The following was submitted in the form of a comment:
I’d like to have some opinions about the bill that I’m writing to replace citizenship with residence-based taxation. Maybe someone could move this to a different page if it gets too long. By the way, I’m about one third of the way through with the relevant sections in the Internal Revenue Code.
1. To define residence, I am using the current substantial presence test with all of its rules and exceptions. This is the definition that is currently used for foreigners without a green card, so I am just applying it to everyone. I am also adding an exception to consider US government or military employees abroad as residents, because their salaries are sourced in the US and they would pay higher taxes if they were considered nonresidents. I am also adding that US citizens and permanent residents who don’t satisfy the substantial presence test may elect to be treated as residents for tax purposes by simply filing the normal resident tax forms (1040). I understand that there are some cases where this may be beneficial, and I don’t want to increase taxes on anyone.
2. Because some people may elect to be treated as US residents even if not acually residing in the US, I am keeping the foreign earned income exclusion and the exclusion of income from US possessions available. It may be hard for you to imagine, but there are situations where using the exclusions is better than being a nonresident. For example, this occurs for those residing in a low-tax country or US possession who have income from US sources and a low total income.
3. To be consistent with the concept that citizenship should not be used for taxation, I am removing the requirements that certain dependents be “citizens or residents”. If I changed the requirements to only “residents”, some people might not be able to claim dependents that they currently claim, and again I don’t want to increase taxes on anyone.
4. Also to be consistent with eliminating the use of citizenship, I am repealing the sections that allow higher taxes on those whose country of citizenship or residence impose higher taxes on Americans. (I don’t think this provision has ever been used anyway.)
5. Again to be consistent, I am removing the requirement that the spouse be a US citizen for the estate tax exemption. I am also allowing the exemption from US estate taxes to all residents of US possessions, not just who were born there.
6. I was trying to restructure the exit tax based on termination of residence, but I decided to repeal it completely. My understanding is that the main reason for the exit tax in the US is not to collect revenue on unrealized gains, but to penalize rich people who renounce US citizenship to avoid taxes, because certain dual citizens, permanent residents with less than 8 years of residence, any residents only by virtue of the substantial presence test, and any people not considered “rich” are exempt from it, while those who do not certify current tax compliance are not exempt even if not “rich”. The whole idea of renouncing citizenship because of taxes does not exist in a residence-based system. One could argue that taxes would then be a motivation for terminating residence, but I’m not aware of any US state that imposes an exit tax. Some countries have foreign exchange control but not an exit tax per se. As far as I know, only Canada has a real exit tax, and the Netherlands can only impose it under a treaty with the new country of residence. I also don’t agree with taxing unrealized gains because they are not final and could decrease, just like what happened to Eduardo Saverin’s Facebook shares. Besides, the gains may be taxed by the new country of residence once realized; if it doesn’t tax capital gains, it probably collects more revenue from other taxes or other sources instead, or it spends less. Likewise, I decided to repeal the estate tax on inheritance from “covered expatriates”.
7. I am getting tempted to include in the bill a complete repeal of FBAR, FATCA and even the whole estate tax. It’s very easy to write “section #### is repealed”. But those are separate issues and I guess I shouldn’t try to fix everything, I don’t even know if my bill will be introduced at all. I think it’s better leave the unconstitutionality of the FBAR penalties for the courts to decide, a repeal of FATCA for the banks to lobby, and a repeal of the estate tax for the Republicans in Congress. Citizenship-based taxation is the issue that no one else cares about.
@FromTheWilderness
Not to be a bad citizen… well.. don’t really matter since I found out I am a dang tax evader…
ILLEGALS…. stay hidden… forget legal… just forget it… Price is too high… they want all your money… here & at home… don’t do it…
Underground business is thriving… wait until 7/1… it will be booming…
@US_Person_Foreigner..
I feel for your plight. It is the BIG untold story about the OVDP, imho. I am now talking with an Indian immigrant that is being hosed over by the vindictive OVDP examiner, who has kicked them out of the program and then sending them penality notices up to $200,000 for supposedly $2,500 of tax underpayment, disputed.
There was on Chinese that fought back in the OVDP, and escaped with only a warning. This might give you hope. Read IJs story here…
http://isaacbrocksociety.ca/2012/09/16/a-minnow-opts-out-of-the-irss-ovdi-and-gets-the-correct-result-a-simple-warning-letter/
@Just Me
Thank u for pointing out the area I need to look at… Its becoming info overload… Since I found out about this by accident… its been this huge boulder on me… I want to do the right thing… but I don’t want to hand the knife over to them to use… catch-22
@US_Person_Foreigner, I know some who just started filing correctly forward. It’s been 3 years, and they haven’t heard anything from the IRS. I guess they’re out of the wood since the tax SOL have expired. I don’t think the IRS would go after FBAR penalties for years past the tax statutes for minnows.
I might be wrong, but it seems unlikely.
@Just Me, Darrell Issa should investigate that instead of loosing his time with the tea party targeting.
He might have more success. Although they might all plead the 5th like Lerner. That’s shameful. She should be held in contempt. I hope Issa at least goes for that.
@noone
*I don’t think the IRS would go after FBAR penalties for years past the tax statutes for minnows*
Not to add into my paranoid state… with my luck… I could be the one they use as the test case or example…lol
I am on joint accounts with my family.. near & exended… so if something happens… they can get at their money… see to me… that money is not mine… I have nothing to do with it… what am I suppose to do… declare something that is not mine or cut them loose… I can’t do that…they are my family… If it was only 1 or 2… not a big deal… but its alot of the elders since they are either alone or family is far away. Lets just say its a complicated situation that is not unusal of immigrant families… we take care of our own… But then I will have to worry about the estate stuff… that pulls in other issues… Lord… I should have had a better education on structuring all this better… I didn’t so nothing I can do… Basically… its almost my whole family that is effected by this crap… Lets not get me started on trying to hunt up the paperwork to do anything… they won’t give it up…
@USPF, I don’t know whether this applies to you or not, but for those who’ve never filed US tax before, there’s no SOL on tax filings.
@Bubblebustin
Thank goodness… we weren’t that stupid… paid taxes at each place we made money or had investments/interests etc… but we did what some call… compartmenting… cause we weren’t there… never rec’d monetary anything & never took foreign tax credits… just paid on what was there … we moved around. Nothing shady… we paid taxes where it was owed. There is no law… unless I am more stupid then I thought… that I have to be a resident full-time anywhere… but when u add up all the accounts… it exceeds the 10K cause we saved & invested
@USPF
I’m not clear. Unlike many, you obviously knew about your US tax filing obligations when you moved abroad, but like many who do, you didn’t know about FBAR. Did you choose to pay full taxes to both the US and the country where you’ve lived? What’s compartmenting?
Thanks very much for the update from the homeland @Shadow Raider,
re;
“…I asked him clearly if he thought that “the US should continue to tax people who don’t live here”. He answered yes, that he agrees with CBT.”
“Then his chief of staff, Bill Parsons, offered to continue the discussion with me. He said that he had already met with ACA, and that people who don’t want to continue being subject to CBT can renounce citizenship….”
@ShadowRaider, when they say; “…… people who don’t want to continue being subject to CBT can renounce citizenship” – well of course that doesn’t include minors and NEVER includes those deemed mentally/intellectually lacking competency – who are prevented from renouncing or relinquishing. No exit or tax relief of any kind is available for them (though the minors can later on, their education savings RESPs are considered TAXABLE ‘foreign trusts’ by the IRS – contrasted with the treatment of minors in the US who can get education tax breaks and incentives, whereas minor US citizen children abroad get taxed on their tuition savings plans instead). Those who are disabled have their disability benefits and disability savings plans (RDSPs) taxed, and are subject to the 3520/3520A reporting and penalty regimes.
And,
Though we are being told that we can ALWAYS renounce if we don’t like CBT, FBARs and FATCA etc, then an IRS spokesperson comes out in public and tells the Federal Bar Association’s Section on Taxation meeting in Washington on February 28 that; “..The IRS Criminal Investigation division is looking into the reasons behind some recent renunciations of U.S. citizenship, according to Jeffrey Cooper, the deputy director of the division’s international operations. ..” from the ‘IRS CI Is Looking at Renunciations of Citizenship Just in Case’ Jaime Arora 2014 TNT 41-8 (3/3/14) cited at http://federaltaxcrimes.blogspot.ca/2014/03/irs-ci-is-looking-at-renunciations-of.html and text at http://isaacbrocksociety.ca/2014/03/01/irs-starts-criminal-investigations-of-renunciants-and-relinquishers/comment-page-3/#comment-1171842 and discussion here http://isaacbrocksociety.ca/2014/03/01/irs-starts-criminal-investigations-of-renunciants-and-relinquishers/comment-page-1/
@US_Person_Foreigner says
I understand the overload… I know of others like you. There an immigrant called Chris that comments from time to time on some IBS threads. You will see some of his contributions on this thread if you work back a bit…
Here is one he made back in November…
http://isaacbrocksociety.ca/2012/01/28/the-ovdi-drudgery-for-minnows/comment-page-18/#comment-667733
You might post a question to him, to see if he will get an auto email and respond. He might be able to commiserate with you… 🙂
The plight of US_Person_Foreigner and so many others within the borders of the land of freedom:
http://samuelclemmons.wordpress.com/2014/01/28/legal-immigrants-next-in-line-for-their-fatca-whoopin-from-the-irs/
Due to the extreme difficulty in having a decent discussion about CBT with Congress, I decided to start a plan B. I’m not abandoning the RBT proposal, but I see that it’s going to take a long time, so I came up with an alternative that may work in the meantime. I’ll explain it below.
In US law, nationality and citizenship are not exactly the same thing. Citizenship is actually a subset of nationality, so all US citizens are also US nationals, but it is possible to be a US national without citizenship. Such status was historically created for people in US territories, and today it only applies to American Samoa.
What is interesting is that the alleged “benefits of citizenship”, often mentioned as the justification for CBT, are actually benefits of nationality. US nationals without citizenship also use a US passport, receive US consular protection, and they can enter, live, study and work in the US without restriction. They can also apply to become US citizens, if they wish (after residing in the US for a short period). The only rights specifically for citizens that I’m aware of are the right to vote, to work in US government jobs, and to sponsor foreign relatives to immigrate to the US. US nationals without citizenship also transmit their status to their children born abroad.
What is also interesting is that the US tax code mentions US citizens all the time, but not US nationals. US nationals without citizenship are taxed as aliens, so they are taxed on worldwide income (and are subject to reporting requirements on foreign assets) if they reside in the US, and are taxed only on US income (and are not subject to reporting requirements on foreign assets) if they don’t reside in the US. Basically, they are subject to RBT. There is no “nationality-based taxation”.
And what is even more interesting is that US law only allows renunciation of the entire US nationality, which includes US citizenship, but not just the citizenship. That’s why the document that renunciants get is called a Certificate of Loss of Nationality.
You may have realized where I’m going with this. My proposal is to allow people to renounce only US citizenship while retaining US nationality if they wish. I suppose many Americans abroad would like this option, as they would get rid of CBT, FBAR, FATCA etc. but would keep a US passport and the ability to return to the US at any time and even to become US citizens again later. They would still be subject to the expatriation taxes but not to the Reed amendment, because they would become aliens under the tax code but not under immigration law. The option would be totally voluntary, of course.
I know that this proposal is not nearly as good as RBT, and it would not work for people like calgary411’s son. But it’s a sort of temporary solution, and I believe it would be much easier to implement and to gather support in Congress. It would consist of only a small paragraph to be added to the section of law that deals with renunciation (I already wrote a draft), and it would not touch the tax code at all. It would completely avoid the Ways and Means and Finance committees and the heated debate about taxes, and would satisfy those who stubbornly want to keep the tradition of CBT.
I would like to contact some congressmen to see if they are interested. The American Samoan delegate would be a good start, as he is aware of the subject and recently stated that citizenship should be a choice. Also, his constituency is very small, so he may be more accessible than regular congressmen.
What do you think? Is this idea too weird, or it is worth a try? If you had the option, would you renounce US citizenship but keep US nationality?
@Shadow Raider
This is a great idea, it’s almost too logical. It’s so logical that many in congress probably won’t go for it. The only problem I see with your idea is that it creates a new loophole for the wealthy American residents who want to avoid taxes while still enjoying many of the benefits of a US national, and I know just as well as you do that Uncle Carl and Uncle Chucky will never agree to such an idea. I wouldn’t even be surprised if the two of them, after hearing of such an idea, would do all that they could to turn their coveted and sacred CBT to NBT (Nationalism Based Taxation)
@Shadow Raider,
You are definitely onto something. In fact I think this is the right way forward.
When I renounced US citizenship I received a CLN, but in my heart I did not renounce being an American and never will. How can I do that? Being American is in my blood, I have ancestors who came to America on the Mayflower. And just because most of the politicians in Washington have betrayed the ideals of the American Revolution, doesn’t mean that I have.
In fact, I still consider myself as more American than most of the Homelanders who have never even taken the time to read the Constitution. I cherish the ideas about the relationship between man and the state as they were written in the Declaration of Independence and Bill of Rights.
This whole idea of renouncing one’s nationality (the blood in one’s veins) is crazy and creates a lot of confusion and pain in the hearts of those being forced to renounce being an “American.”
Shadow Raider, you are definitely on to something. This is not just an issue about CBT vs. RBT. This is an issue about the difference between citizenship and nationality.
Fuck Uncle Carl and Uncle Chucky. They are traitors of liberty and therefore not real Americans. They should both be deported. They would both be much happier living in the Soviet Union. That’s where their ideas come from.
Samuel Adams,
I, too, think that this is worth pursuing. It might lead to something that will be heard without the loss of “US pride”.
I say this even though it would not help those with a ‘mental incapacity’ who are wrongly entrapped into US citizenship there was no choice for in the first place. Although his parents were “American” when our son was born, we soon after became Canadian citizens. My son would understand nothing for himself than the Canadian country that has given him his benefits and the air that he breathes.
[I hope blood running through one’s veins is the analogy for the love one has (or formerly had) for their country. I would think that the blood that runs through my son’s veins is no different than that of any of his human brothers and sisters and there is not some blood that is better than other blood like some colours of skin are, in my mind, wrongly considered superior over that of another colour (by some)].
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@shadow raider
It sounds as though nationals get to have their cake and eat it too. Considering CBT is thought of as a revenue generator, I think that lawmakers need to see some kind of cost/benefit analysis of the status quo. They also need to see how your proposal will stem the renunciations, which if allowed to continue will soon become a source of embarrassment for the US.
Call me stupid, but I just looked at the US Dept of State forms and they reveal something rather interesting:
http://isaacbrocksociety.ca/wp-content/uploads/2014/03/Consulate-Report-Directory-2013.03.05.c.pdf
Form DS-4079 for Relinquishing refers ONLY to US Citizenship
http://www.state.gov/documents/organization/97025.pdf
Form DS-4080 for Renouncing refers ONLY to US Nationality
http://www.state.gov/documents/organization/81606.pdf
Form DS-4081 Statement of Understanding refers to BOTH US Citizenship and US Nationality (mixes back and forth in confusing manner)
http://www.state.gov/documents/organization/81607.pdf
Form DS-4083 Certificate of Loss of Nationality refers ONLY to US nationality but with intent to lose US citizenship
http://www.state.gov/documents/organization/81609.pdf
I have to read the forms again more closely, but my initial examination makes me wonder if it is legally possible to only relinquish US citizenship but to keep US nationality. This would open up the possibility that Shadow Raider is talking about.
Perhaps one of the Brocker lawyer types can study the forms more closely. I am only a layperson.
@Shadow Raider…
Heard this this morning, on NPR and thought it might interest you..
How To Meet Your Congressman
Right this week, AARO and ACA are back doing what this describes during their Overseas American Week, OAE although I doubt they are clients of Soapbox..
@Just Me, Thanks for the article. In my experience, the problem is not really to get a meeting, as I’ve been able to get about half of the meetings I requested. I’ve talked mostly to assistants, but some later told me what the congressman said, and I also talked to my own representative directly. ACA and AARO had a similar experience. Soapbox or similar services merely make appointments, so I don’t think they are necessary if we have the patience to write or call congressional offices ourselves.
The problem is to actually get them to do something concrete. And this is not really up to us. We can inform them of everything, send suggestions, and even convince them that our ideas make sense. But in the end of the day, they have the full power to choose what they will actually do. When I started this “adventure”, I was motivated by phrases like “you can achieve anything if you work hard” and “nothing is impossible”, but now I realize that this has limits. Just like it is impossible to violate the laws of physics when dealing with things, it is impossible to control the will of another person. A friend of mine told me that I’m not God and I cannot fix the world. I’ve come to accept that.
Now some news. Bill Parsons, my representative’s chief of staff, told me that he reviewed my document (at last someone read it) and that he thinks he is in a position to recommend that the congressman support consolidating the FBAR and FATCA forms and making the penalties proportional to unpaid tax. It’s great that he agrees with the idea, but his words are too vague. I don’t know if he will actually do something.
@ShadowRaider…
Indeed, getting someone to do something, is something only BIG GOVERNMENT can do via coercion, as we have seen…
I think Victoria is coming to your view too, if you read her latest blog about the Lay of the (home) land.
As for Congress, it is the money contribution for political campaigns that really gets their attention, and the income tax code exists as much to raise revenue for their campaigns via exemptions or loopholes as it is to pay for that new drone or social service.
When you listen to podcasts like this, you really get discouraged…
Take the Money and Run for Office…
Victoria’s post is indeed discouraging.
Officials acknowledge there is a problem, but don’t think they can fix it by legislation, and there is only so much that they can do without. They seem they are being compassionate, but that’s about it.
Our only hope is some real nasty stories when FATCA goes in effect, but I have the feeling that the stories we’re going to hear will be about bank withholding not being warranted. Too much withholding impacting the BANKS, and renunciations going so high that it is becoming embarrassing. Somehow, I doubt this is going to happen or the number are going to be even more manipulated that they are now.
Indeed, that would be great it the FBAR penalties were reviewed and based on the interest.
As Victoria mentioned, it seems like this was legislated, this can only be undone by congress, and according to her, there is NO HOPE of that happening.
FYI, have you read one of Jack Townsends latest blog entry on the IRS hammering full blown non willful FBAR penalties of 10k PER ACCOUNT PER YEAR, on what are not even foreign accounts:
http://federaltaxcrimes.blogspot.com/2014/03/civil-fbar-penalty-case-in-process.html
At some point, I hope some case will go all the way to the supreme court that hopefully will strike them down as unconstitutional. That might be our only hope to get them fixed.
Any news on that other case, which was foreign related? Can’t remember the name of the guy…
@noone, I “understand” that Congress doesn’t want to fix FATCA or CBT now because it would require complicated changes to the tax code, but can’t they even fix the FBAR penalties, or consider my nationality proposal? I don’t accept their lame excuse that changing the law is difficult, because that is the whole function of Congress.
I am certain that the Supreme Court would rule the FBAR penalties unconstitutional, because it has a very clear precedent. If the IRS continues this insane witch hunt, it might be just a matter of time. The other person you might be thinking of is Carl Zwerner. I haven’t seen any news on that case since last year.