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.
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.)
@All….back in the day when ADCS was doing its fund raising there were plenty of nay sayers around here and elsewhere.
I remained FULLY optimistic, Fully supportive and encouraging all the way to the efforts of the plaintiffs, the witnesses and the ADCS team. THEY were doing heavy heavy lifting to help and when another human being is doing selfless service to help I refuse to engage in any effort to belittle or discourage them.
I applaud ADCS Canada.
I applaud ADCS with the USA cross border action.
I applaud Republicans Overseas.
I applaud Keith Redmund.
My heartfelt thanks to all the above, none and I repeat none of them are bullshitters.
My sole discouraging remark to Team ADCS is that the litigation may be rendered moot because of political events in the USA!!! We may have FATCA gone before the Court Case starts!!! If thats being a discouragement then my apologies.
I do not think they are bullshitters either, but TBT for individuals would come as an edict from the US ,where other countries would have to renegotiate a tax treaty
It is not simple, like the US coming into terms with the rest of the world re RBT.
TBT for corporations where the workforce are physically present in the country where the tax is applied is really the only logical future for tbt
Pacifica. Thank you Will try.
My country already has a negotiated tax treaty for my IRA.
I cannot redeemed by IRA, it is a university fund and locked into a yearly distribution.
@ DoD… A friend asked for an appointment in July. She was recently contacted with a date for March for the Calgary Consulate. I was shocked! I asked for a date, had an immediate reply, was given (2) choices for appointments. I renounced four months later, but I could have renounced sooner given the dates I was offered. Something changed in 2016. I am hearing that lots of people are waiting long periods to renounce and often left in the dark for months after the initial contact with the Consulate.
I imagine Trump’s election is creating the stampede to the door, and that they are completely unaware of the Republican platform that promises to repeal FATCA and CBT.
…just as Americans are supposedly stampeding out of the US, completely unaware of what awaits them taxwise.
The main problem with this TBT proposal is not the first-order effect that it would raise taxes dramatically on non-resident aliens by unilaterally overriding practically every tax treaty in existence (though this is indeed a pretty large problem).
No, the main problem with it as it stands is the second-order effect, that this aforementioned and huge tax hike on foreigners would cause a giant suck of foreign money out of the US as people manoeuvre to avoid it, and the US simply could not afford that since it relies on foreign money. Congress, while idiotic on many levels, is not so stupid as to fail to notice this as a fatal flaw in the proposal.
You said it yourself: “Simples, Do Not Invest in USA”. Simples for individual investors maybe, but a huge headache for congress when investors exit US investments en masse, and so not something congress is likely to accept.
Guess I really don’t care if non-US-residing, non-US persons invest in the USA (it’s THEIR choice) but if it looks like the proposed TBT rules are resulting in a drain on the US economy the IRS (with congressional approval) can always lower the tax rate to the point where outside investors will continue to participate and the US treasury can still feel like it’s getting a “fair share”. If I was using ANY country’s economy to create a gain for myself (including and especially Canada) I would expect to be taxed by that country on that gain. In Canada, tax due on investment gains can be mitigated to a point by the standard deduction which I realize is not available outside Canada. That makes me think there could be another possibility for mitigating the perceived adverse effects of TBT. The USA could offer a standard deduction for non-residents when they file the 1040NR to report their US investment gains. That would help out those with lower income levels at least. Perhaps home country tax credits for US taxes paid would not even be needed then. I don’t know … I’m so confused by cross-country taxation that I could have this all messed up in my mind. I would only want things to be simplified, rather than the tendency to increase the complexity.
The OECD writes that on average, inwards foreign investment reduces by 3.7% for every 1% increase a country makes to its tax rate on these investments. The range of actual outcomes is large, running from 0% all the way to 5%, but given that the proposal here is for the US to raise the capital gains tax rate from 0% to 30%, to raise the interest tax rate from 0% to 30%, and to raise the dividend tax rate from (generally) 15% to 30%, the broad-brush approach being taken suggests that effects are unlikely to be small.
What rate to set, if less than 30%, comes down how much inward investment the US can afford do without, and where on this 0%-5% elasticity continuum it believes that it lies. (For reference, 30% multiplied by the 3.7 average is 111%!)
Well I certainly don’t know what rate would work. There are people who understand this sort of thing and have access to handy-dandy algorithms who could probably figure it out though. Those are interesting OECD numbers but wouldn’t individuals with money to risk in an investment simply weigh — amount expected as gain in home country minus home country tax — against — amount expected as gain in US minus US tax — and then base their decision on that? It’s possible, depending on how much more lucrative the US market is, that even at 30% an individual would end up with more in their pocket by going with the US investment. However I have no idea if this is the case or not.
“…just as Americans are supposedly stampeding out of the US, completely unaware of what awaits them taxwise.”
I have a grim satisfaction of seeing their panicked faces when they find out that there is NO escape from #FATCA #FBAR and that they’re screwed and they were the one that voted in the assholes who did that. Poetic Justice. Now they get to experience the pain that they inflicted on others so willingly.
Awful thought came to me. What if TBT versus RBT is a divide and conquer tactic to keep CBT in place? I think my head is going to start hurting soon. Anyway it’s just a proposal, not a sure bet for enactment because there are big question marks about what the next US administration will do. Such is the degree of uncertainty that has been created on this very troubled planet. How I wish I could just quietly slip-slide into a kinder, saner dimension.
I feel pretty confident that CBT for corporations is on the way out. I think tax reform to repatriate these offshore monies is pretty certain, and the incentive to stop inversions will make it happen. Perhaps we can then show the parallels for individuals as an argument.
There aren’t really people who could “figure out” the right tax rates for TBT. There are people who think they could, but these are economists and so no two will agree (in fact, ask two and you’ll get four or five different answers). In aggregate they might come close, but congress will ignore all of them anyway, preferring demagoguery to any rational basis for their decisions. You can always tell when something is hand-waved rather than calibrated because it has a round number to it — 30% tax, $2mm asset test for the exit tax, and so on.
Regarding home country tax credits against US tax and so on, this 3.7 ‘average’ multiplier found by the survey of existing reports already takes account of those. So that’s probably a decent starting point at least for estimating the inward investment loss to the US if it raises rates on foreigners.
As for the US market being lucrative even still, an up to 30% headwind is an awful lot of ground to make up versus 0% in other markets. To sell this, the US would have to outperform relative to other countries by 30% or so, not just on one fluke year, but year after year after year. And it would likely have to do so with the handicap of much lower inward investment from the rest of the world, and with the investment that is now not coming to the US flowing instead to its direct competitor countries.
I am no Economist but it has been reported that many countries have large pension deficits because of low interest rates and pension fund managers are fast moving into US corporate bonds. If a 30% US TBT is applied surely that would spell disaster to non US pension funds, especially if the home country has also to offer a tax credit when those funds are accessed. Wouldn’t it eventually end up drying up the US bond market?
Now my head is going round in circles too. After a rethink, I would suppose that if a UK pension fund is invested in in US it would not be subject to the TBT 30% as it is territorially in the UK.
“How I wish I could just quietly slip-slide into a kinder, saner dimension.”
Our 3 musketeers , witnesses, you and many of us here refuse “to go gentle into that good night”
Watcher: you remind me of Harry Truman asking to be sent a one-armed economist unable to that follow every explanation with “…on the other hand…”
@ Watcher and heidi
Thanks for your extra input. Maybe it’s time that all the rules and all the advantages aren’t always for team USA.
“As for the US market being lucrative even still, an up to 30% headwind is an awful lot of ground to make up versus 0% in other markets.”
I don’t think that’s true. A lot of countries including Canada and Japan withhold around 15% from dividends and interest going abroad — and since they don’t have CBT, the withholding isn’t even refundable when the investors are their own diasporas. 30% is bad by comparison to 15%, which is why the proposal to burn even the inadequate fragments of tax treaties that exist now will persuade some investors to leave.
And now for something completely different from the topic, but irresistible.
“You can always tell when something is hand-waved rather than calibrated because it has a round number to it — 30% tax, $2mm asset test for the exit tax, and so on.”
A round four years ago I bought four puzzles from the world reknowned Canadian institution Puzzle Master. As it happens, all four of those puzzles were round in shape. I forgot exactly how much the prices added up to in Canadian dollars and how much postage was in Canadian dollars, but PayPal converted the amount to Japanese yen. Then PayPal added PayPal’s commission, about 2.5% of the exchange rate. The total came to exactly 8000 yen. You can hardly get any rounder than that for four round puzzles.
It’s not just a 15% increase in dividends, though. Nor so much the new tax on interest. The real kick in the teeth is the brand new 30% tax on US capital gains. I know of no other country that taxes capital gains made on its stock markets by foreigners. This will be the part that drives foreign investors out.
Watcher: you remind me of Harry Truman asking to be sent a one-armed economist unable to that follow every explanation with “…on the other hand…”
Fred (B). Of course said one-armed economist could conceivably temper his explanation with “idiomatically speaking: on the other hand”. Frankly, I don’t know which would be more annoying.
However in this case, we need to know every eventuality from every possible angle that could possibly happen so that we aren’t surprised to our detriment.
“The real kick in the teeth is the brand new 30% tax on US capital gains. I know of no other country that taxes capital gains made on its stock markets by foreigners. This will be the part that drives foreign investors out.”
Watcher, at least it’ll be satisfying to see the US circle the drain if the economists haven’t figured this out already and made steps towards dulling the cuts that the proposal makes.
@Watcher – the OECD report will be useful. I’ll have a closer look whn I can get to it (after the weekend). No one will be able to predict the outcome of such a large increase in tax rates on non-resident investors. There are too many moving parts. When capital starts to dry up because the US is no longer an attractve destination for investment, interest rates will rise in an attempt to attract foreign capital. This will have far reaching effects throughout the economy.
This is how it works currently and for every country I’m aware of. The proposal explicitly states that these gains would be taxed by the US and treated as territorially within the US. But the capital is supplied by the UK, so I agree with you – the capital gain should be taxable in the UK.