Pamela is an American who has lived in Sweden for 25 years and has always been diligent about filing her US tax returns, something required of American citizens even if they live abroad.
But after chancing across some information about an obscure US tax regulation known as FBAR, Pamela (not her real name), has been on a roller-coaster ride that has taken her through a difficult maze of dense tax regulations and punishing financial penalties.
"I was potentially looking at a seven figure fine," she tells The Local.
FBAR is the common term used to refer to what US tax authorities officially call a Report of Foreign Bank and Financial Accounts, a law which has been on the books since the 1970s, but which US tax authorities have only recently begun to enforce in earnest.
Any US citizen living abroad who owns assets (checking, savings, pension, brokerage investments, life insurance, property, etc.) registered outside the US equaling a total of more than $10,000 – and that’s for all accounts, whether individual or joint ownership – is required to file an FBAR.
For those living in Sweden this includes not only bank accounts and the like, but also includes items such as Coop MedMera cards, ICA cards, and Rikskupong food vouchers.
Pamela's concerns about what the FBAR requirements might mean for her escalated as she kept coming across the works "FBAR penalty" as she went about completing her tardy US tax return.
Previously she had always done her own taxes but to be sure she was following the requirements correctly Pamela contacted an accountant in the United States, who in turn sent her to a lawyer.
The lawyer advised her that as she hadn’t filed her return on time, it meant she had undeclared income and with the current tough stance taken by the main US tax agency, the Internal Revenue Service (IRS), for non-filers of the FBAR, she should "do the math".
Much to her horror, Pamela discovered that the penalty for non-compliance of FBAR is $10,000 per bank account per year, with the IRS looking back six years.
Because many Swedish banks open a new account each time a stock is bought or a fund opened, Pamela had double-digit number of accounts registered in her name.
By the time she'd followed her lawyer's advice to "do the math", she found herself potentially facing a penalty in excess of $1 million.
According to her lawyer, the only the way to pay a smaller penalty would be to join something known as the Voluntary Disclosure Program set up by the IRS.
"Because I am fully integrated into Swedish society, I thought it would be an opportunity to explain my situation," she recalls.
But the reaction she received from US tax authorities was entirely different.
"I was treated like a criminal. I was told that even in the Voluntary Disclosure Program it would be assumed I was a ‘willful violator’ of the tax laws and would need to pay 25 percent of [the value of] all my overseas assets, based on the highest balance in the sum total of all my bank accounts, retirement accounts, apartment, car, etc. over the last eight years," she says.
Even the total value of Pamela's apartment was to be included in calculating the "lesser" penalty, not simply the amount remaining on her mortgage.
"I was told I should be happy I was not paying the seven figure penalty. But I have never even had close to seven figures in my accounts in my life!" she explains.
The United States is the only country in the developed world that requires its citizens to file tax returns if they have enough taxable income, whether living in the US or not.
However, this requirement is actually separate and distinct from the FBAR filing requirement.
It doesn’t matter that there was no criminal action on Pamela’s part or that she might have had reasonable cause to have not complied with FBAR.
The IRS policy has been one of "no negotiation, one size fits all", although it has softened its stance somewhat recently following an outcry from US citizens living abroad.
Last June, the IRS reduced the penalties to five percent of bank accounts and retirement plans (leaving out assets), but the conditions for qualifying for the lower penalty are very narrow and many expats do not qualify.
And while Pamela may no longer be facing a seven-figure penalty, she's already racked up a bill of $40,000 in accountants' and lawyers' fees.
"‘It’s been more than one year since I started the process and the end is nowhere in sight," she laments.
While Pamela’s story is enough to give any American ex-pat many a sleepless night, even Swedish financial institutions will soon find themselves facing new headaches due demands from US tax authorities regarding Americans living abroad.
Of increased concern for banks and other Swedish financial companies is a regulation with yet another confounding acronym: FATCA, the Foreign Account Tax Compliance Act, which requires foreign banks to report Americans to the IRS starting in 2014.
FATCA regulations require banks to install costly software and have already led some Swedish and other foreign banks to deny service to potential American clients.
A quick survey of some of Sweden’s leading banks shows that most are studying the issue but have not made any concrete decisions as to whether they will either comply with the new regulations or simply stop taking on American clients.
Handelsbanken, SEB and Swedbank all say that they are weighing the options and will come with a decision before 2014.
However, Swedish business daily Dagens Industri (DI) reported recently that Swedish financial institutions are actually becoming more restrictive about taking on American clients, with some going as far as saying they would close the door on US citizens seeking to open new accounts.
Lisa, a Swedish-American who has lived in Sweden for more than ten years, told DI that she had been denied a new investment account by Handelsbanken, whom she has been a client with for almost as long as she has lived in Sweden.
When she attempted to open the account she was asked if she was American. Lisa replied that she was Swedish-American and was told that they didn’t open new accounts for Americans.
She was later told that the rules applied to Americans living in the US and since she lives in Sweden if would be okay after all.
According to Mary Louise Serrato, the Executive Director of American Citizens Abroad (ACA), a lobby organization representing the interests of US citizens who live in other countries, the organization has been swamped with stories from members who have been caught up in the FBAR crackdown.
"We have heard of banks calling in mortgages and refusing pension fund and insurance coverage for US citizens. These testimonials also represent individuals who were levied abusive, financially ruinous FBAR penalties for simple errors of omission or ignorance," she explains.
As Serrato points out, many US citizens are unaware of the FBAR requirements, and the US tax authorities' "one size fits all" approach has left many well-meaning US tax payers concerned about what might happen if they try to comply.
"These individuals have reasonable cause to have been ignorant or IRS laws and requirements: however many have entered or will enter the Voluntary Disclosure Program to try and ‘do the right thing’ but will find themselves being bankrupted by the process," she explains.
All told, ACA has already received more than 150 testimonials from individuals who have lost access to their US-based accounts or who have been shut out by foreign banks unwilling to comply with FATCA.
"Many individuals are not even aware that they are American and should be filing, such as Green Card holders and ‘accidental’ Americans (born in the U.S., left when they were three and never returned), children of Americans now living overseas (even if US citizenship was never claimed)," she explains.
Peter Hallworth, a UK native who lives in Stockholm, has two children who were born in America who, upon reaching the age of majority, will face a lifetime of not only filing US tax returns but also of complying with FBAR.
"I always thought having US citizenship would benefit them in the future; now we’re considering whether it’s worth the price," he says.
"I really can’t believe it! This nice country that I respect – have they gone mad?"