Liberty and justice for all United States persons abroad

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Author Archives: Eric

U.S. source-of-interest rules, part one: how the U.S. does residence-based taxation (very badly, with lots of traps)

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Image of CN Tower

The firm which designed the CN Tower couldn’t get correct U.S. tax advice. What do you think your chances are on a ground-floor budget? (Photo: Local Hero/Wikimedia Commons)

On Twitter, Andrew Grossman mentioned Housden v. Commissioner, 63 T.C.M. 2063 (1992). Mr. Housden, a partner of famous Canadian architecture firm WZMH, got a loan from the Royal Bank of Canada. He later moved to the U.S. to operate a WZMH subsidiary, and made some payments on the loan from 1980 until 1983 — meaning that RBC earned interest income “from sources within the United States” within the meaning of 26 USC § 871(a)(1).

The U.S. Tax Court ruled that when an individual resident of the United States has borrowed money from a non-U.S. bank, the individual is supposed to be the withholding agent for the 30% tax on interest income earned by the bank under § 871(a). So Housden had to pay that 30% out of his own pocket and try on his own to get it back from RBC. The only relief for Housden was that he didn’t get hit with penalties for underpayment or failure to file required forms, since two famous nests of compliance condors — first Deloitte, later the now-defunct Laventhol & Horwath — failed to warn him about his withholding obligations until he was already being audited.

Brockers with local mortgages or credit cards are probably about to panic upon reading this. Fortunately, the IRS suggested in 1992 regulations that an individual interest payor should probably only be considered a “resident of the United States” if the individual meets the substantial presence test (SPT), regardless of citizenship. As Phil Hodgen pointed out two years ago, the IRS confirmed this view in (non-precedential) Chief Counsel Advice in 2012. So if you have lived in another country for your entire adult life, IRS lawyers do not seem to think they can reasonably interpret § 871 or its regulations to grab 30% of all your mortgage payments.

In other words, this is a tiny island of residence-based sanity in the citizenship-based “Internal” Revenue Code — well, almost. Nothing involving the U.S. tax system can ever be as simple as it sounds.

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1,313 published expatriates in Q1 Federal Register honour roll; 1,484 renunciants added to NICS for same period

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The Quarterly Publication of Individuals Who Have Chosen to Expatriate for Q1 2017 has just been placed on public inspection for printing in Wednesday’s Federal Register, ten days later than required by law. This quarter’s list contains 1,313 “published expatriates”, in contrast to the FBI’s NICS gun control database which counted 1,484 renunciants for the first three months of the year (and another 460 in April).

NICS only includes people who renounce citizenship under 8 USC § 1481(a)(5). In other words, it is supposed to cover a smaller population than the Federal Register list, which includes § 1481(a)(1) – (4) relinquishers as well. So it’s clear that not all ex-citizens get their names published in the Federal Register, though there seems to be neither rhyme nor reason behind that long-standing phenomenon — (a)(5) renunciants & (a)(1) relinquishers, rich & poor, covered & uncovered expatriates, and filers & non-filers of 8854 alike are among both the published and the unpublished.

All we can say for sure is that either the State Department is not forwarding some CLNs to the IRS, or the IRS is not publishing the names from all the CLNs they receive. (Given that State should be forwarding CLNs to both the FBI and the IRS, and the FBI clearly have been receiving CLNs, I’d guess that the problems are the IRS’ fault.) It’s clearer why tens of thousands of people who abandon their green cards each year don’t show up in the list either: USCIS isn’t providing the IRS with the information they need about those folks, as we’ve discussed in more detail previously.

We still can’t tell whether the U.S. election results are having any effect on the numbers, because it’s not clear when the people named in this quarter’s list actually went and paid that $2,350 to the U.S. government — I’m not having much luck matching the names in this quarter’s list to media reports. One person in this quarter’s list is known to have relinquished in June 2016, but I can’t find any others who have previously spoken with the media about giving up U.S. citizenship. If you know the date anyone in this quarter’s list (whether yourself or a public figure) had their final appointment at the consulate, please leave a comment.

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FATCA reciprocity watch: it doesn’t matter whether the Form 5472 filing requirement for single-foreign-member LLCs survives Trump’s regulatory review

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As TaxProf Blog and others noted at the time, a few weeks Trump signed Executive Order 13789, setting a deadline of 20 June for Treasury Secretary Mnuchin and his people to:

… review all significant tax regulations issued by the Department of the Treasury on or after January 1, 2016, and, in consultation with the Administrator of the Office of Information and Regulatory Affairs, Office of Management and Budget, identify in an interim report to the President all such regulations that:

(i) impose an undue financial burden on United States taxpayers;
(ii) add undue complexity to the Federal tax laws; or
(iii) exceed the statutory authority of the Internal Revenue Service.

Unfortunately for beleaguered U.S. Persons abroad, that time frame does not include the original FATCA regulations released in 2014, and the scope does not include past refusals to use clear statutory authority to issue new regulations to excuse us from incomprehensible “offshore” information forms with obscene fines.

For foreigners investing in the U.S. it’s better news: the Trump/Mnuchin review might repeal the Form 5472 filing requirement for single-foreign-member LLCs (proposed on 10 May 2016, 81 FR 28784; finalised on 13 December 2016, 81 FR 89849). That requirement was widely seen as a tiny, halting step towards imposing genuine FATCA reciprocity on inbound investors who were trying to remain anonymous. But even if it doesn’t get repealed, it’s no big deal: the Obama administration left plenty of loopholes to make sure that foreigners can keep hiding their identities from both the U.S. government and their own governments.

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99.999% of this country’s citizens didn’t renounce during Q1, proving that it’s nearly perfect

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By which of course I’m referring to Vietnam, where media reports state that 1,077 people renounced Vietnamese citizenship during the first quarter of 2017, while by counting notices in the official gazette I came up with a somewhat higher figure of 1,382. Since Vietnam’s population is roughly 92.7 million, I guess we can say, using FATCA-natics’ logic, that 92,698,618 people chose not to renounce their citizenship and so Vietnam is 99.999% perfect, right?

Sarcasm aside, Vietnamese nationality law and bureaucracy have several praiseworthy aspects. First, there are a few provisions which try to prevent “accidental citizenship”, meaning that some of the diaspora can avoid going through renunciation procedures in the first place (though as one case from the United Kingdom demonstrates, these provisions haven’t always worked very well). They even issue certificates of non-citizenship to people who never had Vietnamese nationality but need to convince other disbelieving governments or private institutions of that fact.

For those who do need to renounce, Vietnam does things relatively efficiently. The Vietnamese embassy in DC says that they accept renunciation forms by mail. The law requires them to respond to an application for renunciation within 60 working days. And the Vietnamese government managed to issue a press release about their Q1 renunciation statistics less than four weeks after the end of the quarter.

In contrast, the U.S. State Department’s unilateral demand for in-person renunciation appointments, and strict rationing of those appointments, makes the waiting list ten months long in some places. You might wait more than a year after that to get your Certificate of Loss of Nationality. They certainly don’t issue certificates of non-citizenship. And while 26 USC § 6039G(d) requires the U.S. government to publish a list of renunciants within 30 days after the end of each quarter, there was nothing relevant in Friday’s Federal Register and nothing scheduled for Monday’s either.

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Reviewing the Unintended Consequences of the Foreign Account Tax Compliance Act: video and summary of hearing

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Thank you to all those who worked so hard to make this hearing a reality, and in particular to witnesses Daniel Kuettel and Mark Crawford for putting a human face on the FATCA disaster. Here’s a brief overview of what happens during each section of the hearing. Longer and more detailed notes after the jump. See also the official webpage for the hearing.

Time Summary Details
14:36 Quick introduction by Rep. Mark Meadows (R-NC-11)
Meadows is the chairman of the Subcommittee on Government Operations
15:32 Testimony by Sen. Rand Paul (R-KY)
Mentions that FATCA gathers far more information on foreign accounts than Form 1099 does on domestic accounts (I’ll call this “8966 vs. 1099” for short). States that he hopes to get FATCA repeal done as part of tax reform.		 Link
23:07 Opening statement by Meadows
Mentions poor return-on-investment from money spent on enforcing FATCA.		 Link
27:45 Video by Donna-Lane Nelson
Discusses her renunciation. Mentions that she’s a lifelong Democrat and not rich.		 Link
30:45 Meadows continues opening statement
31:30 Opening statement by Rep. Gerald Connolly (D-VA-11)
Connolly is the ranking member of the subcommittee. Makes incorrect statement that most countries tax worldwide income of citizens. Notes FATCA implementation difficulties.		 Link
37:00 Introduction and swearing-in of witnesses
38:30 Testimony by James Bopp
Lawyer for Republicans Overseas. Mentions Democrats Abroad survey showing FATCA’s effects, and that U.S. is one of only two countries which tax citizens abroad. See written submission.		 Link
44:50 Testimony by Mark Crawford
American businessman in Europe. Mentions how Same-Country Exception (SCE) would not have solved his business banking issues. See written submission.		 Link
50:10 Testimony by Daniel Kuettel
Ex-American who renounced to save his mortgage. Mentions that his daughter will eventually face the same choice he did, of having U.S. citizenship or having a normal life where she lives. See written submission.		 Link
54:00 Interstitial remarks by Crawford and Connolly Link
55:30 Testimony by Elise Bean
Former Carl Levin counsel. Says Forms 8966 and 1099 are equivalent, and that the number of citizens renouncing is not a concern because more immigrants are naturalising. See written submission.		 Link
1:03:50 Meadows questions Bean
Asks about U.S. banks’ views of FATCA reciprocity, if revenue from OVDP was taxes or penalties, if suspicion of wrongdoing is sufficient justification for FATCA.		 Link
1:10:30 Connolly questions Bean
Asks about FATCA implementation difficulties. Bean denies that FATCA is the problem, pointing instead to CBT and the lengthy renunciation process.		 Link
1:15:50 Connolly asks Bopp for response to Bean
Bopp says that FATCA is causing problems for large numbers of people, not just renunciants; rebuts Bean’s earlier point about 8966 vs. 1099; notes that penalties are not tax penalties but FBAR penalties.		 Link
1:17:34 Recess
Microphones left on, pick up some chatter at 1:22:00 regarding the Democrats Abroad survey.
1:54:53 Hearing resumes
1:55:25 Rep. Jody Hice (R-GA-10) questions Bean
Asks Bean how much revenue is lost to offshore tax evasion, how much FATCA recovers; Bean not familiar with JCT $870 million recovery estimate. Hice expresses concern at such poor results for potentially law which has both Fourth Amendment and separation-of-powers issues.		 Link
1:59:45 Hice questions Bopp
Asks whether FATCA should be repealed or modified. Bopp responds proposed fixes (probably means SCE) don’t solve problems. Kuettel and Crawford also support repeal. Bean supports modification.		 Link
2:00:59 Statement by Rep. Carolyn Maloney (D-NY-12)
Mentions membership in Americans Abroad Caucus, concerns about terrorism financing, disappointment at Treasury’s non-response to SCE (actually, Treasury said no). Notes she has introduced a bill to require SCE implementation.		 Link
2:08:53 Rep. Eleanor Holmes Norton (D-DC) questions Bopp and Bean
Asks Bopp about SCE; Bopp says SCE will not relieve burdens. Asks Bean whether repealing FATCA and joining CRS would get same information; Bean unsure. Criticises Bopp, Crawford, and Kuettel’s call for repeal.		 Link
2:16:00 Meadows questions Bopp and Bean
If nothing else, watch this. Meadows comes to the conclusion, based on Bean’s statements regarding 8966 vs. 1099, that FATCA was intended to circumvent the protections of the subpoena process.		 Link
2:27:07 Maloney questions Kuettel about SCE
Kuettel responds that SCE would not have solved his problems because “the damage has already been done”, the banks are terrified of America, and that SCE still puts a burden on the banks themselves.		 Link
2:31:10 Closing statement by Meadows
Rebuts remarks by Democratic members stating that FATCA addresses terrorism financing, noting that a Hezbollah sanctions bill he sponsored used different tools. Asks each witness to give him three suggestions for modifying FATCA if there is not bipartisan support for repeal.		 Link

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Emigrant-hating Congressional Progressive Caucus accidentally proposes right of return for (some) ex-citizens

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Earlier this month, Raúl Grijalva (D-AZ-3) and forty other Democrats introduced the Veterans Visa and Protection Act of 2017 (H.R. 1405), a bill to shield current and former members of the U.S. armed forces against deportation or removal from the United States and to let them apply for green cards. Grijalva is the co-chair of the Congressional Progressive Caucus, and the bill’s co-sponsors include twenty-six other CPC members.

When Homelanders proclaim that they want to protect immigrants, they only mean immigrants from other countries to the United States, not immigrants from the United States to other countries. However, Grijalva’s bill is so broadly written that it would protect veterans in both groups of immigrants — those who were never U.S. citizens in the first place and got deported, and those who emigrated and gave up U.S. citizenship after being discharged.

SEC. 4. Protecting veterans and service members from removal.

Notwithstanding any other provision of law, including section 237 of the Immigration and Nationality Act (8 U.S.C. 1227), a noncitizen who is a veteran or service member shall not be removed from the United States unless the noncitizen has a criminal conviction for a crime of violence.

As I understand it, this prohibition against removal extends to expedited removal of inadmissible aliens at ports of entry. In simpler terms, not only would non-citizen veterans now in the U.S. not have to worry about being sent away against their will, non-citizen veterans outside of the U.S. could show up at the border without fear of being turned away — whether they intended to stay in the U.S. for a week or for the rest of their lives. This is much better news than other CPC-supported legislation like the Foreign Account Tax Compliance Act, which forced at least one veteran living in another country to renounce U.S. citizenship in order to save his home.

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U.S. State Department rejected two visa applications in 2016 based on Reed Amendment

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As I just noticed, last week the State Department released one of the final missing pieces of their Report of the Visa Office for Fiscal Year 2016: Table XX, “Immigrant and Nonimmigrant Visa Ineligibilities (by Grounds for Refusal Under the Immigration and Nationality Act)”.

This latest update reveals that two out of the tens of thousands of people who have renounced citizenship since 1996 were denied U.S. non-immigrant visas last year under 8 USC § 1182(a)(10)(E) (colloquially known as the Reed Amendment) because they had renounced U.S. citizenship for the purpose of avoiding taxation by the United States. One was later able to overcome the finding of inadmissibility.

This is the first time the State Department have formally admitted to denying visas on that basis. However, for decades they have been denying visas to about a half-dozen ex-citizens or ex-green card holders per year whom they believe left or stayed outside the U.S. to avoid the draft.

The State Department acting on their own cannot legally find you inadmissible under the Reed Amendment, and the Foreign Affairs Manual warns consular officers against doing so. They need a determination of inadmissibility from the Department of Homeland Security. DHS have said they can only make such determinations if ex-citizens “affirmatively admit to renouncing their U.S. citizenship for the purpose of avoiding U.S. taxation” — the IRS cannot offer DHS any assistance, due to provisions protecting the confidentiality of tax returns, and State can only tell DHS what the renunciant tells State.

DHS revealed all these difficulties in a November 2015 report, which both myself and Patricia Moon have previously discussed. It is not clear whether the two individuals denied visas by State last year were the same two individuals mentioned in that 2015 report (to whom DHS had previously denied entry), though I suspect that may be the case.

In short, don’t tell DHS or State the obvious truth about why you want to stop being a U.S. citizen, and they — unlike the IRS — officially won’t treat you any worse than they treat other non-citizens. (Unofficially, there do seem to be a few reports of consular officers getting angry that anyone would dare apostatise from the American civic religion, and then using an outlandish finding of 8 USC § 1184(b) “failure to overcome presumption of immigrant intent” as an excuse to deny a visa.)

U.S. consulate in Netherlands ignorant of 9 FAM 202.1-2 regarding visa issuance to person with possible claim to U.S. citizenship?

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We’ve previously discussed the rising trend of of American emigrants choosing not to register their non-U.S.-born children as U.S. citizens. Children who don’t get registered and don’t hold a passport from a Visa Waiver Program country have to apply for a visa in order to visit their relatives in the United States.

Along those lines, over at Wikipedia’s Reference Desk an American in the Netherlands recently asked for advice about getting a U.S. visa for his daughter. His daughter is a Russian citizen & passport-holder and has Dutch permanent residence. However, he reports that he’s encountering some resistance from his local U.S. consulate:

I’ve been advised that someone (in this case a child, my daughter) who ‘has a claim to US citizenship’ – in this case because I am in fact an American citizen – is therefore ‘not eligible for visa to visit the US’. So I’m looking for some reference to what rules or law that might be? My daughter has a Russian passport, permanent Dutch residence, and we don’t plan to apply for American citizenship for her – in fact we’re in the process of obtaining Dutch citizenship for her, me and her mother. Can someone help me find a reference or rule or law that would explain why, if you could be an American citizen, but aren’t one, you would be denied the possibility of a visa. Thanks if you can help with a concrete reference or link. I’ve been googling but its an unusual circumstance.

He went on to clarify:

My advice was in fact the US Embassy. They received my daughter’s visa application, and sent me the message I quoted from above. My daughter is not a US citizen, and there isn’t a plan to be one. I’m trying to find good info with references to prepare for negotiating with the Embassy. I wouldn’t think that they can impose US citizenship on her. Thanks anyone who can point me to hard information.

The State Department’s own Foreign Affairs Manual in fact clarifies that the child can apply for a visitor visa rather than being forced into making a Consular Report of Birth Abroad. Specifically, 9 FAM 202.1-2(a), formerly 9 FAM 40.2 Note 1, says:

a. Processing Visa Applications for Aliens Who May Have a Claim to U.S. Citizenship:

(1) Nonimmigrant Visa Applicants: You may not issue a visa to an individual who has been determined to be a U.S. citizen. However, if a nonimmigrant visa applicant with a possible claim to U.S. citizenship is unable or unwilling to delay travel until he or she has been able to obtain documents to establish that status, as determined by the post’s citizenship and passport officer, you may presume that the applicant is an “alien” pursuing a nonimmigrant visa application. If you find the presumed alien eligible to receive the visa then you may issue the visa.

This subsection was last modified in November 2015. After the jump I discuss the history of updates to 9 FAM 202.1-2.

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In four years, about 1% of diaspora non-filers chose to come into compliance through Streamlined: IRS

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On Thursday, the IRS released their “Dirty Dozen Tax Scams” for 2017, among which they listed “unreported offshore accounts”. They go into more detail in IR-2017-35:

Since the first Offshore Voluntary Disclosure Program (OVDP) opened in 2009, there have been more than 55,800 disclosures and the IRS has collected more than $9.9 billion from this initiative alone.

In addition, another 48,000 taxpayers have made use of separate streamlined procedures to correct prior non-willful omissions and meet their federal tax obligations, paying approximately $450 million in taxes, interest and penalties. The IRS conducted thousands of offshore-related civil audits that resulted in the payment of tens of millions of dollars in unpaid taxes. The IRS has also pursued criminal charges leading to billions of dollars in criminal fines and restitutions.

Works of the U.S. government are not objects of copyright, which is a boon for stenographers who mislabel themselves as “journalists”: they can just cut-and-paste the U.S. government’s viewpoint on the issues into their magazines without thinking about it, or attempting any analysis.

Anyway, US$450 million is an average of about US$9,400 per Streamlined participant. Not as big as the $13,000 per head they extracted from minnows with two-digit annual tax deficiencies under the 2009 OVDP, but still a sizeable sum from the perspective of the individual.

I’m sure there’s some poor deluded souls in the IRS and the Joint Committee on Taxation staff who are salivating at the thought of getting nine grand per head out of the rest of the millions of diaspora non-filers too — that might help them turn those mythical FATCA revenue estimates into reality. If that’s their aim, however, then forty-eight thousand over four years is a rather slow start.

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2,365 names of ex-U.S. citizens in latest published expatriates list

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The Quarterly Publication of Individuals, Who Have Chosen to Expatriate for Q4 2016 has been placed on public inspection for printing in tomorrow’s Federal Register, ten days later than required by law. The IRS gave 2,365 names in this list, making it the largest they’ve ever published. We had a total of 5,411 published expatriates in 2016 (1,158 in Q1, 509 in Q2, and 1,379 in Q3). That’s slightly larger than the 5,321 federal additions to the “Renounced U.S. Citizenship” category in the FBI’s NICS gun control database last year. However, NICS only includes 8 USC § 1481(a)(5) renunciants, whereas the Federal Register is supposed to include relinquishers under other paragraphs of 1481(a) as well.

How many non-renunciant relinquishers are there? We’re not sure. In January, the State Department published updated Paperwork Reduction Act estimates stating that about 600 people per year file Form DS-4079, “Request for Determination of Possible Loss of United States Citizenship”. After the Foreign Affairs Manual update two years ago, DS-4079 is no longer used for renunciation cases, so that gives a lower bound on the number of 1481(1) to (4) relinquishers. The tens of thousands of people who abandon green cards each year definitely aren’t in the IRS list either, even though it misleadingly claims that “[f]or purposes of this listing, long-term residents, as defined in section 877(e)(2), are treated as if they were citizens of the United States who lost citizenship”.

The list is not only incomplete, but slow to include names; for example, Rachel Heller, who renounced all the way back in November 2015, didn’t show up until this quarter. Brockers who gave up citizenship as recently as August of last year did get their names published, but Japanese politician Kimi Onoda, who renounced in October 2016, is not included in the current list. In other words, we are not yet seeing the impact of the U.S. election results. The sudden growth in the list has some other cause.

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