got a preliminary quote of $50,000-$60,000 from one of the major accounting firms even after carefully stating I was sure our affairs were very “simple”, did not involve significant sums and were completely honest.

So, we went off on our own.

Working with our long-standing financial advisors, a methodical analysis requiring a one-off computer program and access to historical records reconciled 1000’s of investment manager transactions in our super going back 7 years.

With the AUD/USD volatility in the 2000’s, it turned out there was only modest net USD “unearned income” in our case, and the determined figures were duly reported for CY 2016, CY2017 and, finally, partial year CY2018. Even in retrospect we did not owe any tax after Standard Senior Deductions in those years.

It was painfully clear repeating the analysis on an annual basis would be an absurd and expensive proposition. My overall research also discovered a series of shocking rules like the US capital gains tax denominated in USD (potential “phantom” translation issues) on a positive sale of your Australian residence whenever. That issue alone – eventual downsizing being a given – was suddenly a monumental “black hole” in post retirement cash flow flexibility if dual citizenship and its tax obligations continued.

 As we heard from one expert in the field; “compliance is like tiptoeing through a minefield blindfolded”. Rather than risk draconian penalties for any mistakes in future filings, however innocent and/or grossly unfair, we renounced our citizenship July 2018 in an expensive and cumbersome (4 months!) process with the key #8854 filing done meticulously.

We had arguably been textbook 21st century dual citizens. Before the full reality of punishing IRS rules, and administrative processes hit home, we had never before considered renouncing US citizenship  for sentimental reasons given an American family history predating the Revolutionary War. But it became the default rational decision after months of deliberation.

For the next 18 months all was “quiet”.

The real trauma story began in 2020 when a 2017 tax year audit notice arrived (i.e. Referencing the last full tax year before expatriation) All ideas it was going to be pro forma were quickly obliterated.

For starters, the agent in a direct phone call did not know husband and wife did separate tax filings in Australia, nor that it had a higher marginal tax rate, and it got much worse on multiple grounds quickly.

 My wife hadn’t to file an Australian return for years for strictly superannuation receipts compliant with all regulations. So of course, there was no return in the US or Australia for the agent to review our overall consolidated income.

  The audit focus on our “income” arguably should never have proceeded after my first detailed response and description of reality backed up by thorough documentation. With considerable retrospect, it is debatable if I even should have filed a tax form at all based on available standard “8833” Treaty exemptions.

While there were peripheral and distracting questions, matters got much worse quickly when the Agent arbitrarily pronounced ALL Australian super had to be identical to a US 401(K) with predominant employer contributions. It is of course the diametric opposite in purpose and practice.

In 4 separate demands for further documentation over the next 12 months, plus unannounced phone calls with no agenda, we were asked unbelievably intrusive and inappropriate questions about our religious practices, travel diaries, location and closeness of our relatives, plus the usual bank statements, tax filings etc. and much more. All was supplied in cross -referenced, indexed files with supplemental published Australian market information about superannuation. (BTW the Agent never asked any questions about our documentation and ignored my repeated offer for a conference call with my investment advisors.)

My objective was to finish US citizenship with a gold star, not to avoid anything.  I was aware from the outset that with no hard US assets, no IRS enforcement authority in Australia, and only a limited ability to garnishee US social security after complicated and tedious litigation, any eventual IRS demands &threats would be moot.

The process was disgraceful. The Agent lost the supplied Australian tax filings twice, confused everything regardless of detailed submissions totalling hundreds of pages, and repeatedly asked for such as detailed copies of my current employment circumstances and compensation even when I kept pointing out in writing and verbally, I was long retired!

Outrageous statements and demands completely off base never stopped. My wife and I have been life-long volunteers in Church, community and business associations. Specifically, to US ties, I arguably had one of the most consistent leadership histories in diverse major bi-lateral organizations in my generation.

The agent demanded my statement, “under penalties of perjury”, that my volunteer roles, which included an American Ambassador board appointment, had not generated undeclared “stipends and benefits” over the years!

My wife was similarly challenged about any stipends from her lifetime charity work in refugee advocacy and support! And the Agent asked for a reconciliation of casual earnings 1985-1995 from a home studio piano teaching activity when she learned there had never been a “corporate” employer.

The arrogance, and ignorance, of the Agent was on display most every exchange. At one point she demanded to know why I had not paid US Social Security taxes over my entire working career seemingly unaware of the reciprocal totalizer agreements that had ended the exposure years ago.

In another, she dismissed a legal opinion arguing Australia’s superannuation options were “privatised social security” as “gibberish” without comment.

The IRS auditor, moreover, flatly and unequivocally refused to believe annual investment performance reports were not identical in the US and Australia which was, of course, utter nonsense with different fiscal periods, accounting standards, tax rules etc.  Accordingly, she refused to even look at the irrefutably professional analysis that had been done 18 months earlier in calculating superannuation “earnings” because it wasn’t on letterhead from the Wrap account provider. The latter would of course have closed the account even after c.30 client years rather than be involved in a “one-off” exercise, or FACTA full stop!

Similarly, it was exasperating to get repeated audit questions, underlined for emphasis, asking for the detail on the (arbitrarily presumed) contributions and rearrangements we made in our Super in the last 5 years. It made no difference to consistently retort (and reference published information) that we could not have made contributions to the super due to being past the 75-year-old age limit and working requirement for any such. In other words, the account had been ruled off years ago in that regard.

After close to a year of the foregoing, the Agent eventually “determined” all of our CY17 superannuation receipts, 100%, were fully taxable in the US as if every penny was employer contributions, rather than the reality that proceeds were a high percentage return of principal. And the “earnings” had already been reported.

  Parenthetically it was stated I had been contributing to an account since the early 1970’s! The supplied work history had detailed I was on full expat assignment in Sydney 1971-75, working in New York 1976-80, was not on Australian employment terms till the mid 1980’s and the SG levy didn’t start till July 1992 (and I retired from full time corporate life in 1999!). In other words, she was off on a simple historical basis by almost 15 years of tax domiciliation, and that I had only been in the SG regime for 7.25 years at an average rate of about 4% over that period. It was simply impossible to have had any sort of materiality in the super account unless there had been significant after-tax contributions. All this was ignored in an indisputable fabrication.

Furthermore, in another astounding fabrication, it was “determined” my wife’s 2005 established superannuation account could not be legitimate/factual because she had never had a corporate employer as noted re piano teaching! Detailed evidence of 100% after tax contributions (including US capital gains taxes paid in 2005) and family inheritances for the foregoing was just ignored, as was the fact the implicit earnings in it had been taxed at 15% until pension mode.

The constant refrain over the months was “make us an offer” even in the metaphorical dark when nothing had been calculated! The requests peaked after receiving a completely arbitrary tax bill just before the 3-year Statue of Limitations deadline which by then included accrued interest and a penalty for my “negligence” in not reporting all super receipts as US taxable income.

I refused to budge; I did NOT owe anything and was deeply offended at the de facto attack on my integrity and the unrelenting abuse of authority.

After the formal Determination I finally got through to the agent’s Supervisor and made it obvious I was outraged and would appeal.  I thought the bald-faced case for the Agent’s numerous indisputable fabrications in the “determination” should have been “uncomfortable” factors at the minimum in a supervisory review. But no such occurred, and my request for a formal complaint to be registered was ignored.

However, shortly after our direct contact our case was referred to “review“ in June 2021 in what was described as “almost unprecedented” 6-month extension of the just expired Statue of Limitations.

Further exchanges and explanations verbal and written occurred over the next few months through November 2021. The 2017 audit saga ended de facto at the extended Statue of Limitation’s conclusion with no IRS historical or new demands being served, just silence. The closure came 3.5 years after expatriation, and about 5 years after the first IRS letter about “unearned income”.

I had a horrible experience with an agent who was, at the absolute minimum, unprofessional, demonstrably manipulative and thoroughly insulting by actually laughing in one instance at my harassment protests.

The fact that virtually all of the 2017 audit saga was in the middle of tight Covid lockdowns with attendant personal stress and administrative difficulty was utterly ignored in all written and verbal exchanges.  The bottom line was my inherited DNA belief in systemic fairness and consideration disappeared to be replaced by dismay and bitterness.

The subsequent Reviewing agent was quite professional, but, politely, made it clear he was annoyed at being tasked with a review of such little risk/reward opportunity (“Only had 3 reviews in my 16 years as an auditor!”)

I think the first agent had ended up concerned at having spent so much time with no taxes due from the IRS perspective. Although without any stated specific justification or formal notice, auditing partial tax year 2018 (our last filing as American citizens) and the final expatriation documentation filed in Jan. 2019 kept her possibilities open per the 2017 Statue of Limitations expiration.

I was asked (and flatly refused to accept any more harassment) for copies of our respective Wills, 5 years of bank statements looking for suspect significant capital transactions, 3rd party preparations of our historical Personal Financial Statements and such on the basis we “we must” have had Gifts and Trusts shifting ownership around to juggle the #8854 exemptions to be under the covered expatriate ceiling.

 The subsequent reviewer looked over our thorough documentation and with (appropriately) no questions or doubts on correctness, closed the investigation and pronounced us ex-Americans in a November phone call.

The only sticking point in the separate 2017 “extended” review was the Agent’s insistence that I had not documented the precise commencement date of a legacy superannuation account which I had liquidated for technical reason some years before. I pointed out it was sometime in late 1986 – 35 years ago – and 3 subsequent administrators had merged / gone out of business before record keeping stability over the last 20 years to date, plus it had no relevance whatsoever. However, I did not know until the end of the saga if this was going to be a sticking point for the audit sign-off or not.

The 2017 auditor’s Supervisor, and the subsequent 2021 “review auditor” were, contextually, reasonable people. But they were adamant and determined defenders of the system, with no subtlety. All Australian residents required to file for whatever reason will highly likely run into that unreasonable, often grossly ”unfair”, and unyielding wall until the Australia/US Treaty is changed.

By way of final example in that regard, I note in closing that even the “reasonable” review agent went out of his way early in the piece to warn me that it was a USD 10,000 plus fine if I had left my Super Wrap provider’s address- and only that – off the FBAR. A much bigger fine would be imposed if I had not submitted a newish form requiring the detailing and quantum of all financial assets. (I was ok on both points by referencing contemporaneous published arguments against being required to file those forms.)

The point is these were adjunct compliance documents and nothing to do with the accuracy of the basic tax filing. Similar hurdles are being erected all the time and Perjury is committed if you knowingly haven’t complied when you sign the basic tax form.

From an administrative compliance burden alone, few dual citizens could comfortably or easily unwind years and years of Australian home ownership, retirement planning and medical coverage as if they were hypothetically living in the US. And accordingly, the “status quo option” is to pay a deliberate tax penalty and significant compliance costs and worries year upon year right through to an ultimate very messy Estate settlement for your Executor. Stories abound of the angst in that regard.

Compelling background to morph from the individual’s plight to the “system’s” failings  can found in a lengthy argument – Mission Impossible: Extraterritorial Taxation & The IRS in TaxNotes Federal, Volume 170, #12, March 22 ,2021 ,and also on the Fix the Tax Treaty’s website. It eviscerates the IRS on virtually all fair-play grounds, and the US approach in general as ignoring moral & practical constitutional principles in dealing with expatriates of all sorts and circumstances.

It is an across-the-board international problem, and change is most unlikely anytime soon, if ever. It is therefore up to individual Treaty countries – i.e., Australia – to renegotiate bi-lateral terms to protect a diverse cohort of their law-abiding residents who are being severely disadvantaged to the detriment of domestic social policies, and subject to outright harassment.

Please FIX THE (Australian/US) TAX TREATY! 

A senior citizen