What follows is a commentary on Virginia La Torre Jeker’s interview of ex-IRS Willard (Bill) Yates, recently retired from the Office of Associate Chief Counsel (International), If You Go, You Can’t Come Back. The Reed/Schumer Follies-Past And Proposed Anti-Expat Legislation: Interview With Bill Yates, Former IRS Attorney (International). Yates explains why US has never enforced the exile provision of the Reed Amendment.
It is said that you can tell a lot about a person by what he finds funny. Inside the IRS, they laugh at laws that intend to penalize people through taxation and exile for exercising their fundamental right to expatriate. The United Nations Universal Declaration of Human Rights states (Articles 13.2; 15) :
Everyone has the right to leave any country, including his own, and to return to his country. … Everyone has the right to a nationality. …. No one shall be arbitrarily deprived of his nationality nor denied the right to change his nationality.
Congress has passed tax laws aimed at attracting foreign capital: non-resident aliens may invest in the US exempt from interest income tax and capital gains. Therefore, some billionaires have taken advantage of this huge loophole by expatriating to gain tax-free income on their US-based investments. Congress therefore passed the Reed Amendment (1996) to close this loophole. It would penalize the renunciant of US citizenship with permanent exile and ten years of further taxation. Neither penalty is in conformity with fundamental human rights, and this law, and the proposed “Ex Patriot Act” of Charles Schumer, shred the dignity of thousands of alleged US citizens who dare not renounce their US citizenship, lest they be cut off from their loved ones in the US.
I have talked to a few US expats whose only reason for not renouncing US citizenship is that they still have close family members, usually parents, children and/or grandchildren, who are living in the US, and these beleaguered expats do not wish to risk permanent exile from the US. This effectively prevents them from exercising their fundamental right to change their nationality. In the age of NSA and FATCA, many Canadians, for example, would gladly expatriate, if they could, to protect themselves from having their banks reveal their accounts to the IRS, thus exposing them to extortionate FBAR fines, to rights violating extraterritorial taxation, to gouging cross-border tax specialists, and to friendly cross-border lawyers that are really wolves in sheep’s clothing. But the act of expatriating in many cases could potentially expose them to the bill of attainder called the Reed Amendment.
Now Bill Yates explains why the Reed Amendment has never been enforced. We had reason to suspect this, but we never knew why until now. The reason is that Section 6103 of the IRS code prevents the IRS from revealing tax information to other agencies of the US government, including Immigration and Naturalization Service (INS), which would enforce the Reed Amendment on any renunciant, whose loss of citizenship was motivated by the desire to avoid US taxation. Yates says that INS would have to detain renunciant entering the US and insist that the renunciant waive his 6103 rights so that the INS could obtain the private letter ruling (which determines if the person’s expatriation was to avoid taxes) from the IRS. If the renunciant refused, INS would send him off packing. However, this procedure never came to fruition only because the INS failed to finalize the regulations.
Yates uses the imaginary example of “AC”=”accidental citizen”, who was born in the US but lived from childhood in UK. AC had never paid US taxes and one day his tax account (another wolf in sheep’s clothing), hears that AC is a US citizen. The accountant then informs AC that he should be filing and paying US taxes along with his UK taxes. It is a very realistic story, and likely based on real-life examples. It shows that the IRS intentionally makes life hell for accidental Americans. It exposes the evil inside the IRS. It is a must read for people who wish to understand the mentality of career bureaucrats. Obviously, they have no concern for fundamental human rights. They only care about whether the bureaucracy has the ability to implement a law, once passed. A law is good or bad based on the ease implementation. If it is unworkable, Yates finds it funny, no matter how much misery it could cause. Yates only laughs because the other laws prevented him from implementing the full provisions of the Reed Amendment. Yet he is proud of his authoring of 877a which implements the current exit tax on expatriates, another major obstacle on the path to exercising one’s fundamental right to change one’s nationality.
Now please consider how much misery permanent exile could cause. I am an ex-American. Imagine that an INS agent in Toronto invoked the Reed Amendment when I joined in the search for my missing father last July. Luckily, there is no procedure for enforcing the Reed Amendment, and the border guard let me pass. Had INS barred me from entering the US, I would have felt regret to the end of my days–and that would be in addition to the great grief of losing a loved one.
Clearly, exile is punishment and the Reed Amendment is punishment via Congress made laws applied to single class of people–those who exercise their fundamental right to expatriate. The Constitution bans such laws by forbidding bills of attainder. This is no laughing matter.
NB: Please see Yates mysterious reference to the War of 1812. Does this indicate that Yates reads the Isaac Brock Society? If so, hi Mr. Yates! Feel free to make a comment below.
@JEG
The truth is, those from “the best country on earth” are renouncing at at least 4X the rate that Canadians are renouncing Canadian citizenship. This is especially alarming, as it’s only now the tip of the iceberg as far as renunciations go.
@Mark Twain
A critical part of the information you posted is “Unless she decides to opt out, she is entitled to the reduced 5% offshore penalty”, as would be advisable for someone who could potentially have their penalties eliminated through the IRM in an opt-out scenario.
@Swisspinoy
If the US pursues the programme beyond Swiss borders then we’re looking at the US declaring every country in the world a tax haven, but I suppose for a country that orders skin searches on diplomats for visa infractions, it’s not a far stretch…
@ SwissPinoy
believe me i have been reading and watching what is going on with the swiss situation (and i don’t envy anyone having to live through that)
i realize that at some point i may have to come out into the open but will only do so kicking and screaming
that is not to say that right now i am just sitting on my hands and waiting. i have been active in spreading the “fatca is bad” word amoungst people i talk to as well as my media contacts and politicians (for what they are worth)
@bubblebustin, this has nothing to do with tax havens. If it did, then the US would have begun with Delaware. As Jack Townsend and others have stated, this has to do with making expats file US tax returns and 7 million are claimed to not be doing so. With its 30k “tax cheats”, Switzerland is an easy drop in the bucket, but a good propaganda starting point, thanks to Hollywood. Canada, with its 700k “tax cheats” is ka-ching for the US taxman and Canada will bend over to let the US do its thing.
@Swisspinoy
If that’s the case, then the USG is working on Americans being the most despised creature on the face of the earth. We are kind of the opposite of a refugee – where the immigrant is welcomed and protected from their former government. In our case, our former government (US) is protected and we are reviled.
WTF is wrong with these people???
@CHF Forever wrote: “US tax law and policy as currently applied to its diaspora is in potential violation of Civil Rights Acts, the International Covenant on Civil and Political Rights (signed and ratified by the US, legally binding internationally and based on many principles of the UN declaration of Human Rights) along with various constitutional amendments; primarily the fifth, especially the eighth, potentially the ninth (very good reference to US legal obligations to uphold many of principles in the Universal Declaration of Human Rights) and the fourteenth.”
Most of the rights and obligations listed are not binding. Children of American citizens born abroad can be stateless if the country of birth does not, in that case, offer its own citizenship and the parent(s) never had qualifying US residence. Britain likewise. (Département fédéral de justice et police v. Vilchez, Trib. féd., Cour de droit public, 29 June 1979, A.T.F., 105, 1979, Ib, p. 63, Clunet, 114.1987.674 is an interesting case: Switzerland will grant citizenship to an otherwise stateless child born on its soil but in that case, the Swiss Government argued that the parents could have, but did not, register the birth with the Peruvian consular section.)
The numbers others cited (6 million expat citizens, although I think that number is too high) and several hundred thousand tax returns covering maybe 1 to 2 million citizens) suggest that the rest lack the means to become compliant. It is one thing for a country to give up its banks, knowing that otherwise those banks’ ability to clear funds internationally will be curtailed. It’s another thing to start cooperating in enforcement of a foreign country’s tax law and extraditing those citizens (and for Switzerland you have to add all EU/EEA citizens with treaty rights).
IMHO what will happen is very little: The IRS does not like to lose cases. (It lost the only case I ever brought in Tax Court, years ago; and, typically, it conceded on the Courthouse steps so that there was no judgment on the merits, just the granting of a motion for summary judgment.) It remains to be seen whether the names large numbers of supposed noncompliant persons are targeted on the TECS database http://www.irs.gov/irm/part5/irm_05-001-018r-cont01.html
If large numbers of travelers were being taken aside at ports of entry, I think this Forum would know about it.
On the main point: My understanding is that Government constitutional lawyers decided the Reed Amendment was unconstitutional. That’s another matter that, for bureaucrats, government lawyers and Congresspersons, was better not ever submitted to a court and decided against them. Like a lot of federal laws it goes unenforced; the publicity Schumer gets is enough for him and for them.
I read somewhere a long time ago that the AG under Clinton, Janet Reno, questioned the Reed Amendment’s constitutionality which was the reason it wasn’t enforced while she was at the helm of DOJ.
Petros,
My husband is travelling in countries south, away from the cold of Calgary for awhile. He is right now at a hostel in Panama (travelling on the cheap and because that is an interesting way for him to experience different countries and he speaks the language of those countries). He has met others around his age (73) who have been living in or at hostels where he’s been, Costa Rica and Panama, there for many reasons. Some of them have ventured from the US late in life; some are veterans; they have not prepared for retirement beyond US social security and any veterans benefits they might be entitled to. Of course they want to hear nothing of FATCA and, of course, think they will be OK from such. Will they? How will they receive any social security payments if banks they would have to have their monies transferred to no longer accept US Person clients? I don’t think many of these persons will be able to count on family that will receive their SSI cheques in the US and mail them on. It seems these persons who are not aware and are not necessarily any longer able to make a living in a foreign country will be in more dire circumstances than their ‘Plan B retirement’ gives them with FATCA thrown into the equation for them. These are people who found they could no longer afford to live in the US. US Persons Abroad come in many descriptions and means, many never able to even think of affording any professional help.
Another law that the IRS hasn’t implemented, even though it’s been over 5 years since it was enacted, is section 2801 of the Internal Revenue Code. This section imposes a tax on gifts and inheritance received by a US citizen or resident from a “covered expatriate”. This tax results in horrible and illogical outcomes, as I’ve written before in other posts, and I wondered if that was the reason why the IRS hasn’t implemented it.
I contacted Bill Yates and asked him, and he was kind to answer me in detail. He said that the IRS is not allowed to delay or disregard a law simply because it’s burdensome. The problem in this case was that the IRS didn’t see how a person who receives a gift or inheritance is going to know that it came from a “covered expatriate” or that it was taxed, so the IRS found it “extremely difficult, if not impossible” to write guidance on section 2801. He said that his office wasn’t the one responsible for such guidance, but he supposes that the other IRS office saw the same problem.
…”one of the biggest benefits of IBS: empathy and the sharing of perspective.”.. Roy Berg said;
Yes, and it is free.
I wonder if Mr Yates thinks that Ted Cruz was lying when he said he didn’t know he was a Canadian citizen. A chance to comment to a bunch of homelanders why Cruz is lucky that Canada doesn’t exercise CBT:
Ted Cruz hires lawyers to renounce Canadian Citizenship, Canada breathes a sigh of relief
http://freakoutnation.com/2013/12/29/ted-cruz-hires-lawyers-to-renounce-canadian-citizenship-canada-breathes-a-sigh-of-relief/
@Calgary, Don’t worry about those folks. They probably have their SS cheque direct deposited into a US account and then access it with a ATM machine. You can access funds this way in almost any country.
Shadow Raider,
I just posted a comment that relates to yours: http://isaacbrocksociety.ca/2013/12/28/us-residents-avoid-tax-using-trusts-located-in-tax-haven-usa-while-americansabroad-evade-tax-through-tfsa/comment-page-1/#comment-899280.
The law and the inability for some to renounce their supposed US citizenship is indeed burdensome. Too bad anyone in the US IRS finds these things impossible to give guidance on but feels a person’s supposed US citizenship (although they have never been registered, never lived in or had any benefit from the US) is so *precious* that a parent, a guardian or a trustee cannot renounce that *citizenship* for a family member, even with a court order. Let these people go some way!
Thanks, Petros. I’ll go back to my own worries.
From what others have said, a lot of Americans who live in low cost countries don’t officially reside there, at least as far as the US is concerned. You never know when you might want to take advantage of Medicare in the US. Medicare generally doesn’t cover non-residents.
http://americansabroad.org/issues/healthcare/
I just met a Canadian couple who have been living in Mexico for 2 years now. They didn’t know about Canada’s departure tax and believed that you can reside in 2 countries at the same time. I guess you can – until you get caught.
@bubblebustin
I was troubled about that “entitled” language in the IRS FAQ 52 when I first saw it years ago. Even though it did NOT apply to me, the use bothered me. Does anyone else see the Orwellian speech tones that its use implies, or is it just me? The AC is now being granted an “entitlement” of only a 5% penalty! Words are chosen for a purpose. Why not just say, “the penalty will be” 5%. Why use the word “entitled”?
It seems that Americans (and possibly humans everywhere) see everything now in terms of ‘entitlements’ that the government grants you. It sets up the benefactor / benefactee (sp?) relationship. Government, is the GREAT provider and we get “entitlements” as they are granted.
In this case, the ‘entitlement’ is a penalty (5%) less than what they would rather have which, as we know, is 27.5%. So, in their compassionate view of imposing their ‘made up’ tax OVDP penalty regime, they are going to give you something, that you should not have, but they will now grant you a 5% penalty entitlement.
Geez, thanks IRS. You are too kind!
I wonder about these IRS/Treasury staff attorneys that write these things. Do they really believe that, or just insert that word for their own gallows humor and amusement!
Does it represent an unconscious mindset, something bigger, or I am putting too much emphasis on a simple word. Just wondering….
@Roy @Petros
I understand what you mean and agree that those who become aware now have access to much more info including this site. However, I am referring to more than who will be affected than those just by a Canadian-US IGA.
I assume there are many who do know and are not doing anything and I do not assume those who do not know will automatically put themselves in harm’s way. Largely due to the information sources that have grown since 2010 and even 2011, when I first came to know about it. There was almost nothing except the renunciation guide other than wading through the hopelessly complicated IRS documents, etc.
Regardless, I feel sorry for everyone in this miserable boat.
@J.E. Gutierrez: “But it is presomptuous to expect that this will not severely restricts the rights you previously enjoyed as a US citizen”
Americans living abroad enjoy the following “rights” as “US citizens”:
1) The right to take away the job of a stateside American if they move to America and can find work
2) The right to be prohibited from banking abroad if they move to America
3) The right to a possibly smaller customs line if they travel to America
4) The right to not be prohibited from spending tourist dollars when visiting America
Normally, individuals are not “US citizens” because of “rights”, but because of culture and heritage. They were basically born that way without their choosing. Renouncing US citizenship simply means protecting oneself from bad politics.
Happy New Year! I expect that US politics will become even more hated by Americans this year, and one can’t blame expats for that:
Why Americans have grown to hate Congress
http://www.yourhoustonnews.com/deer_park/opinion/spriggs-why-americans-have-grown-to-hate-congress/article_5fd6bd71-cad4-56f4-a157-292a3cdeec13.html
JEG, you doubt that the Reed Amendment is unconstitutional.
I suggest that you access the detailed review by William Worster (at the Hague) on the constitutionality of the exit tax provisions at expatriation: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1628568
Worster does mention the Reed briefly, but just substitute the “Reed Amendment” for “exit tax” throughout and most of the same arguments apply.
Worster “agrees” in part with you that the right to expatriate is not explicitly mentioned in the US Constitution but goes into very lengthy detail justifying his conclusion that “…the acts of the judiciary, executive, and legislature, from the early Republic until the present day, affirm, “the right of expatriation … must be considered … a part of the fundamental law of the United States.”
He argues that: “…the exit tax [or Reed] is not constitutional because it is not narrowly tailored to achieve a compelling government interest and must be judged at that standard because it infringes on the fundamental right to expatriate and discriminates based on national origin.”
Discrimination Worster suggests is based in part on expatriates being a “discrete and insular minority,” exposed to “invidious, deep-seated prejudice,” having an “immutable trait,” and “political powerlessness.” Further, there has been intent by Congress to discriminate. The effect of that discrimination will occur when the law is enforced. He also would argue that the Reed would not pass strict scrutiny–a compelling state interest or a proper legislative goal.
Worster mentions: “Proponents of the expatriate tax [or the Reed] may argue that the U.S. is motivated by a desire to simply recoup expenditures from individuals who have benefited from the U.S.‟ protection; however, the debates on the Congressional floor and the titles of many resulting bills suggest an intent to target expatriates purely on the basis of their former nationality.”
Do you take issue with the points raised by Worster? If so, why don’t you send him an email and let us know his response (or I could do this). I have corresponded with Worster and he is friendly.
BTW I did approach the ACLU in my home state to fight the Reed, but ACLU refused my request.
@IRSCompliantForever
Thank you for the paper. It is a little early to read it in full, but here are a couple of thoughts.
First, the paper really refers to the exit tax and not to the Reed(-Schumer) amendment(s). They are different things. In fact you go back to my second post in this thread (seems like a long time ago since I wrote it), I had been careful to carve out Covered Expatriates (the category subject to the exit tax) from my general view that the tax (and general) treatment of expatriates is constitutional.
The main reason I don’t believe that Reed is unconstitutional is that the United States government has unconstrained right to define what category of visitors it is willing to admit either immigrant or non-immigrant. A former citizen would be treated like any non-resident alien and would not have a constitutional right to challenge the United States Governments’s determination of his/her inadmissibility.
@SwissPinoy
You are obviously venting some anger and frustration here, so there is not much to be said about your “analysis” of non-resident Americans’ rights.
I would caution you against the view that US citizenship is conferred by culture or heritage, as this is definitely not what the framers of the Fourteenth Amendment, as reaffirmed in the various legislation and Supreme Court rulings based on it. US citizenship is precisely disconnected from culture, race, heritage, social or economic class, etc.
Under the constitution, all US citizens are equal in rights and obligations whether they descend from Mayflower immigrants or enslaved Africans, are naturalized Hispanics, etc.
@JEG, Americans abroad are getting to where they feel forced to expatriate in order to be able to lead a normal life where they live. How can it be reasonable to ostracize them even further by not only losing their birthright but also potentially even permission to visit the US?? How can it be reasonable for normal not rich Expats having to be burdened with +100 page tax returns and huge accounting fees?
People don’t necessarily want to renounce but find compliance too burdensome and expensive. It’s actually starting to make me angry!!
No other civilized western country puts its citizens abroad in such a quandary. I honestly agree with the Republicans Abroad that they should 1) Repeal or at least modify Fatca divorce focuses on homelanders hiding assets abroad; 2) Move to RBT or at least make compliance far simpler; 3) Offer an official pardon or apology to recent former citizens and offer them their citizenship back if they so choose.
In my case, it wasn’t so much the double taxation as much as it was the complexity of compliance which would have resulted in ongoing annual tax preparation fees of $2000-$5000.
@JEG, As a Canadian citizen due to the NAFTA I should be able to live and work in the US if a US company were to hire me. Should I be banned from the US for renouncing (I’m a covered expatriate) or do you think the US should respect a treaty it signed?
@J.E. Gutierrez, you mentioned “rights”, I described these “rights” and you confirmed these rights with the usage of ad hominems. Thus, we have settled with an agreement on what these “rights” include.
You have the right to view citizenship according to your needs and interests, and I explained to you how others view citizenship. So, you can talk on an on about the Fourteenth Amendment, Supreme Court rulings or whatever, but all of that still has no impact on how individuals view themselves and their nationality with its relation to culture and heritage. The most that your sttaement does is to suggest why many politicians seem to suffer from a noticable lacking respect towards the American diaspora.
In my view, American culture is the mixture of Mayflower immigrants, former Africans, naturalized Hispanics, illegal Mexicans, etc. More American politicians need to learn to recognize this to gain a better understanding of citizenship.
……..wondering if Mr JEG would want to pay 30% of his life`s savings if he lived and worked elsewhere for 50 years.