I found a rather interesting website of a now deceased Vancouver tax lawyer/preparer who at one time dealt with US Canada tax issues. The site has a series of newsletters and question and answers going back to 1993 (This is was in the “day” when there was an IRS attache located at the US embassy in Ottawa who dealt specifically with Canada). I would not necessarily bet my life on information from a dead person that is 15 years old but going through his newsletters (I am still going through starting in October of 1993); he appears to at least have some answers from the then IRS attache in Ottawa that “may” in fact explain some of the situations people find themselves in. The real funny thing is at least as of 1993 the IRS could administratively require anyone living outside the US who hadn’t filed to file returns going back to 1967.(I guess there was a big tax law change back in that year. This was definately before my time maybe Roger would know).
Here is his first newsletter from October 1993 that deals with the filing requirements.
This is the newsletter I am studying right now from March 1994 that talks about dual nationality and loss of citizenship issues.
@tim, Taxation by the US of income of those abroad began with the Tax Act of 1962, but it affected only the very wealthy becase initially it excluded earned income below $35,000, which corrected by the consumer price index is equivalent to about $560,000 in 2012 US dollars. It was soon cut back to $25,000 (less for those outside of the US for less than 3 years. That was what it was until the 1976 legislaton. You could also use foreign income tax credits on all your income to offset the US tax on income above the exclusion.
The 1976 legislation cut the FEIE back to $15,000 “off the bottom.,” and taxed everything above the FEIE at the marginal tax rate that would apply had there been no FEIE. It also disallowed foreign tax credits for the FEIE amount and you could no longer utilize foreign tax credits on the FEIE – just for foreign taxes on income that was also subject to US tax. In my case, living and working in Brazil, before 1976 my cumulative US + Brazilian tax was about 10% more than any non-US citizen in Brazil with my same income and family status. With the 1975 legislation it skyrocked to 81% more.
Back in 1962 it was only the very wealthy that actually had a US tax obligation, but after 1976 it hit the middle class with a sledgehammer. That was when I headed back home.
I hope this helps to clarify the history of what happened.