This post original appeared at the Righteous Investor. It argues that since the US census does not count US persons abroad, they do not have proportional representation in the House of Representatives. Thus, even though citizens abroad may vote in Federal elections, they are voting for someone else’s representative, not their own. This is a violation of the Ninth Amendment of the United States Constitution.
Is it taxation without representation if you can vote? Damn right!
Do United States persons abroad differ substantially from residents of Washington D.C.?
Tax Treaty in conflict with Canada’s Human Rights Act
The United States of America started as a country very sensitive to tax issues. Thirteen colonies of King George’s England rose up in unified rebellion because the Crown did not respect the rights of colonists. Furthermore, they resented this extra-territorial taxation and insisted upon a basic principle of English democracy, “No taxation without representation”. This protest was in spite of Parliament’s claim to have protected the Colonists in the war with France. The slogan helped to incite the American Colonies to rebel against the King and to declare independence in 1776.
Now 235 years later, the numbers of Americans living in foreign countries has grown to six million and Congress believes that it has right to tax them because it “protects” them (for a history of taxation of non-resident citizens see renunciationguide.com)–mind you, Congress does not provide customary services, such as roads, post office, or social welfare, which are available to residents. I recently asked where the US Federal Toronto office for unemployment, food stamps and welfare could be located and found that no one has had a reply. Yet there are phone numbers to call for help from the IRS if you are living abroad. It’s like that bad friend who borrows from you but never lends when you need help.
Now my question in this post is whether this extra-territorial taxation is legal in the first place. From the standpoint of international law, it is highly suspect and the only other nation in the world which taxes its non-resident citizens is Eritrea, and most civilized people see Eritrea’s attempts to tax their citizens living abroad as “extortion“. Yet since the US doesn’t care what the rest of the world thinks, we will get nowhere with that approach: you cannot shame this government. But if we approach it from a constitutional perspective, then we have to deal with the superstructure of lower and Supreme Court case law wherein even legal experts disagree. My contention in this post is that the Constitution belongs to the People and the People are the final arbiters of what it means. The Supreme Court gets its power from the Constitution and the Constitution gets its power from the People. Therefore, if I can convince enough People that what I think it means is correct, then I will be satisfied. Here then are my arguments:
Taxing people residing outside of the United States violates the fundamental right of “no taxation without representation”. Very simply put, the US census doesn’t count those of us who live outside the United States and since the US Census determines the number of representatives for each state on the basis of population, the non-resident citizen does not have representation. This is a fundamental principle of Constitutional law that extra-territorial taxation violates to the core. I was alerted to this by a comment on Phil Hodgen’s blog (see below).
Applying the so-called exit tax, created by Heroes Earnings Assitance and Relief Tax Act of 2008, to non-resident former Americans is unconstitutional because it violates the fundamental right to expatriate. From the standpoint of American law, the right to expatriate is supported by the Declaration of Independence. It is also supported by an Act which Congress passed in 1868. It says explicitly:
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That any declaration, instruc- tion, opinion, order, or decision of any officers of this government which denies, restricts, impairs, or questions the right of expatriation, is hereby declared inconsistent with the fundamental principles of this government.
Ironically, Congress was trying to protect those who would leave their countries to become citizens of the United States and to forbid other countries from not permitting their expatriation. Now, the requirement that former U.S. citizens fill out Form 8854 to determine if they are covered expatriates or not, is a violation of this 1868 law, which to my knowledge has never been repealed. I have other objections to the Form 8854: for one, it requires that I list all my assets, which I flatly refuse to do on the grounds that the IRS has no right to that information (has anyone in the IRS or Congress ever read the Fourth Amendment?). But my understanding of fundamental rights, is that government is not allowed to tax you, require fees, or prevent you in any other way from exercising them. For example, no impediment is allowed to hinder the right to vote. This would apply also to the $450 renunciation fee, in my opinion, but you could whistle till you’re blue in the face, the State Department won’t budge. The $450 is an impairment to expatriation and it is a violation of the 1868 law quoted above, which is based upon a “fundamental principle of this government”. The exit tax is likewise an impediment.
Finally, in case anyone is worried that the Bill of Rights does not support the right to “no taxation without representation” or the right to expatriate, don’t ever forget that the Ninth Amendment covers those fundamental rights:
The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people.
Thus, the Bill of Rights supports these fundamental rights and the attempt by Congress and the IRS to collect taxes from non-residents and an exit from those who would renounce their citizenship, is in my opinion unconstitutional. Class action lawsuit anyone?
See also: William Thomas Worster, “The Constitutionality of the Taxation Consequences for Renouncing U.S. Citizenship“, Florida Tax Review 9 (2010) 923-1020 (can be downloaded at link: see “One-Click Download”).
Appendix: Comment by Jeff D. Tom, August 8, 2011 | 3:42 am, on Phil Hodgen’s blog:
DISCLAIMER: The following is lay opinion and not legal advice; I am not a/your lawyer, and never played one on TV.
I fully agree with and support your constitutional arguments, but would go much further as to the issue of the authority (nay, lack thereof!) of the US government to impose taxes or any law whatsoever on bona fide residents of a foreign country and especially as regards their activities abroad. This goes for FuBAR, FATCA, and double taxation.
According to Article I, Section 2, Paragraph 3 of the US Constitution « Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers, which shall be determined by adding to the whole Number of free Persons, including those bound to Service for a Term of Years, and excluding Indians not taxed, three fifths of all other Persons. The actual Enumeration [Census] shall be made within three Years after the first Meeting of the Congress of the United States, and within every subsequent Term of ten Years, in such Manner as they shall by Law direct.”
Americans abroad are not counted in the Census, thus are not proportionally represented in Congress as the Constitution provided. Many are unable to vote due to the complexities of registration or inability to prove a home precinct in the US. This means that the legislative process that resulted in extraterritorial tax laws was inherently flawed and thus the legislation affecting those in the disenfranchised category null and void, at least and especially as such legislation may be to their detriment.
Some might argue that the 16th Amendment “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” would void my argument of the last paragraph. I disagree, believing that the intent of the language of the 16th Amendment is to allow the federal government to maintain a progressive tax system, allowing the taxation of entities according to their level of income; regardless of how populous each State might be, in order to distribute funds to finance projects in whatever state required.
The 16th Amendment supersedes only the “…direct taxes shall be apportioned among the several states” part of Article 1, Section 2, and the part of Article 1 Section 9 that states “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken.” The 16th Amendment does not use the word “Representative”, “Representation”,”Representatives”, or “Congress”. It does not seek to strip the citizenry of proportional representation as provided by Article 1, Section 2!
Furthermore, according to the 1st Amendment “Congress shall make no law … abridging the freedom of speech…. or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.” This means that those laws which Congress has established to direct the conduction of a Census that does not include Citizens resident abroad are unconstitutional because they abridge the right to petition the government for a redress of grievances (by abridging the access of Americans abroad to their constitutionally-mandated proportional representation). As Congress’ laws for the conduction of the Census are unconstitutional, there has been no valid Census, again meaning that Congress is not properly apportioned as the Constitution requires.
Therefore Congress loses legitimate authority, the legislative process is inherently flawed, and the IRS, FBAR, expatriate taxation, and even FATCA thus have no valid legislative mandate to exist, at least, and especially as to those whose representation is abridged.
The IRS threatens people with prison terms for making what they deem “frivolous arguments”. Any basis in federal law for such a prosecution is invalid as it would violate the “Congress shall make no law… abridging the freedom of speech” requirement of the 1st Amendment.
No Taxation without Representation !
Source for the Constitution: http://www.archives.gov/exhibits/charters/constitution.html
I started but never finished a post about Bjakajian, which is extremely pertinent to FBAR. Essentially FBAR is similar in creating a severe civil and criminal penalties well beyond any discernable damage to the government, which would be adequately covered by the tax penalties themselves. So you pay all back taxes owing, plus the penalties and interest. That would suffice. The FBAR fines would then be illegal in that they violate the excessive fines by going well beyond anything which is proportionate to damage to the government. Suppose I have a million in FFI. I make $50,000 per year from that account for 5 years. What does $3,830,000 FBAR fines have to do with 35% of $250,000 that I failed to pay to the government: = a tax loss of about $87,500. The maximum civil fine that the IRS threatening is nearly 44 times the tax loss damage to the government!
@dje-dje: Where do you live? Some of us in Canada have consulted a lawyer here. Both he and Canadian Civil Liberties Association have told us it is premature for legal action. We need to wait and see what happens with FATCA. If the banks demand information about our place of birth, we may have grounds for a lawsuit against the banks. If the government changes laws to accommodate FATCA, we may have grounds for a Charter challenge against the government.
I know you are likely thinking more of a US constitutional challenge, but it is also worth checking out legal recourse wherever you live. Others have said FATCA violates laws or constitutions of Switzerland and Brazil.
@Blaze, FATCA is currently illegal in Brazil, but there is a Brazilian law that allows the government (but not banks directly) to share information for tax enforcement with another country if there is a treaty with that country for this purpose (Brazil doesn’t currently have any tax treaty with the US). I suppose this is similar to Switzerland and many other countries.
@Petros, You didn’t consider the foreign tax credit in your example. The tax loss to the US could be much less than $87,500, perhaps even zero if the account is in a high-taxed country. And why do you say that the maximum FBAR penalty is 383%? I thought it was 300%, or 50% for 6 years. Anyway, I think any Supreme Court justice would agree that this is a clear example of an excessive fine.
The simple reason for that is that I assume no foreign tax credit is that we are talking about a whale who lives in the United States who puts his money in a tax free account in Cayman or Switzerland. The number 383% is based upon 1 million dollar example in 2012 OVDP FAQ: see FAQ 8.
The point is that if it is a violation of the 8th amendment for a whale, how much more is it excessive for a minnow living abroad (a fortiori).
@Petros, in the example from the IRS, the value of the account rises from $1 million to $1.4 million during the years because of interest. The FBAR penalty is still 50% of the value of the account in each year, for 6 years.
I found two errors in FAQ 8:
1. It says that the person would pay a total of $518,000 under the OVDP: tax of $140,000, tax penalty of $28,000, and offshore penalty of $385,000. If you add the numbers, the total is $553,000, not $518,000. The lower total is for an offshore penalty of $350,000 (25% in the 2011 program), not $385,000 (27.5% in the current program). Apparently they copied the values from the previous FAQ, updated the offshore penalty, but forgot to update the total.
2. It says that the person would pay a total of $4,543,000 outside OVDP: tax of $140,000, tax penalty of $28,000, and FBAR penalty of $3,825,000. If you add the numbers, the total is $3,993,000, not $4,543,000. Again, apparently they copied the values from the previous FAQ, which incorrectly included 7 years in the calculation of the FBAR penalty, resulting in an FBAR penalty of $4,375,000, not $3,825,000. In the current FAQ they corrected the FBAR penalty by including only 6 years, but forgot to update the total.
Also, the FAQ uses an accuracy-related penalty of 20%. This is for nonpayment of tax in general, but for unpaid tax on income associated with foreign financial assets not disclosed in form 8938, the penalty is 40% instead. The FAQ is not technically wrong in this aspect because the example includes an account from 2003 to 2010, and form 8938 only started for 2011. However, the example should be updated to include 2011 and explain whether the OVDP also reduces this penalty to 20% or not.
I am surprised (should I be?) that the IRS would make such a gross error of changing values and not updating the sums. I am also shocked that the tax collection agency of a free (or any) country would threaten taxpayers with fines of this magnitude, and have the audacity to write an example where the penalty is almost 3 times the entire value of the asset, and 27 times the unpaid tax. Are they out of their minds? Do they actually think that a court would allow this? Even the worse willful tax evader does not deserve this kind of penalty. I think Bryan Williams should argue against the FBAR penalties based on the excessive fines clause.
@Shadow, I have argued that the IRS is actually bluffing for full effect of scaring the hell out of taxpayers, not least those in foreign jurisdictions. They have already stated that they won’t be able to collect such exorbitant fines, but as long as they don’t try to actually do it, they can continue to threaten to do so. This is not civilized behavior. You are appropriately shocked.
@Petros, I hadn’t read that post. Thank you so much, I’m now convinced that the IRS can’t apply these penalties. So the constitution really works after all.
I also found a page at the IRS showing the convicted UBS cases. These are pretty bad cases of tax evasion, where people really hid money in tax havens on purpose, creating fictitious entities with different names registered in multiple countries to hide the real ownership. All cases are of US residents or foreign bankers who assisted them, involving millions of dollars, and most cases also resulted in criminal penalties such as probation and home detention. Still, even in these cases the IRS applied the 50% penalty once, not for each year that the FBAR was not filed. I still think that 50% is too high because it’s disproportional to the tax owed, and I wonder if the defense in any of these cases challenged the FBAR penalties as unconstitutional.
I don’t know if I should be angry at the tax evaders too. After all, they are the ones who caused the exaggerated response by Congress and the IRS. Was it really worth all the trouble to establish entities in other countries, create the accounts, transfer money, convert currency, all at the risk of criminal procedures in the US, just to save some money on taxes? Was it really a lot of money that they saved? Doesn’t Switzerland already withhold some tax on the interest? What were they planning to do with this money anyway? Would they transfer it back to the US in the future? Would they actually move to a tax haven? Would they renounce US citizenship? Didn’t they know that even tax havens cooperate with authorities in other countries when there is evidence of tax evasion? I don’t like taxes either, I use all deductions that I’m allowed, and I vote for candidates that propose lower taxes, but I’m not going to do anything illegal. No money can buy a clean conscience.
June 29, 2012
Jensen: “Does the Taxing Clause Give Congress Unlimited Power?”
‘Does the Taxing Clause Give Congress Unlimited Power?’, 135 Tax Notes 1515 (June 18, 2012):
Apparently, you can live and work INSIDE the US, and cheat the federal government, and owe huge amounts to the IRS, and apparently the IRS has trouble getting at you – but, if you live outside the US, minding your own business, paying taxes in full to the country where you live OUTSIDE the US, owing no US taxes, and holding legal bank accounts there, then, the IRS puts you on the FBAR and FATCA rack. And who exactly is responsible for the US ‘tax gap’? Looks like the IRS needs to look closer to home. But they won’t, because, those are homeland voters (US doctors, hospitals and other highly paid medical providers) who are cheating and owe US tax money, not conveniently defenseless expat scapegoats abroad with no representation.
“Unpaid taxes are a persistent problem for the government, a so-called tax gap of about $350 billion a year. Much of the money is considered uncollectable.
GAO investigators scrutinized Medicaid providers, from
doctors to hospitals to medical transport companies, in three large states: Texas, New York and Florida.
During 2009, about 7,000 Medicaid providers who were
paid a total of $6.6 billion by the program also owed $791 million in unpaid taxes.“
*@Badger, You are so right, they are only after Honest US Citizens Aboard, it is sickening.
@saddened, their hypocrisy seems to know no limits.
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*Welly, welly, well well. The U.S.A. claims the right to tax expats yet provides us with absolutely no services. How in Hll is any of this Constitutional. I am riled up now because I called Crown Point, Indiana for a certified copy of my marriage license so that I can divorce the U.S. They asked me where to send it When I told them I live in Canada their answer was: “Oh, we no longer mail documents to Canada nor Mexico.” It has to be sent a relative in Michigan and he will send it on to me. I asked why they don’t mail documents to Canada and the folks on the other end of the line said they did not know.
Could be right, but I am trying to figure out how they believe that scaring someone retroactively will persuade them to have changed their behavior so as to ensure that they have not been performing the unwanted behavior. I have already retroactively changed my 2008 vote and have declared that the guy sitting in the White House has not been the president of my country. In addition to that, Bill Nelson has not been my Senator.
Has anyone seriously approached a US lawyer yet, regarding any discrimination suit regarding any portion of FATCA? What response was received?
Has anyone seriously approached a US lawyer about Constituionality of the law yet? What response?
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Ik cbt is unconstitutional, and I believe it is, wouldn’t that give us an opportunity to initiate a class-action suit. There are more than 7 MM of us livind overseas!! How about it ACA?
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There is certainly another reason why taxation of dual citizens abroad is unconstitutional. If one holds dual nationalities, one of them US, but one is recognized as a citizen of the country in his place of residence outside of the US, then one is not a US citizen and can legitimately claim so. Why?
The reason is simple: The pertinent definition of “US Person” for most of the cases that will affect dual nationals is, “An individual who is a US citizen or US resident alien …” The one place where citizenship is defined in American jurisprudence is in Amendment 14: Section 1 of the Constitution of the United States, which is the supreme law of the land, and whose definition would supersede any and all other definitions of US citizenship, including those of the IRS. (Article 6 – Supremacy
This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land;)
Amendment 14: Section 1 of the US Constitution provides the definition of US citizen: “All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside.”
This is the definitive definition of US citizen. But, both conditions of “born or naturalized in the United States” AND “subject to the jurisdiction thereof” must be true for this definition to be true. This is a rule of logic.
Therefore, by definition, a person living outside of the US and not “subject to the jurisdiction thereof”, and who is not a resident or citizen of any state of the United States, is not necessarily, a US citizen. It would depend on how his country of residence recognizes his citizenship.
Thus, when a citizen of one country is abroad and no longer under the jurisdiction of that country, he may or may not continue to be a citizen of that country depending on how he is recognized and treated by the country in which he is currently residing or visiting. This is the case for persons who hold sole Israeli citizenship, for example, if they should happen to find themselves in any one of the 31 or so countries that do not recognize Israel’s existence. These persons would be, effectively, stateless persons having no official citizenship.
It is irrelevant, then, how one might consider one’s citizenship, or how an institution like a bank might consider one’s citizenship, or even how a nation like the United States might consider one’s citizenship. The only definition of citizenship that should matter to dual citizens abroad is how the host country, under whose authority and jurisdiction he finds himself, might consider his citizenship, because this determines whether he will be treated as a citizen of that country or as a citizen of a foreign country.
This goes to the heart of the question where it concerns dual nationality: Would a country like Canada, for example, recognize a Canadian citizen having dual nationality and residing in Canada as a Canadian citizen, or would Canada recognize this person as a foreign citizen of the other country? If Canada does recognize a dual national in that situation as a Canadian citizen, then she is not recognizing this person as a foreign citizen, and a dual national Canadian can legitimately claim not to be a US citizen because he not under US jurisdiction, thus not a US citizen, and because Canada says so. If, however, Canada recognizes a dual national in the above situation as a foreign citizen, then she is not recognizing this person as a Canadian citizen, which would raise important questions of constitutionality and national sovereignty. I haven’t considered the case of a country like Canada recognizing a person as both a citizen of Canada and as a foreign citizen at the same time, which does not seen to have clear legal and constitutional resolution at the moment. I think this may be what the current lawsuit is about. All of that may be irrelevant, however, because it is the way that Canada treats these people that matters; as either Canadian citizens, or as foreign citizens. I am not familiar with Canadian law, and whether discrimination on the basis of nationality, place of birth or origin are legitimate grounds for it.