I wrote this introduction for a program to be presented to tax professionals outside of North America back in March 2017. It was only meant as a general guide for those who might have been completely unaware of our grassroots movement as well as several attempts made by Congress to study our situation. It was not meant to be a complete discussion of the entire history of all our efforts but simply to inform them that we exist. To stimulate them to be more than paper-pushers and blind parrots for the IRS.
I still have a hard time believing effective tax reform for our dilemma will happen. Partially because awareness is not “new.” Since Dave Camp and the W&M call for submissions 4 years ago, there have been no less than 9 different studies, drafts etc and up to now, no real progress, no change. In addition, the general dysfunction of Congress (they can’t get health reform right) and the Trump Administration continues. It is now nearly September. There will be a huge effort needed to deal with Hurricane Harvey.
Will we or won’t we see tax reform?
Can this situation be tolerated as is for years to come?
What do YOU think?
The recent history of tax reform in the United States, as pertaining to American citizens abroad is quite a back-and-forth sort of acknowledgement of the issues with recommendations followed by a complete lack of concrete action to address the problems. A short introduction of the intervening factors is truly necessary in order to evaluate the effectiveness of any tax reform for this unique population of “Americans.”
Once the Swiss bank debacle resulted in successful litigation by the Department of Justice, Americans abroad were swept up in the attempts to gain access to all offshore accounts. The IRS created and tried to steer everyone into the Overseas Voluntary Disclosure Programs/Initiative. (The current 2014 OVDP is derived from the 2012 program). The tax compliance community and the media pushed this avenue of action in spite of the fact that the program was designed for criminals, has no legal basis, and should never have included those who had foreign accounts in order to function where they live. It is despicable that many who had lost U.S. citizenship decades ago and those who were “Accidental Americans,” were told they must enter this “amnesty” program.
Due to serious issues with OVDP, expats became very vocal about their concerns of exhorbitant penalties. Then-US Ambassador to Canada Jacobson had promised relief. Instead, the IRS issued Fact Statement of 2011-13. It outlined how non-compliant expats could file and claim “reasonable cause” for not filing FBARs. (I filed this way with no issues). Some in the compliance community and some expats were disappointed as there was “nothing new” about FS 2011-13. It was simply the way things had always been done. Then Streamlined Program, which appeared on September 1, 2012 was fraught with difficulties. The newer version of Streamlined Streamlined allows filing with strong expectation of no penalties.Based upon direct statements by IRS Commissioner John Koskinen and and then-Acting Assistant Attorney General Caroline Ciraolo, there are some concerns that as more become aware of the requirement to file, the Streamlined Program will be discontinued. This may or may not be a scare tactic, after all, what is required by law is simply to file and reasonable cause (which is what Streamlined uses to mitigate penalties) has always been available to abate penalties. It will likely be impossible to undo the level of fear created by the IRS, the tax compliance community and the media should it become necessary for people to file outside of Streamlined.
The signing of the FATCA IGAs followed by implementing legislation passed in a majority of the world’s countries exacerbated the situation for expatriates. The U.S. government including the IRS and CI departments of Treasury Department, the State Department, the House Ways and Means Committee and the Senate Finance Committee are well aware of these problems. There is now a great deal of pressure on the current Congress to include some relief for Americans living outside the United States. It must take into account an incredibly complicated interplay of U.S. citizenship and taxation law to try and mold into meaningful reform. In addition, non-resident Americans experience different tax laws overall, due to their residence in other countries. Regardless of the U.S. government’s assertion that the tax code “treats all Americans the same” in reality, this cannot be true and is not true.
RESPONSES/DEVELOPMENTS WITHIN THE EXPATRIATE COMMUNITY
Historically, American Citizens Abroad is credited as the primary group lobbying for these non-resident citizens. Of special note are the late Roger Conklin & his testimony before Ways and Means and Jacqueline Bunion and her many excellent submissions & videos. Democrats Abroad , FAWCO and AARO are sister groups located in Europe; all support FATCA as well as a move to Residence-Based-Taxation. A main emphasis has been on the
“Same Country Exception”,which would allow tax-compliant Americans abroad to be exempt from FATCA reporting for accounts located in the country they reside in. The Treasury Department recently denied SCE. These measures would have protected approximately 1 million tax-compliant expats from FATCA but would not address the more complicated problems of the other approximately 7 million living abroad.
Republicans Overseas created a set of Resolutions which they intended to be included in the Party Platform. They are the primary backers of the FATCA Legal Action group, funding the
“Bopp Lawsuit” which is currently preparing for an appeal (and has since been denied).
There has been a huge grassroots resistance originating with the Isaac Brock Society in 2011, from which came Maple Sandbox, Alliance for the Defence of Canadian Sovereignty currently in litigation against the Canadian government; the Alliance for the Defeat of Citizenship Taxation , (anticipating future litigation with the American government).
A few years later came Keith Redmond and the American Expatriates Facebook Group from which came the Accidental Americans Facebook group and the corresponding groups American Accidental.com and Association des Americains Accidentals centered in France.
After the Isaac Brock Society insistence upon independent research concerning compliance and renunciation, the renunciation numbers began to rise as more and more expatriates realized the true financial risk of remaining American without a matching effort of the U.S. (who cannot seem to find a way to apply procedures that enable discovery of, identification and collection from Homelanders with foreign accounts for the purpose of evading tax versus Americans outside the United States who have legitimate foreign accounts for the purpose of living). The huge amount of non-compliance of this second group, coming to light in 2009 with a much larger wave in 2011, simply speaks to the lack of due diligence on the part of the American government, to educate this population as to their tax obligations and more importantly, their reporting obligations. It is no small thing that FBAR was unenforced for 40 years. Perhaps longer for “regular” filing. There is no excuse for the threatening and punitive campaign pursued by the IRS for this second group.
In addition to the efforts of expatriates, there has been consistent strong support from the Taxpayer Advocate, Nina Olson. She has repeatedly brought attention to the problems in the Annual Reports to Congress .
Later support has come from Grover Norquist & Americans for Tax Reform ;
the Coalition of 23 Groups letter calling for the repeal of FATCA as part of tax reform and the FATCA Hearing chaired by Congressman Mark Meadows.
PROPOSED TAX REFORMS
The first major attempt at tax reform was sponsored by House Ways and Means Chairman Dave Camp (113th Congress (Jan 3, 2013 to Jan 2, 2015) in 2013. Calls for submissions were answered by many expatriates and interestingly enough, are reflected in the Joint Committee of Taxation report of May 6, 2013. You can read submissions
On May 9, 2013 a paper Senate Finance Committee Staff Tax Reform Options for Discussion was released. This report suggested non-resident Americans could be taxed the same as non-resident aliens; that an exit tax could be implemented and advocated repeal of the FEIE.
Coming quite late in the tenure of the 113th Congress, was The Tax Reform Act of 2014. Regrettably, none of the issues of expats were addressed in this legislation (which failed to pass). For an interesting discussion of the approaches considered that do not necessarily address expat issues see:
here & here .
In December 2014, a very favorable report was released by the Republican Staff Committee on Finance United States Senate. A primary consideration was to tax non-resident citizens only on U.S. sources.
On February 2, 2015 the Obama Administration tried to address some of the problems involved for “Accidental Americans. In the “General Explanations of the Administration’s Fiscal Year 2016 Revenue Proposals”also called the “Green Book,” it was proposed that certain dual citizens could renounce their US citizenship without the fear of penalization, particularly with regard to being“covered” and liable for the Exit Tax. While not tax reform per sé, it represents awareness on the part of the government. It also, for better or worse, raised the hopes of expats everywhere that something was going to be done. The same proposal was put forward a year later, adjusted for changed dates.
On March 11, 2015, the Senate Finance Committee established five working groups to address reform one of which was the International Group chaired by Senator Rob Portman (R-Ohio) & Senator Chuck Schumer (D-N.Y.). Expatriate submissions are < href=http://fatca.eu.pn/ ). The committee report was released in July 2015. It contained a
mere two paragraphs with no specific recommendations.
In June 2016, Republican members of the Ways & Means Committee created a working paper “The Better Way.” It is expected that this will lay the foundation for new legislation. One aspect of this paper is the intent of the GOP to repeal the estate tax and the GST but does not address the gift tax. A concern is that an individual could gift an asset to someone in a lower bracket before a taxable event and have it returned once the income been taxed. It also does not say that a capital gains tax should apply at death (due to no estate tax). The blueprint fails to mention eliminating the step-up basis to FMV that is now available at death nor is there a carry-over provision that would make tax due once an heir sells the property. Whether this is what the Committee intends is not clear.
Unfortunately for expats, this paper has only one sentence pertaining to expats which does not tend to suggest that many of the much-discussed possibilities are likely to find way into actual tax reform legislation
SOME DESCRIPTIONS FROM TAX REFORM PROPOSALS OUTLINING MAJOR NEEDS OF AMERICANS ABROAD
Joint Committee on Taxation May 6 2013
Summary of points applying to U.S. citizens abroad
From Recommendations p 516 –522
3. U.S. citizens residing abroad – Numerous comments were received that relate to the taxation of U.S. citizens living abroad. These comments include the following recommendations:
- Repeal or revise the Foreign Account Tax Compliance Act (“FATCA”);
- Provide an unlimited foreign-earned income exclusion for permanent residents of a foreign country;
- Expand the foreign-earned income exclusion to include passive as well as earned income;
- Repeal the special rules on passive foreign investment companies;
- Repeal the provisions imposing tax responsibilities on those who expatriate by relinquishing U.S. citizenship or residency, including the ban on issuance of visas to expatriates who avoid payment of taxes;
- Adoption of residence-based taxation (see below);
Residence-based taxation should not include a provision for imposing 30 percent withholding tax on U.S.-source pensions;
Any move to residence-based taxation implies the need to eliminate the savings clause from new and existing tax treaties;
Creation of a bipartisan commission responsible for studying the impact of Federal laws and policies on U.S. citizens living abroad, especially those provisions and administrative programs that require disclosure of financial information. The Commission would report to Congress with recommendations and submit a follow-up report on any remedial administrative response to the report.
The Working Group also received technical comments related to the computation of income tax when a portion of income is excluded under the foreign-earned income exclusion. Adoption of residence-based taxation. Many comments proposed adopting a residence-based tax system to treat certain U.S. citizens domiciled abroad in the same manner as foreign persons, applying withholding taxes to U.S.-source income earned by such U.S. citizens and taxing effectively connected income as under the present law rules. The proponents of a residence-based tax system suggest the following elements:
U.S. citizens that meet certain requirements could continue to be taxed under the rules of present law or could elect into residence-based taxation.
Senate Finance Committee Staff
Tax Reform Options for Discussion
May 9, 2013
IV. NON-RESIDENT U.S. CITIZENS
1. Provide an election to citizens who are long-term nonresident citizens to be taxed as nonresident aliens if they meet certain conditions (Schneider, “The End of Taxation Without End: A New Tax Regime for U.S. Expatriates,” 2013; similar to the law in Canada)
a. Require a minimum period of residence abroad
b. Impose an exit tax on electing taxpayers where deemed to sell all assets at the time of election
2. Repeal the foreign-earned income exclusion (H.R.2 (108th Congress), Jobs and Growth Tax Relief and Reconciliation Act of 2003, sponsored by Rep. Thomas)
Resolution to Repeal the Foreign Account Tax Compliance Act (FATCA)
Republicans Overseas December 5, 2013
Whereas, In 2010 Congress passed the Foreign Account Tax Compliance Act (FATCA) in an effort to catch tax evaders; but this Act has inadvertently ensnared every United States Citizen living overseas due to its overzealous invasion of privacy and punitive taxation and enforcement;
Whereas, The United States is one of the only two countries in the world that taxes foreign income of its citizens living abroad who already pay taxes where they reside;
Whereas, FATCA creates enormous reporting burdens for American taxpayers living overseas and puts them a great risk for even the slightest innocent mistake;
Whereas, FATCA requires foreign financial institutions, to enter into an agreement with the Internal Revenue Service (IRS) to identify their U.S. account holders and to disclose the account holders’ names, taxpayer IDs, addresses, and the accounts’ balances, receipts, and withdrawals (sometimes in violation of foreign privacy laws);
Whereas, FATCA has resulted in Americans living and working overseas finding themselves, and their companies, shut out from access to banks, insurance loans and investment opportunities, as many foreign financial services providers have concluded that doing business with Americans is simply too much trouble thus decreasing America’s competitiveness overseas;
Whereas, FATCA’s primary mechanism for enforcing compliance of foreign financial institutions is a punitive withholding levy on U.S. assets, creating a strong incentive for foreign financial institutions to divest (or not invest) in U.S. assets, resulting in capital flight, hurting the U.S. economy;
Whereas, Time magazine reported a sevenfold increase in Americans renouncing U.S. citizenship between 2008 and 2011 and has attributed this at least in part to FATCA and another surge in renunciations in 2013 to record levels has been reported in the news media, with FATCA cited as a factor in the decision of many of the renunciants; and
Whereas, FATCA forces Americans living abroad to make a horribly unfair choice between renouncing their citizenship and abandoning their businesses abroad because foreign financial institutions won’t handle their transactions or accounts; therefore be it
RESOLVED, The Republican National Committee hereby presents this Resolution to each Member of Congress and urges the U.S. Congress to repeal FATCA and to allow those U.S. citizens who renounced their citizenship under FATCA to regain their citizenship;
RESOLVED, The Republican National Committee urges the IRS to cease inflicting damage on the United States and on the global financial system in an attempt to vindicate FATCA’s misguided approach to tax enforcement;
RESOLVED, The Republican National Committee by presenting this Resolution to each Member of Congress urges them to increase the competitiveness of Americans overseas and remove inappropriate invasions of American citizens’ privacy; and
RESOLVED, The Republican National Committee hereby presents this Resolution to each Ambassador and Representative from every foreign nation and warns them that the privacy rights of their own citizens are at risk due to reciprocal agreements.
Comprehensive Tax Reform for 2015 and Beyond
By Republican Staff Committee on Finance United States Senate
The United States needs to rethink its taxing rules for nonresident U.S. citizens.
If a U.S. citizen is living and working abroad with some permanence, and the primary nexus the individual has to the United States is citizenship, we think it makes sense to tax the individual, as a general rule, only on income from U.S. sources.
A test would need to be developed to determine at what point a U.S. citizen is considered a nonresident of the United States and then at what point the U.S. citizen is considered to be a resident again.
Some factors that may be considered include:
*the permanence and purpose of the stay abroad,
*residential ties to the United States,
*residential ties to the foreign country, and
*regularity and length of visits to the United States.
The test could be adopted, in some part, from the existing rules that are used to determine residency of alien individuals, i.e., those individuals who are not U.S citizens.
In addition, an exit tax could be applied when the U.S. citizen is considered a nonresident and no longer subject to U.S. worldwide taxing jurisdiction
Proposal Under the proposal, an individual will not be subject to tax as a U.S. citizen and will not be a covered expatriate subject to the mark-to-market exit tax under section 877A if the individual:
1. became at birth a citizen of the United States and a citizen of another country,
2. at all times, up to and including the individual’s expatriation date, has been a citizen of a country other than the United States,
3. has not been a resident of the United States (as defined in section 7701(b)) since attaining age 18½,
4. has never held a U.S. passport or has held a U.S. passport for the sole purpose of departing from the United States in compliance with 22 CFR §53.1,
5. relinquishes his or her U.S. citizenship within two years after the later of January 1, 2016, or the date on which the individual learns that he or she is a U.S. citizen, and
6. certifies under penalty of perjury his or her compliance with all U.S. Federal tax obligations that would have applied during the five years preceding the year of expatriation if the individual had been a nonresident alien during that period.
The proposal would be effective January 1, 2016.
This same proposal appeared in the 2017 Revenue Proposals with the same conditions and minor date adjustments. Outlined on pp 254-555
The International Tax Bipartisan Tax Working Group Report
United States Senate Committee on Finance July 7, 2015
F. Overseas Americans
According to working group submissions, there are currently 7.6 million American citizens living outside of the United States. Of the 347 submissions made to the international working
group, nearly three-quarters dealt with the international taxation of individuals, mainly focusing on citizenship-based taxation, the Foreign Account Tax Compliance Act (FATCA), and the Report of Foreign Bank and Financial Accounts (FBAR). While the co-chairs were not able to produce a comprehensive plan to overhaul the taxation of individual Americans living overseas within the time-constraints placed on the working group, the co-chairs urge the Chairman and Ranking Member to carefully consider the concerns articulated in the submissions moving forward.
We Believe in America
The GOP Party Platform July 2016
Section 3 A Rebirth of Constitutional Government
The Foreign Account Tax Compliance Act (FATCA) and the Foreign Bank and Asset Reporting Requirements result in government’s warrantless seizure of personal financial information without reasonable suspicion or probable cause. Americans overseas should enjoy the same rights as Americans residing in the United States, whose private financial information is not subject to disclosure to the government except as to interest earned. The requirement for all banks around the world to provide detailed information to the IRS about American account holders outside the United States has resulted in banks refusing service to them. Thus, FATCA not only allows “unreasonable search and seizures” but also threatens the ability of overseas Americans to lead normal lives. We call for its repeal and for a change to residency-based taxation for U.S. citizens overseas.
A Better Way Forward on Tax Reform
Republicans of the Ways & Means Committee June 2016
In addition to these important reforms that will create a modern international tax system for businesses, the Committee on Ways and Means will consider the appropriate treatment of individuals living and working abroad in today’s globally integrated economy