Mark Nestmann’s story of a Mexican

Monty Pelerin kindly sent me a link toMark Nestmann’s article, Growing Numbers of Tax Refugees Exit USA – Permanently.  Nestmann tells the story of man from Northern Mexico, whose mother gave birth to him in a border hospital on the United States side of the border.  In his retirement, he bought a condo in San Diego to have a cooler place in the summer (I am going to quote a little too much for fair usage and yet I hope that Mr. Nestmann won’t mind–this story is too important for Isaac Brock):

At closing, he encountered a strange anomaly. The closing documents listed him as a U.S. citizen. He tried to correct what he believed to be a mistake, but the broker assured him the documents were correct. Since he was born in the United States, he was indeed a U.S. citizen.

Our hero thought that was the end of it, but when he arrived in San Diego for the summer, he received a notice from the Internal Revenue Service. The notice informed him that he was obligated to file U.S. tax returns. And there was no record of him filing a U.S. tax return for the preceding three years. The notice invited him to respond immediately.

A few days later, he drove over to the local IRS office to see if he could resolve the situation. After a brief conversation, he was shocked to learn that the IRS had already commenced an examination. The agent started using terms such as “willful failure to file,” “criminal penalties,” and “jeopardy assessment.”

At this point, our hero hired a criminal tax defense attorney. He spent about $100,000 in legal fees, and eventually received a notice from the IRS informing him that he wouldn’t face criminal penalties. Still, he had to pay 25% of the peak value of his unreported non-U.S. accounts for the period 2003-2010. Unfortunately for him, the value of these accounts fell about 35% in the global economic turmoil of 2008-2009. The accounts that were once worth $2 million are now worth about $1.3 million. Nonetheless, he paid a $500,000 penalty to avoid criminal prosecution.

In addition, he had to file six years of past due tax returns and information returns disclosing his interests in Mexican corporations and other Mexican entities. These returns had to be prepared according to U.S. Generally Accepted Accounting Procedures (GAAP), which means that the Mexican financial statements for each year had to be converted to U.S. GAAP. That expense cost him an additional $50,000.

To tally things up: our hero’s total cost of accidental U.S. citizenship: $650,000. Total benefit of U.S. citizenship: none.

Needless to say, this Mexican gentleman filed a formal petition with the State Department to surrender his U.S. citizenship and expatriate. That eliminates any future U.S. tax or reporting obligations on non-U.S. income or property, but doesn’t affect his past obligations.

I have some questions:

  • Why didn’t this man just tell the US to take a hike?
  • Why would he comply if he was just going to renounce his citizenship in the end?
  • I don’t understand why he was afraid of criminal prosecution.  Why didn’t he just go back to Mexico?
Advertisements

20 thoughts on “Mark Nestmann’s story of a Mexican

  1. Leaving aside everything else, how could this be?

    “Still, he had to pay 25% of the peak value of his unreported non-U.S. accounts for the period 2003-2010. Unfortunately for him, the value of these accounts fell about 35% in the global economic turmoil of 2008-2009. The accounts that were once worth $2 million are now worth about $1.3 million. Nonetheless, he paid a $500,000 penalty to avoid criminal prosecution.”

    Doesn’t sound like he entered OVDI.

  2. @renounce That’s a good question, was he or not in the OVDI? 25% was the 2010 OVDI penalty, and so I would have guessed that he was in it.

  3. Went to the original article – this part:

    “To tally things up: our hero’s total cost of accidental U.S. citizenship: $650,000. Total benefit of U.S. citizenship: none.

    Needless to say, this Mexican gentleman filed a formal petition with the State Department to surrender his U.S. citizenship and expatriate. That eliminates any future U.S. tax or reporting obligations on non-U.S. income or property, but doesn’t affect his past obligations.

    Americans Now Locked Out of Non-U.S. Investments

    At the same time, it has become much more difficult for anyone with even the most remote connection to the United States to invest or do business offshore. Recently, I met with a U.S. citizen who is also a citizen of another country. He and his wife plan to move back to that country to retire.

    On his last visit to that country, he tried to open a bank account. To his surprise – and horror – the first document the banker gave him was a 10-question survey asking him to disclose all connections to the United States. Even a single “yes” answer could disqualify the applicant from opening an account. Indeed, citizens of this country who have never traveled to the United States must now complete this form when opening an account at this bank. Dozens of other clients have reported similar difficulties.

    For all these reasons, I think the 1,788 expatriations the IRS reported in 2011 is only the beginning of a much larger trend. Indeed, I’m surprised the number isn’t 10 times or even 100 times larger.

    The Many Benefits of Expatriation

    Expatriation is a major decision. It requires that you have a satisfactory passport and citizenship from another country. It also means that you no longer have the automatic right to live and work in the United States. Even for brief visits, you’ll need to obtain a visa, unless your non-U.S. passport qualifies you for visa-free entry.

    The payoff, however, is immense. Once you expatriate, you no longer have any obligation to pay tax on your non-U.S. income, nor file any reporting forms to the IRS or U.S. Treasury with respect to your non-U.S. investments. You also eliminate all the offshore investment restrictions now imposed on U.S. citizens or green card holders. Plus, you’ll no longer be expected to adhere to the numerous embargoes the United States has declared against its self-declared enemies (e.g., Cuba).

    Our firm has helped dozens of U.S. citizens and green card holders permanently and legally eliminate future U.S. tax and reporting obligations through the process of expatriation. We can even help you obtain a second passport, if you don’t have one already. Contact us today for a consultation.”

    This strikes me as an “infomercial”. I agree that people should thinking of renouncing, but …

  4. It seems that the question of FBARs and penalties remain for all American Abroad. Is there a way to know for sure how they can handle this without having to spend a lot of money with US Tax Lawyers?

  5. Here is a fun website for alternative financial news and analysis put on by a couple of American expats in Paris.

    http://rt.com/programs/keiser-report/

    I find Max Keiser to be very entertaining and he gets some really great speakers on his show, the most recent being Rolling Stone journalist Matt Taibbi.

    In fact, I would not be surprised if wouldn’t be interested in a doing a segment with Petros.

  6. Petros,

    I just emailed Mark and invited him over here to provide more details and join the conversation.

  7. Well if you want to trade US stocks and have a foreign wife (the IRS doesn’t know about her – the few times I’ve filed because the US government owes me a REFUND her name never is put on a return) it’s not a problem. That’s what I do, my e-trade account is opened in her name and I do all the trades, it might as well be my account. Once again how is the IRS going to stop this from a foreign country?

    As for the Mexican, I personally would never own property in the US again. Why give the IRS leverage over you? Also all my retirement and other assets have long left American shores.

    Although I have not renounced, I have all but renounced financially. The IRS in future may threaten me for a lousy few bucks Social Security may owe me, but at present the maximum I believe the IRS can deduct from Social Security payments for “back taxes” is 15% of the check per month from some of those retired deadbeats – if someone knows better please respond.

    So – Chuck Grassley, Carl Levin and company are going to have to go back to the drawing board and pass a new law once again to screw ex-pats for their remaining Social Security payments for the ones who refuse to file or pay FBAR / FATCA penalities.

    Even then I going to investigate the effect of various Social Security agreements signed between countries to see if there’s someway I can liberate those few remaining dollars from the IRS’s reach.

    Another question about the Mexican – if his condo in San Diego was worth less than his “tax bill” why didn’t he just walk away – particularly if it had a mortgage on it and tell the IRS if they want to put a lien on it they can (but hold on the IRS can put a lien on it but they actually can make him sell it – how does that work, but I suppose they’ve started criminal proceedings against him and he won’t be able to cross the border again suppose his kids could use the property or relatives or rent it out for cash).

    I guess in future the best policy is just don’t touch the US. Bring your foreign credit card and cash and that’s it for your stay.

  8. Petros, is it correct that even if you have renounced you are still obligated to file US tax returns up to that date of expatriation?

    My date of renunciation is March 7/12. It’s my understanding that I must file, as I have for 2011, up to March 7, 2012. After that nothing else is required.

    A little extra info, my US tax bill was $106 US and it cost over $1500 to have prepared. The $1500 was the real cost the actual cost to me was a bit less since my Canadian Tax prepare gave me a break. But she now realizes that there is a real profit to be made from Canadians with US tax filing obligations.

    I assumed I wouldn’t pay any tax but after the $92K tax credit that’s it. Since I’m not a US resident I cannot claim any US benefits. Good thing my Canadian tax return was huge. At least I can pay for the double taxation.

  9. @Jefferson…

    I hope Mark comes up here and makes some comments and clarification. Something about that story did not ring true to me. It was almost too perfect a stereotype of the abuse that could happen, rather than something that actually did. My skepticism meter is in the red zone on it.

    It is almost like he has combined various events into a perfect IRS victim. I am not ready to accept the story exactly as written. I need to hear more. Let’s see if Mark takes the invitation to come here and comment.

  10. @JustMe

    The 25% penalty is an OVDI 2011 penalty – this could not yet have been assessed (at least that’s my feeling). Therefore, I am inclined to think that aspects of the story are not true.

    That said, it is a good example of everyhing that could go wrong it it did.

  11. Itacaf wrote:

    @ Petros, is it correct that even if you have renounced you are still obligated to file US tax returns up to that date of expatriation?

    According to the Internal Revenue Code yes.

    My date of renunciation is March 7/12. It’s my understanding that I must file, as I have for 2011, up to March 7, 2012. After that nothing else is required.

    I don’t know the deadline. I assume that you are required to follow normal deadlines and file the 8854 with your last 1040 filing.

    A little extra info, my US tax bill was $106 US and it cost over $1500 to have prepared. The $1500 was the real cost the actual cost to me was a bit less since my Canadian Tax prepare gave me a break. But she now realizes that there is a real profit to be made from Canadians with US tax filing obligations.

    I assumed I wouldn’t pay any tax but after the $92K tax credit that’s it. Since I’m not a US resident I cannot claim any US benefits. Good thing my Canadian tax return was huge. At least I can pay for the double taxation.

    I’m surprised you owe anything at all.

  12. @all,

    I have received an email back from Mark. I have replied asking if he would mind if I post it here. I am giving him 24 hours to request that I NOT do so, otherwise I go ahead and post. It helps clarify the issue that he was writing about. I hope we can engage Mark to contribute comments here occasionally.

  13. @Just Me, better not to post it without explicit permission. That is a journalistic ethic, apparently, not to post private from someone without explicit permission (I learned that the hard way).

  14. @ all…

    Now for the rest of the story…

    When I read this, I had some questions in my mind, so decided to email the author to invite him over here to explain more. He has graciously given me permission to publish our exchange…
    ……………………………………….
    Mark,

    I just read your post on Lew Rockwell…

    That is a story I know all too well. Assume you saw this recent story at Reuters?

    Special Report: Tax time pushes some Americans to take a hike. http://reut.rs/IGJ3Dx

    or this last year

    Taxpayers with overseas accounts seethe at penalties. http://reut.rs/uwDMt9

    If you haven’t heard of Isaac Brock Society, I would encourage you to check it out, as this blog is devoted solely to the subject.

    We have just referenced your Rockwell post, and have some questions as to the details of the story and why this Mexican didn’t take some other actions.

    http://isaacbrocksociety.com/2012/04/21/mark-nestmanns-story-of-a-mexican/

    Thanks for your post but would like to hear more.

    Best Regards
    ………………………………………………
    Mark Replied….

    Thank you for your note. I recently discovered the Isaac Brock Society blog and find it most interesting. I did see the articles you mention in the email but appreciate you calling my attention to them.

    The story of the elderly Mexican man I described in my blog was related to me by one of his attorneys. It is my understanding from this attorney that he did go through the OVDI. I’m not sure which one but I believe the attorney said 25% in which case it would have been 2011.

    Several of the posts cast doubt on the accuracy of the story, but I don’t know any reason why the attorney would misrepresent the facts. Since I don’t know the situation first-hand, I’m not in a position to answer the questions your readers posed for additional details.

    A couple people suggested that he could have walked away from the USA to avoid paying up. I assume that the attorney he was working with insisted that he become compliant before helping him expatriate. While expatriation doesn’t affect past tax obligations, it can have the effect of making those obligations more difficult to collect. Assisting someone with known and unresolved tax issues to expatriate could potentially open up advisors to civil and criminal charges by the IRS..

    And yes, my blog is an infomercial. It’s free, and I have to get new clients somehow!

    All the best,
    ……………………………………………
    To which I responded:

    Hey Mark….

    Thanks so much for responding. I appreciate your forth rightness, candor and responsiveness. You are unique in that regard.

    There are many of us that understand the current “IRS jihad” in some painful detail, and how the processes are working or not. Of course we have opinions, but I personally try not to be too hyperbolic as I don’t want to be dismissed out of hand. It is important to get stories right, as you
    don’t need any embellishment to tell this story. It truly is stranger than fiction when it comes to the last 3 years of IRS actions. I often fail, with my own characterizations and representations, and I try to stay mindful of that. However, frustration overcomes level headed and measured communication at times. It is hard to get attention without being hyperbolic or partisan 🙂

    Important point I would like you to understand. We are not Tax protesters or Tax evaders, or Sovereirgn Nation types. If I would characterize the group of bloggers at Isaac Brock, it would be:

    “International Tax Complexity & Stupidity Protesters”.

    And there is a lot of stupidity around these days related to offshore accounts, Citizenship taxation, and IRS practices to “improve” compliance.

    I understand the outlines of what the attorney told you, and something might have been lost in translation. There are some details that I am skeptical about, and don’t make sense in light of what we know, however, the IRS has been amazing in their willingness to take BIG Penalties from people like this dual citizen Mexican you mentioned. If that happened, it borders on
    criminal, but then we may not really know all the facts.

    If this actually happened, it borders on attorney malpractice if he failed the client by not having him “Opt Out” of the OVDI or going to the TAS for
    relief. I say that knowing that I DO NOT really have all the facts of the situation. So, there could be good reasons I am not aware of.

    If you are interested in a real story, mine has been well documented at Isaac Brock. I know something about the so called Voluntary Disclosure process. I am not as sympathetic a victim as a dual citizen Mexican, but victim just the same. You are welcome to read it if you are a glutton for punishment! 🙂

    http://bit.ly/y5NQr4

    Anyway, we appreciate any light that is shined on the misguided Citizenship Taxation policies and nothing wrong with an informerical! I understand the need to generate business. Keep it up!

    If you don’t mind, and I will give you an opportunity to object, I would like to post your response. You seem a stand up guy, and heaven knows we need more like you that can clearly communicate about the issues that most
    Americans care not one whit about! 🙂

    BTW, what do you know about FATCA? That is a good blog topic for Lew Rockwell. We can certainly help you understand it if you don’t. I would suggest that you start here… http://bit.ly/nlOAPV

    Cheers and thanks again.
    …………………………………..
    His final response with permission:

    The attorney who related this story to me was brought in rather late in the game. I think the Mexican victim of the jihad (excellent characterization) either tried to do the OVDI on his own or had someone incompetent help him.
    I’m not sure which, but in any event by the time he contacted the attorney who reached out to me he had already incurred very considerable costs.
    Perhaps some of them can be recovered through competent legal representation.

    Feel free to post my responses.

    Your own story sounds interesting, although I only had a chance to read the first few paragraphs of your account at this time.

    I have written extensively on FATCA in my blog. Here’s a recent article with links to some other ones.

    http://nestmann.com/form-8938-another-nail-in-the-coffin-of-offshore-financial-privacy-part-i/.

    A very bad law, to be sure.

    Best//Mark
    ……………………………………………………….

    My final comment. I also see that Mark has written additionally on GATCA, (global FATCA) so he would be one we would want to follow:

    http://www.financialsense.com/contributors/mark-nestmann/fatca-big-brother-goes-global

    and that is the rest of the story as I know it…

Comments are closed.