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.)