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.
@Mia… aka JEG…
There you go again. A mere ‘inconvenience.” A common theme of the FATCA apologist. Sorry, but that does not resonant here. Might try “moaner”, as I think that is your other favorite characterization. That would win adherence to your POV.
I do appreciate your moderate tone and willingness to engage in debate, but.let’s just say, we see it differently than you. Not sure of your agenda. Has Treasury sent you here to change all our minds, or is this just idle amusement for you. I know you love America, think it is Exceptional, and so did a lot of us growing up. However, after 4 years of offshore jihad, that love has worn a little thin. But hang in there, maybe we will ALL come to appreciate the “Shining City on the Hill” as you point us to the light!
I wonder where CBT for non-residents stands when compared to involuntary servitude which is not constitutional?
@Joe Blow, I wonder if we could sue the USA for violation of the minimum wage law. Case: a woman makes less than $10,000 at minimum wage resident in Canada. She files her US taxes which costs her $2,000 in cross-border accounting fees, causing her effective pay to fall far below minimum wage. The US tax obligation is thus a violation of the US minimum wage law. Don’t arrest Devyani Khobragade for abusing her domestic, arrest the USA for abusing its indentured servants across the planet!
@J.E. Gutierrez, not all Swiss ski, not all Swiss work, a Swiss legal profession does not need knowledge of US law and your ad hominems are highly unprofessional from a legal perspective!
Slavery was practiced in America for over a century, but that didn’t mean that its constitutionality could not be challenged in court. US laws allowing slavery originated from US national origin discrimination practiced outside of US jurisdiction, similar to citizenship-based taxation.
Banks are reacting to national origin discrimination enforced by the US government outside of US jurisdiction (similar to slavery). If the US government stopped enforcing national origin discrimination, then banks would no longer be forced by America to enforce US policy. Basically, one must stop US policy outside of US jurisdiction to stop the national origin discrimination resulting from US policy.
As such, one does indeed have a case to bring against the US government for violating American civil rights under the laws of America.
Anybody in Switzerland can inform you that nobody in Switzerland wishes to discriminate against Americans and that discrimination against US citizens is the clear result of US policy. If such was not the case, then why did my local bank refinance my mortgage even though I am an American who is not a US citizen? I told my bank that I am an American and will always be an American, yet they still refinanced my mortgage!
@Shadow Raider, The idea that US citizens living abroad are under the jurisdiction of the United States, is quite far fetched. Consider that the US asserts jurisdiction over Devyani Khobragade and Sangeeta Richards in the Indian diplomatic community in the US. Now if India no longer has jurisidication over this relationship, which exists in their diplomatic embassy, how much less does the USA have jurisdiction over alleged US citizens who are working under permanent residence or work visas. It is plain ridiculous to assert “jurisdiction” over such people–yet I recognize that this is exactly what the courts have said is constitutional. It remains laughable.
Now consider the case of dual citizens living abroad. In their cases, US jurisdiction is just patently false. Here international doctrines of dual citizenship come into play and in no case can the US claim jurisdiction legally. Or so international cases concerning Dominant Nationality or the non-interference doctrines would suggest.
When it comes to the US and jurisdiction, it regularly asserts global jurisdiction of its citizens while denying it to the diplomatic communities of foreign nations. What a bunch of bullshit!
@ShadowRaider
Playing devil’s advocate for a second, I fail to see how the Reed amendment would qualify as cruel and unusual punishment.
It is certainly not as cruel as the death penalty, which the Supreme Court has ruled to constitutional.
It is also not unusual, considering that a very large proportion (may as high as about 30%-40%) of all non-immigrant visa applications are denied every year.
@JEG, The USA is attempting to tax many so-called US citizens who live as citizens in their country of residence. When these people learn about FATCA, they want to prove that they are not US citizens but they are falsely told that they must file at least five years of returns, Form 8854 and six-years of FBARs. Some have even entered the OVDP, only to renounce afterwards. I have no sympathy whatsoever for the position that they incurred tax obligations before their expatriation. That is just so much horse shit, that its would not even be worthy of consideration except that the USA, with its my shit doesn’t stink attitude–hence generous spritzing of PooPourri is called for), the USA thinks that it can extract a pound of flesh from these people. It really pisses me off. If they fall into dire straits because of US taxation incurred while they were still “US citizens” it will fall on the Canadian (et al.) taxpayers to care for them. Your position is untenable in the case of most of the participants at Isaac Brock.
However, if a person has lived in the US all his life and decides to leave and take on another citizenship, he may leave behind a tax obligation. That is quite another matter.
But you can keep the horse shit about tax obligations of non-resident expatriates. That just doesn’t make any sense to anyone. It is just complete nonsense.
@JEG, one aspect of cruel and unusual punishment is the principle of non-proportionality. It is cruel and unusual punishment, e.g., to give a person a life sentence or hang them by the neck until they are dead for smoking a marijuana joint. The death sentence is only not cruel or unusual when it served upon those who are convicted of heinous crimes. But if you receive the death penalty or even a life sentence for burning a US flag, it would be cruel and unusual.
Permanent exile because of exercising a fundamental right to expatriate is cruel and unusual punishment at its finest. No crime is committed, so it is by definition, non-proportional.
Why the discussion over whether or not a law is constitutional? For the current congress and executive branch the constitution is a doormat. “Congress passes unconstitutional law” barely makes a line in the news these days. Congress doesn’t give a flying fig for any part of the constitution that they find inconvenient.
Legal analyses of both the exit tax and the Reed amendment have shown them to be unconstitutional, and Ex-PATRIOT probably is too. But they’re still law. And those adversely affected have no effective legal remedies either way. Individuals cannot realistically challenge a law’s constitutionality. The course of action is the same, then, whether or not a particular law is constitutional. Sauve qui peut.
Oops. “… But they’re still law.” — the exit tax and Reed amendment, that is. Not Ex-PATRIOT. At least, not yet.
@JEG
You wrote: “More substantially the inconvenience you seem to have experienced in your banking affairs was not caused by the laws of the United States or the actions of the US governments, but was entirely the result of your banks’ own decision to discontinue its services to US taxpayers.”
I don’t agree with this at all. The fact of the matter is that the US government has deliberately made a US citizen the least desirable type of customer on the planet for any FFI. A US citizen customer brings an incredibly expensive regulatory regime and an unquantifiable but catastrophic risk.
Broadly speaking, there are two options for complying with FATCA. Option A is to implement the client onboarding and existing account searches to identify US citizen customers and then spend a fortune implementing the system changes required to generate reports that overlay the US tax code on each of the geographies in which the FFI operates. Option B is to implement the client onboarding and existing account searches to identify US citizen customers and then get rid of them all. Option A is incredibly expensive. Option B is incredibly cheap. Option A has catastrophic risk attached of potentially billions (trillions if foreign exchange were to be considered US source payments). Option B is considerably less risky.
There are very few FFIs for whom Option A will make economic sense. Most FFIs will have very few US citizen customers and the margin they make on these customers will be dwarfed by the compliance costs. And that’s excluding the consequences of getting just one customer wrong.
I did a considerable amount of research on the availability of brokerage accounts in the UK reading through the account opening forms, customer terms and conditions etc. for approximately 30 UK brokerage firms. As near as I can tell, 16 of them have made a decision between Option A and Option B. Care to guess which option is more popular? 15 out of 16 brokerages have opted for Option B. As near as I can tell, Barclays is the only one that will be FATCA compliant by implementing the reporting procedures. All the others will be FATCA compliant by dumping all their US citizen customers. The list of those dumping their US citizen customers includes Royal Bank of Scotland (which owns Citizens Bank in the US but I think it’s being sold and is part owned by the UK government), Santander and Fidelity Worldwide (not part of Fidelity Management and Research officially but also owned, in part, by the Johnson family).
The response didn’t surprise me at all. In the UK, there are approximately 180,000 US citizens in a population of 63 million. So, for many FFIs they can drop about 0.3% of their customer base and save hundreds of thousands or millions or more.
So, the US government by implementing FATCA has effectively forced FFIs to stop servicing US customers by making it totally uneconomical in most instances to do so. But, if I read your comment above, you don’t think that this is “caused by the laws of the United States or the actions of the US governments [sic]”?
@ all Great discussion! My thoughts go along these lines:
1. The US government thinks it has jurisdiction over “US persons” wherever in the world they might reside. The constitutionality of CBT is a moot point because the US government regularly violates the Constitution anyway whenever it’s convenient to do so. No problem.
2. The US government thinks anything it decides to do is OK even if it is in conflict with the laws of other countries because the US is “exceptional”. In addition, the US government doesn’t think UN conventions or International Human Rights apply to the US because the US is “exceptional”. The US government doesn’t recognize the sovereignty of any other country if they think there might be some advantage to ignoring it.
3. The US government doesn’t give a hoot that CBT is ruining the lives of “US persons” who live “abroad”. While some in the US government might actually concede that CBT is harmful and shortsighted, they will still insist it must be obeyed because it’s the “law”. (The old “if you think the law is wrong, then work to change it” argument). Believe it or not, I’m not going to waste my time trying to change the laws of a country I haven’t lived in for over forty years. I don’t give a damn about the US and it’s stupid laws. We can’t vote anyway.
4. I’m hopeful that the reason our Canadian government hasn’t yet signed an IGA is that it’s insisting on a hands off policy for Canadian citizens regardless of their US status. A Canadian’s status with some other government has no standing within Canada. Canadian law must reign supreme; it cannot be otherwise. Any government that can’t even exercise sole jurisdiction over it’s own citizens within it’s own borders is turned into a mere branch plant. The Canadian government’s leverage is the fact that if the US government can’t even get Canada to sign up then FATCA is DOA. We are now into 2014 and still no Canada/US agreement. If Canada had embraced FATCA it would have been the first to sign up. I’ve heard Harper hates Obama and probably is enjoying shoving FATCA back in his face.
5. Personally, I’ve decided to ignore the morons to the south from now on. No more 1040’s, no 8938’s, no FBARs and especially no 8854. I’m sorry I panicked and filed for a few years after listening to all the media hype. At least I did it myself and didn’t spend massive amounts of money! I will travel to the US only on a Canadian passport. If they decide to ban me, then it will be yet another example of the pathetic vindictiveness of the US government. I was previously banned back in the Vietnam era; I’m used to it. All of my US relatives and friends will know about the despicable behavior of their government. Those people supported me then and they support me now. I just returned from a Christmas visit and everyone I talked to thinks their government is out of control. I think if all expats thumbed their noses at the IRS then CBT would be exposed for the unworkable abomination it is. Mass civil disobedience any one? It’s unenforceable, they know it, and don’t have the resources to deal with it. (As a footnote, my 94 year old mother just got an assessment from the IRS concerning a simple error which resulted in her underpaying the tax due on her 2011 return.) If they are still grinding through TY 2011 for domestic returns, imagine how far behind they are when it comes to processing returns filed from abroad. In a funny way I almost feel some sympathy for the IRS bureaucrats who must try to enforce all of the idiotic laws Congress throws their way. They have no choice even though they know it’s a fool’s errand which will never produce enough revenue to be cost effective.
Bravo maz57!
@JEG
You write: “the inconvenience you seem to have experienced in your banking affairs was not caused by the laws of the United States or the actions of the United States governments, but was entirely the result of your own banks decision….”
This statement is unbelievably naive- and of course you are not naive at all, so it has to be seen as voluntarily callous. It is as if America can do as much damage as it wants, but is never at fault or to be held accountable. America is bullying the whole world to comply to their needs and wishes, to be unpaid employees of the IRS, and you say it is the victims fault? Thats like saying somebody who was raped deserved it. And to speak of an “inconvenience” in the light of people struggling to survive is just another smack in the face. Can you not see how smug you are behaving in the face of the suffering here? YOu are trying hard to play nice and fair, but there is nothing fair about your attitude at all, and the reactions you are earning from the people here are not “emotional” reactions, but the real and correct way to feel when faced with such injustice and exploitation.
I wrote to Mr Yates and asked him what he thought about Ted Cruz not knowing he was a Canadian citizen even though Cruz knew he was born in Canada (btw, Mr Yates has replied promptly to the few emails I’ve sent him – and in letting me know his rate is $500/hr). He said it’s quite possible that someone could be entirely unaware that they hold another nationality, especially in the case of border babies. I guess the level of plausibility of ones story is entirely dependant on which party the listener represents – the IRS or the hapless citizen.
Said the IRS was under water with OVDI even before he retired. Blames foreign banks and congress’s underfunding of the IRS. I was hoping the 2014 was going to be my year, maybe not so.
@maz57 “The US government thinks” is an oxymoron 🙂
@All
Happy New Year.
These 140 comments demonstrate that the question is:
Is the Government of the United States of America THE WORLD or is it a PARTICIPANT IN THE WORLD.
The U.S. Government and JEG belive that the U.S. Government is THE WORLD. Others believe that the U.S. is part of of the world.
As confidence in the U.S. leadership and moral authority (Yes JEG, ultimately it will be about morality) erodes, U.S. bullying increases. As we enter 2014, we observe a United States that has stripped itself of everything except its military power. That’s it. The U.S. is now a bully without precedent in the post WW 2 world.
We are living in very difficult and turbulent times. Those of us who are caught in the FATCA crossfire have a “ring side seat” to watching the collapse of the U.S.A. and every other country that is too integrated into the U.S. economy.
Much of this particular thread has featured Americans abroad describing the pure hell of U.S. citizenship abroad.
There is only one thing worse than being a U.S. citizen abroad.
The only thing worse than being a U.S. citizen abroad is being a Homelander.
U.S. citizens abroad should look at the bright side. You don’t live in the United States and you are at least geographically free.
Homelanders are neither geographically free nor financially free. The U.S. Gov has created an Iron Curtain around the country.
Finally, please remember:
The bad thing about good things is that they come to an end; and
The good thing about bad things is that come to an end.
We are living through a turbulent and transitional time in history as we witness the transformation of the United States from a world power to a paranoid and isolated state.
Fifty years from now, tourists will visit the United States and visit the FBAR Museum, the PFIC Memorial a and the Library of FATCA. That’s all it will be.
This is interesting. There is a treaty from the League of Nations that states in article 1: “A person possessing two or more nationalities who habitually resides in one of the countries whose nationality he possesses, and who is in fact most closely connected with that country, shall be exempt from all military obligations in the other country or countries.” The US ratified this treaty, and it still honors it, among similar treaties with other countries. So amazingly, the US accepts to limit its jurisdiction over its citizens abroad in the case of military service.
Wouldn’t it be nice if there was another treaty with the same clause, but replacing “military” with “tax”? Indeed, note that the terms “habitually resides” and “closely connected” are very similar to the terms “habitual abode” and “personal economic relations are closer”, used in tax treaties to define the country of residence of a person. However, as we know, the US refuses to sign any tax treaty without a “saving clause”.
So apparently the US thinks that filing tax forms is a more important “duty of citizenship” than defending the country in times of war. Unbelievable.
@ShadowRaider
It has become very clear that the U.S. Gov sees its population as:
1. Property/assets/chattels; and
2. Nothing more than a tax and penalty base.
Put it another way:
The U.S. government does NOT exist to serve U.S. citizens. U.S. citizens exist to serve the U.S. government.
With regard to the treaty of the League of Nations:
Although one can pay taxes to multiple countries, it is difficult to serve in the military of two countries (at least at the same time).
@Shadowraider, thanks for finding that treaty from the League of Nations that and bringing it to our attention. Israel did not yet exist. Thus, Israel arrested a young Canadian woman for not doing her military service, though she was a resident and citizen of Canada. She was however eventually granted clemency after serving half of her prison sentence: http://www.timesofisrael.com/canadian-israeli-deserter-granted-amnesty/
@maz57
I’m with Em! Nice to see you posting again.
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@Edelweiss
Also, according to Model 2 of FATCA, local banks have to register with the IRS but don’t have to report US clients under the condition that they don’t have a foreign branch, at least 98% of their clients are located within the EU and they don’t discriminate against US citizen local residents.
Switzerland has 300 Banks, 90 of which are local and about 10 of which may agree to not discriminate against American citizens, under the conditions provided by FATCA, in exchange that they don’t have to report US citizens.
As such, around 290 banks are allowed by FATCA to discriminate according to national origin. FATCA allows and even encourages national origin discrimination. Yet, US law prohibits national origin discrimination.
Source: http://www.nzz.ch/aktuell/wirtschaft/wirtschaftsnachrichten/kaum-erleichterung-fuer-lokalbanken-1.18177667
Thanks, Tricia and Em! I had a nice relaxing Holiday season. Once I decided on my course going forward it was a great relief and I even went many days without thinking about the whole mess. But I forgot to post point number six up above:
6. If the US government persists in this insane crusade, in a few years CBT will be an irrelevant technicality because there will be no more US citizens who live abroad. They will have either renounced or moved back to the homeland. Problem solved. Then we can all go back to our regularly scheduled lives.
@ Swiss Pinoy
I’ve made the point repeatedly that there would be very few banks that would qualify for the deemed compliant local bank exception and the NZZ article confirms it. And of those banks that could qualify for this category, I can’t see them actually opting to be in this category. It doesn’t save them any money, and, in return, they have to agree not to discriminate. I certainly wouldn’t entertain the thought of voluntarily agreeing to business restrictions with no reward.
Incidentally, a local bank in the deemed compliant category has to report non-resident account holders but not resident account holders (unless, of course, the US decides to change the IGA unilaterally which is always an option).
I thought I had remembered seeing comments from the CBA about the number of Canadian banks that might possibly qualify for the local bank exception and I’ve found them. Apparently, in all of Canada, that number is 4. (http://www.cba.ca/contents/files/presentations/pre_20120515_irsfatca_en.pdf)
“For example, we think the local bank and local FFI categories are good ideas but we believe that improvements are necessary to make them work such as lifting the restriction on marketing a U.S.
dollar account – a product that is very common in Canada given our proximity to the U.S. — and raising the asset size limit. By our estimate, there are only four domestic banks in all of Canada that would meet the asset size limit for the local bank deemed compliant category.”