Via TaxProf Blog, we learn that National Taxpayer Advocate Nina Olson has released her 2016 Report to Congress. Like earlier reports, this one continues to identify FATCA and related problems as being among the “Most Serious Issues” encountered by taxpayers, and dares to make the most mild suggestions for improvement, which the IRS will undoubtedly ignore, as they have since 2012.
The IRS has adopted an enforcement-oriented regime with respect to international taxpayers. Its operative assumption appears to be that all such taxpayers should be suspected of fraudulent activity, unless proven otherwise. This assumption results in the IRS ignoring stakeholders, dismissing useful comments and suggestions, and misallocating resources.
More quotes after the jump.
Same Country Exception
The Same Country Exception (SCE) represents the tiniest amount of relief that the IRS might provide to U.S. Persons in other countries who have been negatively affected by FATCA. Olson continues to call on the IRS to implement the SCE (p. 225):
As a recommendation to help solve this problem and minimize the burden of FATCA compliance for both individual U .S . taxpayers and FFIs, the National Taxpayer Advocate previously proposed that the IRS and Treasury adopt a “same country exception.” This exception would exclude from FATCA coverage financial accounts held in the country in which a U.S. taxpayer is a bona fide resident, would mitigate concerns about the collateral consequences of FATCA raised by U .S . non-residents, and would reduce reporting burdens faced by FFIs. No action has been taken by the IRS or Treasury with respect to this recommendation. This idea of a same country safe harbor has also been placed before Congress by the National Taxpayer Advocate, American Citizens Abroad, and Democrats Abroad. The National Taxpayer Advocate reiterates her recommendation that the FATCA regime incorporate a same country exception.
Contrary to Olson’s statement, action has been taken by Treasury: they have told the diaspora to go take a long walk off a short cliff:
The information reporting required by FATCA is intended to address the use of foreign accounts to facilitate tax evasion, and also to strengthen the integrity of the voluntary compliance system by placing U.S. taxpayers with accounts held with FFIs in a comparable position to U.S. taxpayers with accounts held with U.S. financial institutions. This is the case even for U.S. taxpayers resident abroad, since U.S. citizens and U.S. resident aliens are subject to U.S. income tax on their worldwide income regardless of where they reside and regardless of whether their accounts are maintained by U.S. financial institutions or FFIs. The Treasury Department and the IRS have also decided that the risk of U.S. tax avoidance by a U.S. taxpayer holding an account with an FFI exists regardless of whether the U.S. taxpayer holds an account in his or her foreign country of residence or another foreign country.
Brockers have criticised the SCE — in particular the implementation suggested by American Citizens’ Abroad, whereby U.S. persons would have to provide their U.S. tax returns to their “foreign” financial institutions — as no better than being “strip search[ed] in the bank lobby“. Whether or not the SCE would be better than nothing, Treasury refuses to provide even this tiny morsel of relief to the diaspora.
Banking issues and renunciations
Further down on the same page:
In a recent survey of U.S. expatriates conducted by Americans Abroad Global Foundation and the University of Nevada-Reno, 91 percent of respondents indicated that FATCA compliance placed them at a disadvantage compared with ordinary citizens from their country of residence. Further, 86 percent articulated the belief that the law should be revised to reduce some of the associated burdens by adopting a “Same Country Exception.” The survey report concludes, “There appears to be a consensus among many respondents that their government does not recognize how the FATCA legislation is negatively affecting them and limiting their ability to maintain banking and financial relationships. Most feel that their government is not doing enough to try and address their concerns and problems.”
Perhaps because of the perceptions expressed in the University of Nevada study, along with other reasons including banking lock-out and the additional compliance burdens imposed by FATCA and related information reporting regimes, the number of expatriates renouncing their U.S. citizenship has continued to rise. In calendar year 2015, a record 4,279 individuals renounced their U .S . citizenship or long-term residency — a 25 percent increase over 2014, which likewise had been a record-breaking year. As explained by one expatriate, “If it weren’t for FATCA and the decision by the bank [lock-out], I’d never be doing this.”
Olson cites the error-prone Federal Register Quarterly Publication of Individuals Who Have Chosen to Expatriate for that 4,279 figure. The FBI actually added 5,426 records of 1481(a)(5) renunciants to the National Instant Criminal Background Check System (NICS) in 2015 — and NICS doesn’t even include 1481(a)(1) through (4) citizenship relinquishers. Comparison of media reports on names individuals giving up U.S. citizenship to the Federal Register list suggests that the IRS has been dropping large numbers of names since 2006.
Passport revocation
Olson also touches on the disproportionality of passport revocation as applied to U.S. citizens in other countries (p. 226)
Another enforcement provision that exacerbates the disproportionate burden on expatriates is the recently enacted law allowing for the revocation or denial of passports for taxpayers who owe the IRS more than $50,000. For U.S. residents, the lack of a passport typically would constitute an irritation; for expatriates, however, it could represent a crisis: “Americans abroad need their passports for many routine activities of daily life, such as banking, registering in a hotel, or registering a child for school, and mistakes could be disastrous.” Additionally, concern has been expressed regarding potentially dangerous in-country events or circumstances to which expatriates might sometimes be exposed because of passport revocation.
The IRS is currently developing processes and procedures relating to the implementation of this additional tax enforcement mechanism. In this process, the IRS should learn from its experiences with Chapter 3 and Chapter 4 refunds and carefully coordinate and collaborate within its own Operating Divisions and within the Department of State. Moreover, the IRS should protect the rights of taxpayers by, among other things:
- Broadly interpreting hardship and other discretionary exclusions;
- Providing an administrative appeal before certifying a “seriously delinquent tax debt” to the Department of State;
- Encouraging the Department of State to adopt expansive definitions of humanitarian and emergency exceptions; and
- Informing the taxpayer of the availability of TAS assistance before passport revocation or denial occurs.
Great care should be taken in the implementation of this law to ensure that its application is reasonable and proportionate with respect to both U .S . citizens residing abroad and in the United States.
See our previous posts on passport revocation for further information.
International mailing delays
The report also touches on international mailing delays and difficulty in obtaining assistance outside of the U.S., which results in difficulties for U.S. persons who face extremely tight deadlines for filing appeals (p. 393):
Taxpayer, a U.S. citizen, relocated to China to assist her company in opening an office in Beijing. The taxpayer properly notified the IRS of her new address before moving abroad. She timely filed her U.S. tax return. On June 5, the taxpayer received a math error notice from the IRS; the notice was dated April 18. The taxpayer found the language in the notice very confusing and did not understand what was wrong with her return. The taxpayer attempted to call the IRS over the course of several days. After a lengthy wait on hold every time, however, the taxpayer was disconnected and could not reach an IRS representative. Next, the taxpayer attempted to find an accountant or attorney in Beijing who specialized in U .S . tax law. With only nine days to respond to the notice, however, the taxpayer was not able to find assistance. Her time to request abatement expired and she was assessed additional tax. The taxpayer lacks financial resources to pay the tax and then pursue refund litigation in district court or the court of federal claims.
Brockers have reported extreme delays in receiving mail from the IRS. I am of the opinion that this is a systemic and deliberately-created problem. (I have never even seen a notice from the IRS where the envelope has a franking stamp with the date on it, suggesting they are trying to conceal the extent of this issue, though Norman Diamond notes that some letters he’s received from the IRS do have date stamps on the envelope.)
Although a lot of what the NTA says is music to many of our ears, her job is to find the best way to enforce CBT. Full stop.
“There appears to be a consensus among many respondents that THEIR GOVERNMENT does not recognize how the FATCA legislation is negatively affecting them and limiting their ability to maintain banking and financial relationships. Most feel that THEIR GOVERNMENT is not doing enough to try and address their concerns and problems.”
Even in “helpful” comments the arrogance permeates… the only permissible perspective is that the U.S. government is THEIR GOVERNMENT.
This has been going on so long I’ve forgotten it was me that wrote those words
Yes, CBT is the root of the problem. The USA still doesn’t recognize that the vast majority of expats are not wealthy tax cheats. They simply have moved to another country and no longer live within the boundaries of the US. The lucky ones have become citizens of their new country with the ability to renounce their unfortunate US citizenship. Even if the National Taxpayer Advocate is successful in getting a few concessions regarding FATCA, it will not change the evil root of the problem, CBT along with the aggressive US approach to anything outside it’s borders.
With 20% late interest fees -why should the IRS hurry? Why should there be a date put on the mail? I have received letters without stamps, and also was asked to pay a lot in late fees although I was timely. The IRS was not.
Here’s my comment on this report from the Media thread:
Here is the last sentence of the Taxpayer Advocate’s latest report: “The IRS could achieve better results and reduce burdens placed on taxpayers and FFIs if it followed a collaborative model of taxation that sought to identify and focus on the relatively few bad actors while at the same time recognizing the good faith efforts of the compliant majority.”
So if we’re not members of the “compliant majority” I guess we’re bad actors. The TA doesn’t supply any other possibility.
And how does she know that the majority is actually compliant? Presumably a compliant individual is also filing his FBARs. How many FBAR’s were said to have been filed a few years ago? … 400,000? Or are we up to a million now? Out of a population of between 8 and 9 million? Doesn’t sound like the majority to me.
Anyone who believes that anything but the US reversal of their exceptional Citizenship-Based Taxation to Residence-Based Taxation (as the rest of the world) will bring those of us affected peace of mind and justice needs to think again. It is obvious to those of us who experience this, one of the worst examples of human rights abuse and discrimination, that based on national origin (however that might have been deemed by the US) as we are taxed differently than other citizens of countries of this world, by our US-deemed US taxation citizenship. That blatant discrimination may be by the US or by our own sorry countries’ governments who support the US over their own citizens and permanent residents who have some US-deemed US citizenship and are, therefore they say, US citizens who happen to abide in other countries. (Canada, as its Prime Minister boasted, but will not stand behind, *A Canadian is A Canadian is A Canadian*.)
Some of us will be able to buy our way out of this through the high cost of renunciation and the high cost of compliance with the help of US tax lawyers and accountants; some of us will be denied that escape from this through lack of financial or other means and must live without many freedoms as we now are criminalized and forced to exist always looking over our shoulders, depending on the country in which we reside; some will always be denied an escape from the absurdity of this injustice by their continued entrapment by lack of mental capacity. There may be American Citizens Abroad suggested alternatives, Republicans Overseas alternatives and those from other organizations, none focusing on the only solution I can see, which is the simple and obvious change to US Residence-Based Taxation. Why is the US so exceptional they get away with this among other abuses?
As I tweeted the White House during their self-aggrandizing #ObamaFarewell crapfest.
Hear, hear, Calgary.
@the Animal
Did you watch the Trump press conference? I saw him refusing to take a question from a reporter because he said he was from “fake news”. I thought he was talking to someone from some kind of fringe network, but no! The reporter was from CNN!
““Americans abroad need their passports for many routine activities of daily life, such as banking, registering in a hotel, or registering a child for school, and mistakes could be disastrous.” Additionally, concern has been expressed regarding potentially dangerous in-country events or circumstances to which expatriates might sometimes be exposed because of passport revocation.””
I’m sorry, but this is BS. Banking, registering a child for school, etc. will be of no concern to any expat who loses their passport. Will out a passport, we have to LEAVE THE COUNTRY WE LIVE IN! NO PASSPORT = NO VISA. Which means “Sayanara” to our families. Unless Japan is unique in requiring a valid passport as a prerequisite for a visa, then USCs living in other countries will also have to leave.
Also notice that the TAS writes, “recently enacted law allowing for the revocation or denial of passports for taxpayers who owe the IRS more than $50,000.” NOT ‘owe the IRS more than $50,000 IN TAXES’. Regardless of any possible legal restraints, I believe the IRS fully intends to fines, including FBAR fines, to revoke passports.
@Calgary
Right on!
I have said that CBT has to be come RBT all along. I wondered about the waste of time lobbying for SCE and all those kind of compromises. But I was told that the change to RBT was out of the question which is why people were trying to find some pathway to change, however minimal or convoluted. America and congress would NEVER change to RBT is what I was told. Perhaps a lot of time was wasted trying to get these things through when the focus of all efforts should have always been RBT. The big question is: will Trump change that? It seems to be a HUGE step for the country which claims to be the world leader for human rights.
I’m tired and I have an ulcer from all this. They can go F**k themselves. See ya Lame-bama.
@Polly, “America and congress would NEVER change to RBT is what I was told. ”
Please allow me to expand on your comment with some thoughts and comments I have been making from the past.
1.) Under President Trump and a GOP Congress FATCA will be disemboweled through the Executive Pen and will then collapse. Later it will be unpicked from the tax code as a lifeless corpse as part of some unrelated legislation as a “clean up on aisle six” exercise. That shall happen……
2.) I had high hope that RBT could be passed but was never sure because of the filibuster rules in the Senate.
But in the last few days I read and studied the RO Proposal on TBT.
Do I believe RBT is the Gold Standard? YES. But I also believe that Irish Butter is superior to Danish Butter yet I do understand that if my partner makes a batch of cookies with Danish Butter I will still gobble them down!!!
What is the difference between RBT and TBT? Very simple, the decision to pass one or the other or neither will be made by 100 Homelanders in the United States Senate and one is more likely to pass than the other.
My SOLE objective is to rid the world of Citizenship Based Taxation meaning that any person who has LEFT the USA and has NOTHING to do with the USA will never ever have to pay tax to that place or to file a single piece of paper with that place, nothing……..
Having said that I would consider RBT or TBT a total VICTORY. I have seen on these boards one problem of allowing other political issues to cloud with CBT/FATCA as in “I hate Trump because he is against gun control so even though he would kill FATCA, he is nasty.” The other problem is Outlanders often never relinquished their US Partisanship. I burned a bridge when I left and my former US partisanship is fully relinquished, I was personally burned by both Bush and Obama.
I do know a thing or two about how Congress works and it is indeed sausage making to write laws. To repeal CBT is going to need support from DEMOCRATS full stop. Most Brockers probably identify with that party and well its the DEMOCRATS who hold the final inch of the legislative process in this regard.
It is Democrats in Congress who caused our problem in the first place and they are the problem in crafting the RBT solution and remember they are being led by Sen Chuck Schumer.
I see lots of people touting RBT…..fine show me how are you going to get the votes? We have to face the music that WE are totally unorganized, millions of expats do not care and millions of other expats want to stay hidden and non-involved!!! Expats and Non-Pats have ZERO political clout in the USA.
IF TBT replaces CBT I can name two families on IBS that will benefit. My family and Carols family will benefit to the extent that they will never have to pay a single penny to that place and never have to file a single piece of paper with that place. UNLESS either family makes a decision to invest in that place or otherwise receives a pension from that place above a certain amount.
Homelanders believe money that is earned in the USA should be taxed in the USA. I think that is reasonable and in fact I am disgusted at multinationals that make profit in my country but pay no tax here!!! I will not use Amazon or Starbucks for that simple reason.
The Democrats in Congress along with the US Media will kill any RBT proposal by using as an example an expat living in a tax free jurisdiction who has all of his money invested in the USA paying zero tax in the USA and zero tax in the residence jurisdiction.
To the extent that TBT creates double taxation, that is NOT a US problem it is a problem in your home country. My country the UK unilaterally provides tax credits against many countries that they have no agreements with and in fact provide UK income tax credits for tax paid to US States!!!! If Canada, Austria, Australia, New Zealand does not do that then its up to their own residents to correct and do what the UK does. OR do not invest in the USA.
Conclusion: Under a TBT model persons in the UK will not have to pay US tax or file US forms unless they invest in the US and if they invest in the US they will receive a tax credit in the UK even if the tax treaty is burned at the stake.
@Brockers @Expat Facebookers, let me play devils advocate for a moment.
Here is an example and I am confident such an example will show up in the media and be used in Congress by Democrats to derail any proposal for Residence Based Taxation.
Joe Smith a US Citizen is resident in Freeport Bahamas. Joe earns $300,000 per year on his funds invested in the USA. Because he is a US Citizen he currently pays over $85,000 per year in tax to the USA.
Under RBT because the Bahamas does not have an income tax Joe Smith will have a windfall and pay zero tax even though he benefits from BOTH US Citizenship and the safety and security of investing in the USA.
RBT will NOT jump over that Democrat hurdle in Congress.
Under TBT on the other hand Joe Smith will still pay the same amount of tax to the USA.
To be honest when you read through the tax treaties I get the sense that some of the writers were at least thinking subconsciously on a TBT basis.
I can not see how an argument can be made to win amongst the 100 Senators with RBT but TBT gets the same results to many expats and is available to all expats if the truly leave the USA.
How would Joe Smith fare under CBT, RBT and TBT if he lived in Folkestone England instead of Freeport Bahamas?
CBT: $85,000 owed to USA $32,000 owed to UK, returns filed in both countries.
RBT: 0 owed to USA, $117,000 owed to UK, return filed in the UK only
TBT: $85,000 owed to USA $32,000 owed to UK, returns filed in both countries.
The move from CBT to RBT would be a windfall to the UK.
The move from CBT to TBT would be neutral BUT Joe Smith could decide to invest in the UK and in that case he would owe the USA nothing and file nothing but be in the same tax position.
Boris Johnson paid US Tax on a London house sale, what was more deplorable; paying the tax on the US citizenship or paying the tax on an asset that had nothing to do with the USA?
Original Recipe George: your points are convincing. I just hope the whole thing doesn’t get subverted and overly complicated. Re: ACA’s departure fee of $5000 to the IRS and such bull.
@George
How would US IRA’s fare for a NRA receiving their pension? Would their resident country be willing to give up their right to tax their resident and give a full tax credit for tax paid in the US? Would all countries be willing to renegotiate their tax treaties to suit the US?
I would not have the choice of deciding NOT to invest there. I am already locked in.
@Surely TBT could also cause a loss of investment in the US. Those residents of low or no tax countries would not choose to invest in the US markets if territorial tax was applied to their US investments.
Heidi: indeed. TBT might work better if it was a concerted multinational effort. As the proposal stands it looks like yet another unilateral move by the US and the rest be damned. If others don’t follow, someone gets hurt. As for Trump and the GOP, they may be more business friendly and open to FATCA repeal, but they still don’t care about the rest of the world.
Nevertheless, as George the Optimist describes it, it may be better than nothing.
@Fred
“As the proposal stands it looks like yet another unilateral move by the US and the rest be damned”
Exactly.
I think that TBT is fine for corporations, where both company and workforce are physical present, but for the individual who is not physical present where being taxed, it really would need to have all tax treaties renegotiated.
As George said he would not invest in the US under TBT and neither would a good many others! Surely it would result in a loss of investment for their markets.
Ok folks, there is a new term here, TBT. What is it?
@ Japan T.
OIA (only in America) as a British friend always remarks,we now have a proposal for TBT (Territorial Based Taxation)
@ Heidi
Ah! Thanks!
BTW, What would these proposals do to the FBAR requirement?
@Japan T
As George mentions above, it is a Republican’s abroad proposal. You would have to read it on their site.
I do not think it mentions their plans for fbars.