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.
Foo earlier I had suggested the elimination of the savings clause as step one of a fix
With that I would pair a requirement that the secretary starts eliminating countries for thar that have amp standards equal to the usa
@George
Your interest in the ancient history of how FBAR came to be is admirable.
However, there may be an important piece to the puzzle that many opponents of FBAR seem to overlook.
The BSA legislation was in two parts. One part related to financial institutions and was supported by a Congressional finding embodied in the legislation itself that what Congress decreed with respect to its reporting requirements imposed on financial institutions that such reports would be of great benefit to law enforcement.
That finding, however, did NOT apparently apply to the other part of the BSA, the part that included the statute that you cited (31 USC §5314).
The government purpose rationale for reports required of individuals (e.g. FBAR) by that statute were – arguably – dependent upon a finding by the Secretary of the Treasury that such reports – like those required of financial institutions – would be highly useful for law enforcement purposes.
Shortly after the BSA legislation passed in 1970, the Secretary of the Treasury proposed a “finding” by his agency that the reports (including FBAR) would indeed meet the test of law enforcement usefulness.
Although notice of that proposed finding was duly published in the Federal Register there were apparently no hearings conducted and virtually no written comments were received. As a result the Secretary’s “findings” were made final in early 1971 and have remained unchanged – and uncontested – for 43 years:
http://www.law.cornell.edu/cfr/text/31/1010.301
The question that anyone mounting a constitutional challenge to FBAR or even a challenge to the proportionality of a proposed “offshore penalty” for its violation is, in my view:
1. Is the finding by the Secretary embodied in 31 CFR 1010.301 a legal predicate to the validity of the regulations requiring the FBAR?
2. If so, was the finding by the Treasury Secretary accurate in 1971? Was the finding in 1971 based upon any evidence? If so, what was that evidence? Has the history of the FBAR since 1971 produced any evidence that the contents of the reports themselves were ever of ANY usefulness to law enforcement much less highly useful?
3. If it can be shown a) that the Treasury Secretary’s 1971 finding was based on nothing more than hypothesis without any empirical evidence (or logic) to support its purported high degree of law enforcement usefulness and b) there is nothing in 43 years of its existence to indicate that any law enforcement agency finds the CONTENT of the FBAR reports of any usefulness, then one could make the constitutional argument (“substantive due process”) that the FBAR requirement is not rationally related to any valid state purpose and/or that its factual predicate for validity has never been sufficiently met.
4. Last but not least: For those bold enough to challenge an FBAR penalty asserted against them, the evidence of the 43 year record of law enforcement USELESSNESS of the contents of the FBAR would be directly relevant to the proportionality of punishment test required under the 8th Amendment.
I was hopeful that the Zwerner case would raise these issues but from what I can gather from the jury verdict, Mr. Zwerner’s lawyers either did not understand any of this – or disagreed with it. In my view, there is simply no way a jury could have come to the verdict they did in the Zwerner case after hearing evidence of FBAR’s 43 years of pointlessness and law enforcement uselessness.
They may have imposed a penalty but it would have been comparable to a parking ticket.
Pity.
They are useful because they don’t need to have any evidence of any tax wrongdoing to give an FBAR violation. The only crime necessary is that a form isn’t filled out.
This was just an easy way for the US to collect money from someone who had been labeled a bad guy. It was passed by people who admired the takedown of Al Capone by tax laws.
The initiators were happy that bad guys didn’t need a trial—they just needed to be found to not have filled out a form. Whomever was to be labeled a bad guy could be gotten. Perfect tool for a government.
Law enforcement pretty much ignored it for 40 years until Obama Barack, Sen Carl Lenin, and the Dick Harvey teamed up. They just dug up an old law, dusted it off, and put it out there.
They created a huge hullaballoo about it being about tax evaders. When, it is just a different way to get money by stealing it from expats,
In order to implement it and to crush opposition, they transformed all United States Citizen Expats into Tax Evaders and Traitors. Box sealed. Government wins. Citizens (persons) lose.
Besides Fbar penalties- then they proceeded to confiscate something between 20 – 30 – to the threat of 50% of a US person`s assets!!! I`d like to see a homelander accept the likes of that as “fines”. These are punitive laws that have grown monstrously out of proportion and been implemented since 2001 AND NOT BEFORE. Whoever thought this all up was not even thinking of taxes. It wouldn’t have been lucrative enough to justify the work involved and those expenses. FACTA is really only a tool that is worthwhile for collecting those out of proportion ( UNCONSTITUTIONAL) penalties.
I could be wrong but isn’t it possible that all of this talk and focus on revenue neutrality is nothing more than a red herring, that is designed to string us along? Is it really nothing more than an attempt to engender and exploit a sense of guilt and obligation where none should exist?
The focus is always on revenue that is not taken in. Never do I see that monies not expended are thrown into the equation. How is it fair that a U.S. person can be raised overseas without the benefit of any U.S. budget appropriations for education, health care, roads, food subsidies, etc. and suddenly at the age of 18 be a revenue loss for the U.S. tax system if taxes aren’t filed.
In other words this whole conversation is skewed to favor taxation without question. The per person expenditures that the U.S. avoids should also be a part of the equation.
As for whether or not the U.S. should have the right to follow an expat for a purely arbitrary period of time I still say, NO. Once a bill is paid, including a tax bill, then the connections are severed. If the government feels that the tax collected was inadequate then that is too bad. Unless the government can prove that the tax filings were false then it has no recourse. The government has no right to dog someone.
@recalcitrantexpat. How about the cost of implementation for FATCA? Since there was no cost/benefit analysis, why is there one-sided talk about revenue?
Commenting on a few comments:
1. There are still a few typos, but I think sending this proposal along to Republicans and Democrats abroad (I don’t belong to either and can’t keep their names straight) as well as Americans Overseas and anyone else who is interested would be a great idea.
2. I truly believe the Congressional Budget Office would find this to be revenue neutral since they collect so little to begin with (excluding fines and penalties which can’t figure into a revenue neutral calculus). Indeed, if the law were perceived as remotely fair and reasonable, and a proper “Canadian-style” exit tax were fashioned to capture accrued capital gains of departing residents (which is a logical and necessary element of a tax system with a capital gains tax embedded in it), they would very likely capture MORE tax than they do now. At present, US citizens who leave later in life with savings in tow have no obligation to pay capital gains tax when they move and then slowly but surely disappear from the radar screen and likely never pay capital gains tax on their accrued gains. They are a minority of expats to be sure (when contrasted with life-time non-residents born outside the US or who emigrated as children and those born to US citizens abroad), but the tax take from this group is doubtless tiny at present. A fair and reasonable system can actually be administered without resort to nuclear enforcement weapons like FATCA, FBAR etc.
3. Abolition of housing and earned income inclusions: I can’t comment as I barely understand them. I know the FEIE is mostly useless to pensioners since their income is not “earned” in the eyes of the IRS (just try telling that to a pensioner and see how long you last!). By and large, I would expect the foreign tax credit to capture most of the double taxation issues for most people most of the time if they live in an industrialized country.
4. Amnesty – as drafted (and it likely needs tweaking by a US lawyer, to be sure), the proposal grants a blanket amnesty for everything and everybody after ten years as a true non-resident. For people abroad most of their lives, that is a complete amnesty. For people who emigrated as adults with a US earning history a long time ago, it is practical but not complete amnesty. There may be no limitation period at law, but I can’t see Treasury going after FBAR’s from 1990-1994 for someone who has been abroad for 25 years and never owed taxes anyway. I could be wrong, but they will have neither the data nor the interest. Even recent emigrants will be part way down the ten year road already.
5. The ten year rule is not perfect, but I think it something that Homelanders might actually be persuaded to buy into if they focus for 10 seconds. They want to get at Mark Rich and Eduardo Savarin. They don’t want Tricia, Ginny or Calgary411 or any of the rest. If someone has left in the last ten years, they have at least a better chance at resurrecting the records needed to “come into compliance” and have a pathway to freedom that does not involve being forced to walk the citizenship gangplank involuntarily. Expatriation is a RIGHT not an OBLIGATION. That ought to be the underlying principle of a republic that flings about the word “freedom” with such reckless abandon. I totally agree that if you were to come up with an expatriation regime for tax purposes after calm reflection, you would end up with something like, well, the rest of the world, and that wouldn’t be ten years. I just don’t think the Congress is capable of that much mature deliberation when such a sizeable portion of their voters are as xenophobic and hostile to expats as is currently the case. I opted for an “out of the box” solution that is already in the US Tax Code and doesn’t need to be explained to anybody. You could tweak it by, for example, adding a requirement that the person be a resident for tax purposes of another country for that same ten year period – that might be politically popular but would actually create a host of corporate tax issues that I am just not familiar enough with to open up that can of worms. So I just defaulted back to the existing substantial presence test knowing that almost everyone impacted by FATCA and FBAR can pass that test.
I know that my initial comment on this proposal was positive but I can no longer endorse it. The proposal is too far from what is needed. I see no reason to appease the tyrants in Washington or the expat haters on the street.
Personal rights and U.S. theft from other countries must not be accepted.
Would 8 years instead of 10 be an improvement? It still sounds mighty long so might still be palatable to homelanders.
Nope. A one time Canadian style exit tax is all that is needed.
I agree with recalcitrantxpat. Let’s not forget that the Republicans have adopted RBT as part of their platform. Why throw in the towel so quickly? This is the time to make the case for RBT rather advocate for CBT-light.
@recalcitrant:
The revenue-neutral issue is real, and not just a smokescreen directed at us. Congress has adopted a rule that any change to the laws has to be at least revenue-neutral, if not revenue-positive. This may end up putting money above morality, but that is the way it is. It is one of the few levers of control they have over their whole dysfunctional budgeting process, so I don’t expect it to go away any time soon.
@Anne Frank:
The FEIE and FHE are perennial targets for elimination anyway — everyone in Congress wants to kill them off. So adding it to your package would increase the appeal on that basis, and help with the revenue issue, which would reduce objections.
There should probably also be an option for someone to choose to remain being treated as a US tax resident after 10 years, if they want. For example, for someone who only expects to be abroad for 11 years, then retire back to the US, this might be a less disruptive option for them. Especially if a deemed-disposition exit tax accompanies the loss of tax residency.
@Anne Frank
Bravo for your direction. Please develop further.
I am not sure what you were expecting here. Was it to rally the troops around a particular direction? I see you have lots of comments from the community. You may have to lead on this one like Isaac Brock did in the end to see it through to success.
As mentioned earlier, I would like to see such proposals and even letters developed here with the help of the community. Ideally there would be some mechanism like Wikipedia that a proposal goes up, perhaps in a sidebar, and community members may edit and refine- kind of open source thinking/development.
Back to your proposal. I see it as an improvement over the existing situation so in this regard I favour it. I believe your aim is get something practical through the US government over the next two years and even get Obama’s signature on the legislation. Meanwhile, the legal battles will progress.
I agree with those here who say it does not go far enough. One little fear I have is that we get this 10 year exemption through then would this be a potential block to further reform. Some in Congress may say we gave you the 10 years but now you want more (you just can’t keep coming back asking again and again). Perhaps it would be better to charge forward than dither.
Practicalities. 10 years. How it would all work. Would there need to be some sort of CLN (COSUS10 Certificate of Outside US for 10 years) document that acknowledges that you have not resided in the US for 10 years? Then you would share this with your financial institutions and employer and then would this relieve them of FATCA obligations?
Let say you are an accidental. Will Uncle Sam just grant you one of these COSUS10 if they have no paper trial on you without a stack of forms/compliance?
Would banks who had policies not to accept US citizens as clients then recognize this and accept these COSUS10 people as customers? How about employers? Employers may be more sympathetic to this as with employment there is more of the view of what you may do for a particular manager compared to bank thinking with lots and lots of customers – they may not care about an individual customer.
With COSUS10 then the US would need to consider this as part of its definition of a US Person. Banks may fret the threat of the US just changing all the laws at their expense in future. Yet, it could all be backed up by slipping in anti-discrimination clauses into the IGA’s – which really should have the teeth of if you discriminate against US Persons/COSUS10 persons then we will shut you out of the banking system (called using US financial imperialism to the advantage of US persons overseas).
Every/Any break we get I would feel more comfortable if they were guaranteed in the tax treaties.
I like your other proposal in the comments: go after the low hanging fruit/ easiest to justify a change – exemption for Accidental Americans – get concessions here and then this will start the wedge to unravel CBT. Maybe go after both at one time.
Here is a nice one I heard about recently. We pay tax for the potential of receiving US services in the future, but if say you retire to the US, you would need to live in the US for 5 years before qualifying for Medicare.
@Annefrank
I also thank you for your proposal and efforts in finding solutions.
But I diagree again that the USA is only looking for the Savarins and not Trisha or Ginny. What matters is that there are MILLIONS of Trishas and Ginnys. That adds up and that brings in a lot of revenue- perhaps more so than one Savarin.
(And it galls me to no end that people are taxed who get nothing from America and therefore should owe nothing to America. Its is really not “tax” – it is “confiscation”.)
Thanks for all the input, JC.
I have NO idea, but would a route be to run Anne Frank’s proposal to the Canadian and U.S. legal teams (our government representatives?) rather than having “Anne Frank” leading?
A couple of thoughts.
For someone born abroad, a required paper trail for the concept of a “COSUS10” would be similar to the paper trail needed to even get a U.S. SSN to then be able to renounce a US-defined U.S. citizenship — if a person had the requisite ‘mental capacity’.
http://en.wikipedia.org/wiki/Medicare_%28United_States%29
More good talk at RO Facebook page:
https://www.facebook.com/republicansoverseas
“Chairman Priebus supports Republicans Overseas’ proposed RNC resolution opposing GATCA (OECD’s Global FATCA) during the RNC Winter meeting in order to build a broader coalition against FATCA. GATCA violates 318 million Americans’ privacy rights on the stateside. In order to repeal FATCA legislatively, we need to make sure that your fellow countrymen in the states understand and care about your issues. If Obama implements FATCA per OECD’s statement of the US will be undertaking automatic information exchanges pursuant to FATCA starting in 2015, your countrymen will soon experience FATCA tyranny first hand.”
Perhaps your proposal, Anne Frank, might be shared with American Citizens Abroad (ACA). I understand ACA is revising its proposal for a form of residence-based taxation. ACA has good legal advice, and your suggestion would, I’m sure, be given attention.
Sue L,
I have passed Anne’s thoughts on to the ACA.
Petunia says: “Why throw in the towel so quickly? This is the time to make the case for RBT rather advocate for CBT-light.”
I agree. We all know that ripping off a bandage is painful for an instant but there is quick relief. The alternative is slow agony. The situation as it stands now is just plain wrong. We need politicians who are willing to step up to do what’s right and to rip out this cancer of CBT once and for all. It seems we have such people ready to take the reins in Washington. Let’s encourage them all we can to get the job done. I agree with Anne Frank that the time and opportunity for this is NOW.
But all this strategizing to get to an acceptable bottom line for the US government needs to be overshadowed by one premise: it is wrong to tax people who do not live within the borders of the taxing country. The new laws simply must embody this moral basis. No phasing in over 5 years or 10 years. None of this “we’ll adopt some morality now, a little more in 5 years and then in 10 years we’ll finally have it right.” If there is going to be transitional pain for the US government it is to its advantage to make that pain as short as possible. Rip off the bandage!
That is a very good point. The whole concept of “revenue neutral” is a complete farce. The term is actually a euphemism for Congress’ belief that they can sell to the American people the idea that there is a “free lunch”. In other words your Congressman can vote for extra spending and somehow come up with a way to fund that spending without increasing taxes on you. Taxes will always be raised on the “other person” but since the overall tax take hasn’t increased then they in fact haven’t been raised at all. Revenue neutral is political slight of hand.
Raising taxes on those who can’t effectively present any political opposition to your re-election prospects is the easiest thing to do and the most cowardly. Taxes raised on expats are nothing but pure gravy for the U.S. The U.S. government has no legal or moral right to use U.S. persons to extract revenues from other countries. Nor does it have a right to extend its laws beyond its borders.
@AnneFrank- the proposal is a complete capitulation. This is not at all what the fight has been about and it will essentially get expats no where. It is unfair that anyone born outside of the U.S. been ensnared in a tax grab by the U.S.
It is unfair that expats financial accounts be viewed as foreign accounts by the U.S. or in fact that the U.S. think that it have the right to classify these accounts. And then to classify their income into earned and unearned etc. To subject them to taxes to fund programs that they can not benefit from. To effectively bar them from employment overseas by effectively negating their earnings opportunities is not acceptable. That the U.S. does do so at all is only more evidence of how stacked the U.S. tax system is against expats and the determination that the U.S. has to make sure that no one escapes the clutches of Congress. The comparison of the U.S. and the abusive spouse is a most apt comparison. If a country of 330 million people is so obsessed by the extraterritorial residence of 7 million then that country has a real personality disorder and should go for psychological treatment.
@foo- the simplest answer is to be RBT or a VAT. Taxes should only be collected within U.S. borders. It is as simple as that.
@JC- so your answer to U.S. extra-territorialism in the FATCA law is to be even more extra-territorial? Putting an anti discrimination clause into the IGA’s would not be of benefit to expats so much as to the U.S. government. Right now the effect of FATCA is going to be a scorched earth policy that will remove expats from the world. And of course if expats are removed then FATCA becomes an empty shell and the U.S. can’t collect foreign tribute. Also how can the U.S. have the right to effectively write the charters of every FFI? Your idea may be sincere but it is illegal and immoral. It is more U.S. unilateralism when U.S. unilateralism is the problem.
If you think that the U.S. can use FATCA to be the expat’s friend then you are seriously mistaken.
Last of all I would like to say that any proposal that is put through with the idea that it is acceptable to get a little now and hope for more later is purely self delusion. Do you seriously think that anymore would be given later? Where the war has to be fought and won is on the issue of the illegality of CBT. Expats are simply not a part of the U.S. tax system. They receive no benefits and the U.S. expends no revenue on them. Expats are none existent in the U.S. budget and political process.
The fact that FATCA takes over 500 pages is a statement to the fact that not even Congress knows what the law is all about and is only trying to hide their ignorance.
@Calgary411- so what the law says is that the “residency” that the U.S. uses as a pretext to justify those who aren’t physically resident in the U.S. is not really residency at all. And yet expats are charged real taxes on what is a pseudo residency and the U.S. realizes that this tax residency isn’t real but fake.
So you need to have actual residency in order to benefit from previously paid real taxes. This isn’t exactly consistent. Since the residency of the expat is asserted then government services should be immediately rendered based upon that tax residency. So self serving of the U.S. government.
@MuzzledNoMore- agreed. No half way measures.
@recalcitrantexpat: 11:27 and MuzzledNoMore – extremely well said.
Thx recalcitrant. You worded it well.
The proposal would be such a slap in the face of those who have been raped by the system and then told they have no means of ever being heard or gaining justice.
What about a tax for those who want to return and use the system there then?
Yeah – and the part about “revenue neutral”….loved that.