This post comes from Anne Frank. I agree with the contents and thank Anne Frank for taking the time to organize these thoughts.
Practical Solutions Needed
In my view, the election has created a small opening NOW to pursue a pragmatic solution that will resolve MOST but not all of the injustice that FATCA and CBT generally have wreaked upon US Persons outside the United States and their families. What is needed is (i) a VERY SIMPLE and SUCCINCT summary of why this is an injustice that can be grasped by any voter in a coffee shop with the attention span of a four year old; (ii) a SIMPLE and CLEAN proposal to make the problem go away; and (iii) a Congressman or woman with the courage to take it on.
There is an opening in my view because a) the Republicans control both houses; b) the Republicans have apparently embraced repeal of FATCA and CBT as bad policies; c) Democrats Abroad at least have recognized most of the injustices US law perpetrates upon its diaspora and can be expected to endorse at least limited action to address the worst of it if not outright repeal of FATCA; and d) a Congress which has a double majority has some hope of getting a bill passed which – if consistent with principles the Democrats have at least paid lip service to – the President might not veto. FATCA may be bad law, but it sells politically because it targets “FATCAT” tax evaders. We need to let them solve that problem in their own time and in their own way providing they stop with the collateral damage! We all know Congress will have only a short honeymoon period where it has any hope of getting things done, so the best hope of getting something passed is early and not late in the lifetime of the new Congress. The pending Canadian litigation will serve to keep some level of political attention and heat on the issue (I don’t overestimate that factor in the US of course!).
I think our group can collaborate on the simple summary idea. The Democrats Abroad brief is not a bad one and could likely be an appendix to a short summary that highlights a) double taxation that persists despite tax credits and exemptions; and especially b) the ways in which the fines and penalties associated with “death by a thousand forms” subjects US Persons outside the US to discrimination and threats not faced by Homelanders. Real stories of real people will carry 100 times the weight of an academic brief.
What is the simple solution? Well, I tried to put together something as simple as what we put before Parliament when C-31 was being debated. Here is what I came up with (drafted as an amendment to the US Tax Code):
“General (1) For all purposes of this Title 26 and any other statute referring thereto other than Title 8, a person shall neither be considered to be a citizen of the United States nor a U.S. Person if the person would not be considered a resident of the United States (absent the existence of United States citizenship) under the substantial connection test in 26 U.S.C. para. 7701(b)(3) for the particular year nor any of the ten preceding years. This statute shall apply with retroactive effect.
Repeal (2) Title 26, U.S. C. para. 7701(a)(50) is hereby repealed.
Transitional (3) Any person who has filed any return or paid any tax or penalty prior to the coming into force of this statute shall have no claim against the United States government arising from the application of the law prior to the coming into force of this statute. ”
In simple terms, what the amendment to the US Tax Code drafted above seeks to accomplish is to cut the head off the snake. If CBT is the root of all evil, kill as much of it as we can as simply as we can. What I did was go to the source of CBT in the United States Tax Code which is Title 26 in the definitions section (para. 7701). This is where “US Person” is defined to include a citizen or resident. What my amendment would do is simply provide that for purposes of the Tax Code and any other statute that references it (but not the Immigration and Nationality Act which is Title 8), a US citizen is NOT considered a “tax” citizen if you will if they haven’t met the “substantial presence” test for the year in question nor any of the ten preceding years. For someone who left as a child or was born outside the US to US parents, this is a complete waiver. For someone who left as an adult, this limits their “problem years” to the ten years after they left.
The virtue of this is that it does not require the creation of any new tests, definitions or concepts which often involves the law of unintended consequences (and stalls things for a long time while such consequences are studied and debated). Substantial presence has been in the Tax Code for years – it may be a mess, but it’s their mess! Snowbirds need to be wary of it, but occasional visitors do not.
This is not perfect. People who have been out of the country for ten years or more have connections sufficiently tenuous to the US that it will not be hard to explain to Congress and Homeland voters that it is unjust to persecute them. Yes, it does mean that Eduardo Savarin’s of this world will eventually be able to get out of the tax net, but the IRS will still get to torture them for a decade before they get away. They can create new exit taxes for such people if they like. It won’t be hard to do. It does mean that the vast majority of Accidental Americans would simply be out of their net for all purposes and for all time unless they decide to establish themselves in the US.
The law would have retroactive effect (just as the amendments to the citizenship rules did back when they were changed in the 80′s). This would simply make the problem go away for almost everyone. The provision of para. 7701(5) being deleted is the root of “covered expatriate” in the existing statute (citizen for tax purposes until all obligations discharged under s. 877). They are free to come up with a new exit tax for the fat cats who may leave tomorrow if they like,
What I have NOT tried to resolve here is (i) giving citizenship back to those who were effectively forced to renounce; and (ii) refunding money extorted in the past. In a perfect world, a just government would address both of these issues fairly. I strongly suspect that if we try to bite off too much, we may instead get nothing. The perfect can be the enemy of the practical. On balance, I think this remedy is simple enough to explain that it has SOME hope of getting traction if the story behind it is compelling.
That leaves the problem of finding a sponsor. Maybe Rand Paul? Maybe even Ted Cruz? I leave that to others. I confess to having little insight into how this might be done.
My suggestion is that we try to refine these ideas and develop a near perfect “pitch” collaboratively that can be sold to one or more Congress people and let’s see if we can’t actually solve this problem at the source. FATCA will still be bad law imposing lots of expense, but it will effectively only hunt for or disclose US residents with the proverbial Swiss accounts.
I suspect this plan might find allies at the IRS, which is forced to waste resources on administering CBT.
small typo on my part: the paragraph of 7701 to be deleted is 7701(a)(50), not “(5)” as I incorrectly wrote.
I suspect both IRS and State Department might endorse this. Imagine a world where you no longer have 9 month waits for renunciation appointments and the piles of paperwork low-level diplomats are forced to shuffle, where you can attend a public meeting as a diplomat and not get ambushed by angry expats, where you can focus your energies auditing real tax evaders instead of holding widows and orphans upside down and trying to shake nickels and dimes out of their pockets, where you can analyze Al Capone’s FINCEN filings for actual money laundering activity and not have to sift through 1 million irrelevant filings to find it. Imagine that.
@Anne Frank – your typo has been corrected.
USCitizenAbroad and Anne Frank,
All I can give is, again, my deepest appreciation for your sensibility, your common sense, your suggesting excellent solutions to this US citizenship-based taxation enforced by FATCA IGAs collateral damage.
I am so thankful that we have persons of your caliber helping the others of us without your expertise.
Perhaps I am misreading this. I am understanding this to propose that CBT exists for the first 10 years that one lives outside of the US. Is that correct? Why add the additional language about not meeting the substantial presence test for 10 years?
Good work on your part. I had been thinking about the adoption of the Simpsons/Bowles answer to the budget problems. If you recall their proposal included a move to territorial taxation at least for corporations. I don’t think that it should be much of a jump for the new Congress to extend this to individuals. Also the nice thing about this proposal is that it was worked out on a bipartisan basis so the democrats, including the President, can’t really argue against it. It would look foolish for the President to attempt to veto the work of his own commission.
What about Mike Lee, since he bothered to fly all the way over to Europe to meet with AARO? Definitely not Ted Cruz (Esquire did a piece on Congress and there are Republicans who really don’t like him, let alone Democrats).
I am totally against not getting an money back. What about those “unconstitutional” 27.5% penalties?
I strongly disagree that such grave penalties cannot be recovered “retroactively”.
@Anne Frank,
You are arguing from the point of view of “fairness”. My recent discussions with some in the U.S. suggest that there is now the highest concern in Congress on the budget and that any change in the tax code should be revenue neutral (or positive).
Congress will, I believe, insist on knowing the budgetary consequences of your proposal. I recall that the ACA had previously attempted to obtain some numbers. Any idea how these can be obtained? Perhaps ACA has updated its calculations.
I think that a proposal/pitch that combines fairness and at least no negative effect on revenue (with numbers) could be compelling.
Polly,
We have to ask ourselves “do we want ALL or nothing at all?” Reversing grave penalties, absolutely so defined correctly, might have to be left out of the realm of what Anne Frank is suggesting. I know I have kissed away over $42,000 of my retirement savings for US law, accounting, immigration/nationality fees, as well as the $US 3,661 of taxes paid to the US in conjunction with my holding of a Canadian Registered Disability Savings Plan (RDSP) for my son. If something like Anne Frank outlines would be viable, to me, it is worth the cost not to have the many others yet to come so affected as the costs already borne by others. It is similar to the donations we are making to the litigations on this issue. There will be no perfect solution.
Here, here calgary411!! Many thanks to USCitizenAbroad and Anne Frank.
@AnneFrank, I think you found the sweet spot of the ball.
@Stephen Kish, I had been thinking about something like this and was going to send you an email. But AF has come up with a legislative idea that would work.
You are correct that such a proposal would need to be revenue neutral.
CBT is in my opinion with respect to countries that have a dual tax treaty is actually revenue negative.
Processing overseas tax returns consumes time and money for the USG. These are tax returns that generate no income tax, only labor.
The elephant in the room is that FATCA projected something like $8 Billion over 10 years?
Politically we need to show them that FATCA based on residence like GATCA will generate the same amount of money over the same amount of time with far less administrative cost for the USG.
We also need to keep making the argument that because of tax credits Mr and Mrs Canadian fill out two returns each year and pay nothing to the USA.
Though I hate to point to the other guy behind the tree, but I think we have to and that is we need to loudly deflect off towards the “rich homelander who uses offshore accounts to hide money.”
That argument also allows us politically to have the replacement scapegoat.
Does the USG really want to annually process up to one million more tax returns from CANADA? People do not hide money in Canada but those million extra tax returns make the hay stack bigger ever harder to find the ric homelander (needle).
“a US citizen is NOT considered a “tax” citizen if you will if they haven’t met the “substantial presence” test for the year in question nor any of the ten preceding years. For someone who left as a child or was born outside the US to US parents, this is a complete waiver. For someone who left as an adult, this limits their “problem years” to the ten years after they left.”
Ten years a slave is a very long time. I seem to recall other countries with two years or even one year out of the country for a person to no longer be considered a resident for tax purposes.
@Stephen Kish, one other tool that must be brought on the table.
Adopting a proposal like that with AF allows the USG to pre-empt other countries from adopting retaliatory CBT.
If Canada, the UK, Ireland, Greece and France adopted CBT for their expats in the USA, the cost to the USG would far surpass anything they may get.
@From TheWilderness- I agree, that 10 yrs. is a long time. The duration is itself rather arbitrary. Why 10 and not 15 or 20. In my simple mind it seems to me that residence/terrtitorial based taxation is and should be exactly what the term says. How long does it take to distinguish between revenue that is generated in the U.S. and revenue that isn’t? The answer is that it doesn’t take long at all.
When you combine RBT with the fact that the U.S. banks won’t hold accounts for none residents then I really don’t see the difficulty. Of course a move to a national VAT would make everything even clearer but either way I just don’t think it is at all complicated to figure out where income is generated.
I say that there should be no waiting period whatsoever. To have one only leaves U.S. persons still dangling on the Congressional tax strings.
“I say that there should be no waiting period whatsoever. To have one only leaves U.S. persons still dangling on the Congressional tax strings.”
@Recalcitrant
I agree!
@Anne Frank
You have written a lot of real good stuff; however, ten years a slave is ten years too long. I don’t understand why anyone would want to be so accommodating towards US tyranny.
@ recalcitrantexpat: I agree with you that it isn’t that difficult to determine when residency ends.
I personally don’t see a why there should be an extra requirement of not meeting the substantial presence test for 10 years. If we want RBT, we need to go for it and make the case for why it is needed. Let’s not sell ourselves short.
@All
Just to be clear I did not write this post – all thanks should go the Anne Frank the author and I repeat my thanks to Anne Frank for this excellent proposal and discussion piece.
@StephenKish, more musings….
I think you are debating in your mind, what is doable and how?
Lets start with the elephant in the room. If John/Joe Canadian get audited by the USG, it is likely they will owe zero income tax because they live in a high tax country with a tax treaty. Yes, I know there are exceptions for PFIC but lets keep the story simple to understand so even a congresscritter can understand.
There are no tax penalties if you owe no tax.
The big concern is FBAR form penalties. Thats the elephant in the room. Let me first suggest we all look at the opening recitals of the law as passed forty years ago;
http://www.law.cornell.edu/uscode/text/31/5314
In order to do anything, we need to start in the House, get to the Senate as budget bill (does not require 60 votes) and then get POTUS to sign. Thats the gauntlet……..
The House could include in a Budget Bill a mandate for the Secretary to as stated in the law itself;
First notice that the Secretary can require “residents or citizens,” meaning FBAR could be a resident only form and the law already allows it!!
” the Secretary of the Treasury shall require a resident or citizen of the United States or a person in, and doing business in, the United States, to keep records, file reports, or keep records and file reports,”
Second, the Secretary can exempt whole Countries as Congress provided. Basically exempt dual tax countries and those with high AML standards;
“(2) a foreign country to which a requirement or a regulation under this section applies if the Secretary decides applying the requirement or regulation to all foreign countries is unnecessary or undesirable;”
Third, the Secretary can vary the reporting amounts which has not be done in 40 years;
“(3) the magnitude of transactions subject to a requirement or a regulation under this section; ”
So without any new laws, the FBAR requirement can be eliminated for the majority of expats. But Congress would need to flexc its muscle and mandate the Secretary act which could be included in a Budget Bill.
Because a FBAR is not a revenue generating form going forward it would actually save the government money and further allow them to concentrate their resources on a smaller haystack.
@Anne Frank, perhaps three or five years would be a sensible compromise. I really like this thread and your proposals. However, I would like the option of having one’s US citizenship restored for those of us who were essentially forced to expatriate in order to live a normal life….
I am hoping and praying that the Republicans will at least give us that choice if they do indeed reform the tax system to our favour.
@Monalisa….the gauntlet is that it must be something that can be placed in a Budget Bill so it must start in the House, then as a Budget Bill it only needs 51 votes in the Senate not 60, then it has to be an item that POTUS will not care about.
That cuts down what political allies can hope to achieve.
@George, I realize this and am just expressing sentiment; the harsh reality is that I had to make a ‘Sophie’s Choice’. In an ideal world, I would have preferred to keep both citizenships, because I have strong attachments to both countries but I did what I had to do to survive. It still seems cruel though.
@George,
Yes, I have been discussing with folks in the U.S. what might be doable during the next two years in Congress. I think that it will be a small step.
But on this, there is no debate in my mind: Congress will want to see the numbers showing the effect of the legislation on revenue.
All good comments so far, but keep a few things in mind:
1. Hardly ANY good ideas, even with an energetic sponsor, become law unless there are big money special interests pushing hard. That is simply not going to happen here.
2. Ten years is a long time, not getting penalty money back is a bad thing, not getting citizenship back is a bad thing. All good points. However, my governing principle is keep it simple, find the lowest common denominator and sell it. It will be tough enough to get something done – if one tries to get an ideally balanced, fair provision, you will be decades or longer waiting. Ten years is intended to be a long time. The “accidental Americans”, Calgary 411’s disabled child, people who have lived all or almost all of their lives outside the US and find themselves with unexpected and plainly unfair threats of penalties, fines, jail etc – these are easy stories to tell and easy stories to garner sympathy and a will to act. They also happen to be the story of probably 90% or more of the people impacted by this sorry mess. The reason I picked ten years is because THEY did – that was the original “tax slavery” period they picked back in the 90’s. As well, it used to be the road to citizenship (I think it is five now). It is a round number and will make red necks and short attention span types comfortable that no fat cat is going to be able to “pull a fast one” and get away with murder. They can put exit taxes etc in place if they want, but eventually, people can get out. And don’t forget – exit taxes are not intrinsically evil. If you have capital gains tax – and almost every jurisdiction does, you need something to capture gains when people leave the tax net. Canada has that, most countries do. Recent expats will find the road a little rocky, but it will be better than it now is and after a total of ten years abroad, they can be free without having to renounce. A huge improvement over the status quo. I don’t think we could sell a time frame less than ten years, I don’t think you will get bi-partisan support easily to restore citizenship (remember all the “don’t let the door hit you on the way out” comments on all those media blogs?). For the same reason plus fiscal restraint I don’t think you get support to refund money taken under current law. They may change their policy, they won’t apologize. As I said before, the perfect can be the enemy of the practical and this is one such case.
3. Stephen – I hear you re revenue neutral and I think this covers the bases. IRS and State will save money. State claims that renunciations STILL cost money – well this will lessen their case load pretty substantially. IRS has no agents able to help anywhere near the number of expats that FATCA is sending their way and they are continually coming up with amnesty programs designed to weed out most of the middle-class types (who are most of the work) from their in-basket. FBAR’s and FINCEN reports from people they have no tangible real interest in is simply more paper (or electrons) to process, audit, file etc -all of which consumes administrative overhead. This HAS to save them a material amount of money on administration at home and abroad. As far as revenues go, I am pretty sure that removing the capacity to levy fines and penalties by removing the red tape requirement that gives rise to them would never be called a “cost” in CBO’s lexicon. If eliminating red tape is going to get accounted for as a cost simply because fewer people will run afoul of regulations that are no longer exist – well, heaven help them! As for pure tax, almost no revenue has been raised from CBT in the past on a net basis. Their tax treaties are intended to eliminate almost all of the taxes anyway. FATCA was intended to catch fat cats working in the US and hiding money abroad – they can still do that (as dumb as their chosen method may appear to us). I am pretty sure that CBO would budget about zero revenue from long term expats given earned income exemptions and foreign tax credits. I would love to see their numbers if they tried to claim a reform such as this would have a “net cost” that had to be covered somewhere else.
The more I look at this, the more I think it could be sold as something narrowly-focused on a group that nobody has any reason to dislike. Ordinary folks are just by-catch in this little PR war. We all have views on a host of different matters, but I think a laser-focus on something this narrow will put opponents in a hard spot: there is nothing to criticize here. If they don’t want kids born abroad to have citizenship, change the law, don’t tax them till they drop it!
LITIGATION. Minority views are by definition minority. Hence, difficult to pass in “democracies”
Litigation is probably cheaper than legislation, which takes lobbying.