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.
Today I had two meetings, both at the House office building. This building is also nice, but not as impressive as the Senate office building, and there were no tourists there. The first meeting was with Victoria Palmer, legislative assistant of representative John Sullivan (R-OK). Right in the beginning, she told me that she knew nothing about the subject so I would have to explain it to her. I did, with my presentation. She seemed interested and looked like she understood. In the end, she thanked me for all the information, but said that the representative is retiring at the end of the year, so there isn’t much that he can do. OK.
Then I went to the office of representative Marsha Blackburn (R-TN) for my second meeting, with her legislative assistant Josh Lynch. He knew more about the subject, even FATCA. I showed my presentation and my proposal, and after that he said that the representative agrees with lower taxes and less complexity in the tax code. He understood that the problems that I described are mainly the reporting requirements and penalties, not so much the taxes. He also said that they follow Nina Olson’s reports and they have the sense that the IRS is “overzealous” in general, not only in international taxation. But he said that I should talk to members of the committees on Financial Services and Ways and Means because they are the ones who deal with this subject. He suggested Scott Garrett (I already contacted his office but haven’t received a response yet). He was also interested in the proposal and asked me to send it to him. In the end, he wished me good luck with the proposal.
Next week I have a meeting with senator Jim DeMint’s assistant, but after that, I’m going to take a break from all of this for a few weeks.
Thanks once again, Shadow Raider, for all of the work you have put into your re-write, your presentation, your setting up and representing our case with US government personnel. Good luck with next week’s meeting with Jim DeMint’s assistant.
A break will be well-earned after all your efforts.
Our appreciation.
*@Shadow Raider, Thank you so much for all you do!! It is so appreciated..
@Shadow Raider- I too appreciate the efffort that you are making to present the case of expats to the members of Congress. It is a BIG help to have someone stateside who is willing to be our lobbyist. You have bravely taken on a big task and for that I can only give my personal word of thanks.
One thing though that seems to be an indication that they just don’t get it are the word’s of Marsha Blackburn’s legislative assistane, Josh Lynch. I can’t believe that he can seriously think that the taxes aren’t a problem. The taxes are the problem. The plain and simple truth is that they shouldn’t exist. We have nothing to do with them at all. You can’t break the taxes away from the penalties and the over zealous actions of the I.R.S. Their single minded determinedness to keep citizenship based taxation just shows how incapable they are of listening. He is such an idiot.
It is clear that any proposal to have the Congress look into citizenship based taxation will only result in a playing at the margins. In the end they will come out with a statement which will make us look like we are true “patriots” who want to be treated farily and pay our fair share.
Obviously renunciation is the only way to get off this ship of fools. I can only see things gettin worse with this kind of mentality at the helm.
I’m sorry to have ended on such a sour note and I meant no offense to your work. I just get really upset when people say that the “taxes” aren’t the issue. That that comment was rather dismissive, an insult to your efforts and a denegration of our complaint. Its as if we are being treated like children.
I’m very glad that you appreciate my efforts.
@recalcitrantexpat, He is not an idiot, I’m the one who said that taxes aren’t the main problem, and he just concurred. (I didn’t say that the taxes aren’t a problem, just not the main one.) I explained that making the FEIE unlimited, as in Marsha Blackburn’s cosponsored bill, or even allowing an exclusion of all foreign income, as in Bill Alexander’s bill from 1992, wouldn’t make much difference since 91% of Americans abroad already don’t have to pay any tax to the US. I was trying to show that if Congress agrees to abolish citizenship-based taxation (and I have the impression that many congreemen already agree), it has to be a fundamental change in the definitions of the tax code to end the reporting requirements too, as my proposal does.
Again, I’m not saying that taxes aren’t a problem, since they are the origin of all this mess, but I’ve seen comments here like “it’s the tax complexity, stupid”. I don’t think Americans abroad would be satisfied if they no longer had to pay taxes to the US but still had to spend weeks and thousands of dollars every year to file the forms, while seeing their bank accounts closed due to FATCA and losing sleep out of fear of draconian FBAR penalties. Of course I agree that citizenship-based taxation shouldn’t exist, and Josh Lynch didn’t say he wants to keep it either. His comment was not dismissive.
I would not be making all this effort merely to propose a tax break. When a government threatens to confiscate everything people own because they didn’t write numbers on a piece of paper, this isn’t about money anymore. When a nation treats its emigrants like fugitive slaves and the masses accuse them of being criminals, when I see people being disproportionally punished for no reason and speak of having “lost the joy in life”, I cannot just sit and watch this happen knowing that I can do something about it. I want to let you guys be free to live your lives again, because you have not done anything to deserve this. I’m doing this for justice.
@ShadowRaider, it is too late to name my firstborn after you, but your post above made me think about it!
Seriously, I am overwhelmed that someone who could turn their obviously substantial talents, and valuable time and energies, to something else entirely, is working on behalf of anonymous people far away.
May we name a star after you instead? http://osr.org/en-us/?gclid=CP-y6sv2rbMCFYVFMgodME0A9w
@Shadow Raider. It is great to see that there are still people like you in the US.
@Shadow Raider- I obviously misread that portion of your post and for that I do apologize both to you and to him. I do disagree with the view that “taxes” are not the problem because they are. I only need to report and pay taxes to one tax authority.
I realize that you and some others don’t see it that way. I’ve never felt that the problem was the “complexity”. Afterall I wouldn’t know about the complexity if I didn’t have to pay the tax. I want nothing less than complete freedom.
It is encouraging to hear you say that many in Congress do agree. I just hope that their agreement doesn’t transform itself into an 3 million dollar Congressional study or that the change doesn’t end up deep sixed because it was attached to some bill that had no chance of ever passing. Congresssional good intentions are not good enough.
@badger, I’m flattered, but you don’t have to name anyone after me.
@recalcitrantexpat, Note that I’m trying to solve the problem also for immigrants who have assets in their countries of origin. Citizenship-based taxation doesn’t affect them, but the reporting and penalties do.
I understand your point. Maybe I’ve been too focused on the details and I forgot the big picture. Sure, all of this exists because of the taxes. But precisely because I want my proposal to actually get passed in Congress, as you wrote, I want to show that the taxes that Americans abroad pay are already insignificant compared to the rest of federal revenue, so Democrats wouldn’t feel that they are giving them a “tax break”.
@Shadow Raider- I’m glad that your’e still talking with me after my misstep. When it comes to the Democrats feeling that they would be giving expats a “tax break” I wouldn’t be to hopeful about succeding with that. As long as they are convinced that the U.S. has the right to tax every U.S. person no matter where he/she lives then they will never buy into it.
They can understand that taxation is a soverign issue that is only exerciseabl over one’s own treasury issuances. In other words taxation can only be exerised over a government’s own currency and the resulting economic activity of its citizens. In other words they equate taxation of economic activity with taxation of the individual. While not realizing that the individual is merely the intermediary who works with the nation’s currency.
They could never understand that a U.S. individual who earns his/her living in another country under that country’s currency has no obligations to the U.S. Treasury for economic activity that is generated in that other country’s currency. You can’t give tax breaks to people who are not using your treasury to receive benfits or wage compensation. This is true territorial taxation. But if we can’t get territorial taxation then residency based taxation would be better than what we have now. This would also be of immense help to the immigrant population that you are concerned about.
I do wish you well.
In June, I wrote a letter to my representative, Chris Van Hollen, a member of the Americans Abroad Caucus, about the FBAR. I restricted my letter only to the FBAR as I wanted to keep it short, and because I see the FBAR as the biggest problem by far in this whole subject. I went to my representative’s local office and handed the letter in person to the lady there, who said that she would forward it to the Washington office. Over four months later, today I received a response from my representative, by mail.
Here is my letter (keep in mind I wrote it before the IRS announced the new filing procedure for taxpayers abroad):
And here is his response:
I’m glad that he (or his staff) actually read my letter and wrote a meaningful response, not an automatic one (even though the part about the SFP is copied almost exactly from the IRS website). He wrote that “The FBAR is required because many foreign financial institutions are not subject to the same reporting requirements as domestic financial institutions.” Well, that’s not true anymore with FATCA. And he didn’t comment on the repetitive form 8938 nor gave any solution to immigrants. Still, it’s nice to see a response, and now I know that at least he is aware of the issue.
YES! BREAKTHROUGH!
Today I went to downtown DC again, a different senate office building this time, and met with Alec Aramanda, legislative assistant of senator Jim DeMint (R-SC). Different from the previous assistants I met, he was very interested in the issue and asked me many questions during my presentation.
When I mentioned that 91% of Americans abroad don’t owe tax to the US, he asked if there were specific groups that ended up owing tax, if it was only the very rich. I explained that the foreign earned income exclusion only applies to wages, about the phantom gains due to currency exchange rates, and the tax-favored savings accounts in Canada and Brazil. In sum, any American abroad can end up owing tax to the US, even if not rich.
It seems that he hadn’t heard about the FBAR before, and he was particularly surprised by the FBAR penalty of 50% (he thought it was absurdly high). He asked me to explain these penalties in more detail, so I mentioned the absence of penalties with reasonable cause as determined by the IRS, the non-willful penalty of $10,000, the willful penalty of at least $100,000 and up to 50%, and the OVDI penalty of 25%. I also mentioned that he could read about Nina Olson’s criticism of OVDI in her most recent reports to Congress.
He was surprised by the large increase in renunciations.
Regarding FATCA, he said that he is very aware of it, and that the senator wants to repeal it. He also asked me to send him a list of banks that refuse services Americans due to FATCA.
He mentioned that the senator introduced a bill to make the FEIE unlimited a few years ago. I explained that if the senator’s intention was to reduce taxes on Americans abroad and stimulate US exports, making the FEIE unlimited wouldn’t make much difference because it is already fairly high and it only applies to wages. I repeated that the great majority of Americans abroad don’t owe taxes to the US, that for most of them the cost of filing forms is much higher than any taxes, and that what makes them despaired is the threat of enormous penalties.
When I showed him my proposal, he thanked me for writing it in form of a bill, making it easier for them (he and other legislative assistants) if congressmen decide to implement it (yes, he implied that my bill could be introduced in Congress). He said that senator Jim DeMint and the more conservative Republicans would probably agree with it, but he remarked that the Democrats just got a bigger majority in the senate. I explained that Democrats would probably require some kind of expatriation tax (he didn’t know that there was an expatriation tax, so I explained it to him and how it changed over the years). I also said that there could be opposition from other Republicans too. I mentioned senator Tom Coburn’s (R-OK) plan to reduce the deficit, of which he was aware, and that it suggests eliminating the FEIE, with the justification that Americans abroad should pay taxes for the benefits of US citizenship. I explained that the few services that the US provides to Americans abroad, like consular services and even rare evacuation assistance, are not free. I also mentioned the academic consensus that disagrees with citizenship-based taxation.
In the end, he said that he agrees with everything I said, and that he will talk to the senator about the subject. He thinks the senator could try to include my proposal, or something similar, in a more general tax reform bill that should be discussed very soon in Congress. He also suggested that I contact representatives, since it would be easier to pass it in the House due to its current Republican majority. He gave me his card and asked me to send him the presentation and proposal.
In conclusion, there is a real chance this is going to work. I’m going to write him an email with what he asked, and more. Can you guys help me with the list of banks that refuse services to Americans due to FATCA? Thanks.
@Shadow Raider,
You have given us good news on your efforts. Congratulations on such a fruitful meeting today. And, it goes without saying, all you have been doing on our behalf is very much appreciated and respected.
*Shadow Raider
Read my new post on China and FATCA. China(and Hong Kong) are NOT negotiating over FATCA.
Way to go Shadow Raider! And there’s good news from Calgary 411 today too. 🙂 Swisspinoy once posted a list of Swiss banks which were excluding US persons (see below). A quick check on the internet also came up with Kantonalbank.
http://isaacbrocksociety.ca/2012/07/30/us-bank-denying-americans-services-for-being-us-persons/
Shadow Raider for President! I teared up reading your post. We need to fire up Congress before the Canadian government decides to enter an IGA. How can Canada even discuss such an agreement when the USG apparently doesn’t know WTF they’re doing?
@ Shadowraider, that is a rare piece of good news – and the fact that he was actually interested and receptive. I am feeling down about the official announcement on our federal government site that Canada is talking with the US about FATCA, but glad that at least somebody in the US is open to hearing about the problems we face.
This article doesn’t name any banks but it is anecdotal regarding the banking situation for American’s abroad.
http://www.usatoday.com/story/money/business/2012/09/27/american-expats/1594695/
And this article describes the problems of a Swiss citizen living in the USA.
http://www.swissinfo.ch/eng/specials/expat_woes/Swiss_expats_caught_in_middle_of_US_tax_conflict.html?cid=32137500
*Off the top of my head TD Internaxx in Luxembourg has not accepted US clients in a very long long time like pre FATCA.
http://www.internaxx.lu/guide/en/expatriate-7785519.htm
I think you can’t even get to the website beyond the front page in the US.
*@’Shadowraider, Thank you very much for all your time, it is great news that you had a good meeting..it sounds very promising.. You have done a Terrific Job!!
@Shadow Raider, I join everyone in thanking you for your efforts.
*Shadowraider, my most updated list on banks in Switzerland which are rejecting US persons is here:
https://expatami.wordpress.com/2012/08/31/letter-to-staff-of-congressman-vern-buchanan-requesting-recommendation-to-renounce-us-citizenship/
I would be interested in learning from Alec Aramanda if Congressman Vern Buchanan is aware of this list, given that I sent it to his staff!
Here are some other posts that I made on the topic:
http://isaacbrocksociety.ca/2012/07/22/fidelity-investments-refuses-to-service-to-u-s-persons-abroad/
http://isaacbrocksociety.ca/2012/07/28/denying-us-persons-banking-services-its-all-about-fairness/
http://isaacbrocksociety.ca/2012/07/30/us-bank-denying-americans-services-for-being-us-persons/
http://isaacbrocksociety.ca/2012/08/01/most-foreign-banks-dont-want-u-s-clients-how-to-find-one-that-does/
http://isaacbrocksociety.ca/2012/08/31/zurcher-kantonalbank-is-now-refusing-to-refinance-the-mortgages-of-swiss-citizens-who-live-in-the-us/
*I didn’t look much at international banks, but would be interesting research:
http://isaacbrocksociety.ca/2012/07/18/ing-frances-message-to-usa-fatca-thanks-but-no-thanks/
http://www.overseas-exile.com/2012/07/ing-france-turning-away-us-customers.html
http://www.1stregents.com/about-first-regents-bank/about-us-non-us-clients.html
http://mib.rbs.com/about-us/our-locations/asia-pacific/singapore/us-persons-disclaimer
@ShadowRaider- Thank you for your continued efforts. It sounds like you did indeed have a productive meeting. I am glad that you were able to find a receptive mind.
If we are going to supply a list of banks that the U.S. will stand up and take notice of I think those banks will have to come from a country other than Switzerland. A bank from that country will be deemed to have gotten its just desserts. Unfortunately though right now the Swiss banks are the ones where the pre-FATCA boat has landed. Right now I think that all of the other banks are biding their time. It is possible that there may be some Asian banks who are rejecting resident Americans but I wouldn’t know who they are. Hopefully we have someone on this site who lives in Asia and who knows what is going on in this area.
Thank you again.
*TD Internaxx is based in Luxembourg. I believe TD Waterhouse UK may not accept any US clients either.