Category Archives: Issues regarding US persons abroad

by Karen Alpert
www.fixthetaxtreaty.org

Overview

This feedback addresses the Residence Based Taxation (RBT) proposal from American Citizens Abroad that can be found at these links:
 

• Residency-Based_Taxation_ACA_Proposal_Side-By-Side_Comparison_161201_Final (1)

 

• Residency-Based_Taxation_Baseline_Approach_Feb._7_2017

 

• https://www.americansabroad.org/news/aca-publishes-detailed-descr-of-its-rbt-proposal-and-announces-coalition-to-score-rbt-proposal/

 

• https://www.americansabroad.org/news/aca-advances-on-residency-based-taxation-rbt/

 

This proposal starts from the premise that citizenship is an acceptable basis for taxation. Shouldn’t that premise be questioned? Allison Christians, tax law professor at McGill University, argues that citizenship alone is not a sufficient basis for taxation ( https://ssrn.com/abstract=2924925). Every other country on the planet (bar Eritrea) starts from the premise that countries have the right to tax residents to support the services used by residents.

Qualification for RBT

For Accidental Americans – both those born in the US to foreign parents who have not lived in the US as an adult, and those born outside the US who qualify for US citizenship from birth but have never lived in the US – the justification for citizenship based taxation is non-existent. Do these individuals need to apply for a “Departure Certificate”? If so, at what age?

When a person makes a long-term move out of the US, why should they have to wait for 5 years to qualify for RBT? If I move from California to Texas, once I’ve established a residence in Texas, California no longer taxes me as a resident, effective immediately. Why should an international move be any different?

While waiting those 5 years, US tax will cost low income earners much more than it does under the current system. The proposal repeals the Foreign Earned Income Exemption (FEIE). While the level of FEIE is quite high, it is most valuable for middle class and lower socio-economic groups. Other countries have much more generous tax free thresholds and lower tax rates at low income levels. In Australia, for example, an individual could earn up to A$20,000 (US$15,000) before any Australian tax is due. Loss of FEIE will mean tax is due to the US for individuals earning US$10-15k. At the other end of the income spectrum, however, FTC is always a better answer than FEIE. Australia’s tax rates rise to 45% for incomes above A$180,000 (US$135,000). So, repeal of Section 911 FEIE will impact those least able to pay additional taxes and exacerbate income inequality.

The proposal does not address other information returns. Current IRS rules require that forms 8621 (PFICs) and 5471 (controlled foreign corporation) are required even when a tax return is not. For many Americans abroad, the reporting (and associated punitive penalties) is more of a problem than actually paying taxes (most owe no tax to the US anyway). If the reporting continues as long as one is a citizen, then renunciations will continue as well.

Departure Certificate

When applying for a Departure Certificate it appears that the IRS has control over the timing of the issuance of the Certificate and thus the effective date. With the current renunciation process, the potential renunciant has the date of the appointment in advance and can decide on the day whether to complete the process or not. With volatile exchange rates, the timing can affect the US dollar net worth of the individual, potentially subjecting them to the Departure Tax should the value of the US dollar fall relative to their home currency in the time between submission and approval of the application for Departure Certificate. Additionally, lack of control over the timing could cause hardship for those who must be free of US reporting to take up a job, or otherwise have a time-critical need to be free of US taxation.

Annual re-certification is a bureaucratic nightmare. One possible alternative is to collect this information as US citizens enter and leave the country. For those who return to employment in the US, the chance of avoiding taxation is minimal. Similarly, Social Security checks or investment income sent to a US address could be used as a rebuttable presumption that the US citizen is once again residing in the US.

In the Departure Tax section of the proposal it is not clear whether the intention is to use the net worth threshold in section 877(a)(2) and raise that to $5million for both renunciants and citizens opting in to RBT. Given the justification used by legislators for both the exit tax and the Departure Tax, the net worth threshold for both should be linked to the estate tax threshold and similarly indexed for inflation.

At what point does an individual determine that they have been tax compliant. Is it similar to the current Exit Tax procedures where delinquent returns filed before filing form 8854 allow one to certify compliance?
The IRS “User Fee” of $2,350 per person is a lot of money for those on modest incomes – precisely the people who will be hurt most by the repeal of section 911. The renunciation fee, which the IRS User fee is based on, is already the highest such fee in the world, and a financial hardship for many. Forcing citizens to buy their way out of Citizenship based taxation at this high price means that only those who are already relatively well-off will be able to buy their freedom. Like the current system, the proposal exacerbates income inequality by making it prohibitively expensive for those with incomes below the median to exit the double taxation forced on them by the unfair system of citizenship based taxation. As under current rules, the proposed User Fee also makes it harder and more expensive for US citizens residing outside of the US to leave the US tax system than it is for permanent residents (green card holders) – in this area citizens are treated worse than non-citizens!

Furthermore, setting the IRS User Fee to the same price as renunciation makes renunciation preferable to RBT for many citizens abroad. Those who will not be covered expatriates, who are having trouble maintaining banking relationships, are shut out of jobs due to either FATCA/FBAR reporting or the requirement to report controlled corporations to the IRS, or have no intention of returning to the US will find renunciation preferable.
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Nov./5/09 – FATCA Hearing pg. 13- Treasury confirms that FATCA is specifically intended to include #Americansabroad https://t.co/xwswNkDF6d pic.twitter.com/7X3gqPa2dY

— Citizenship Lawyer (@ExpatriationLaw) April 15, 2017

The purpose of this post is, as put forth by Tim:

We would like to hear what sections of the testimony (including the non-witness, written testimony) you feel may have some impact on our Charter Challenge. I have tried to make this a little more readable; i.e., the original document is 154 pages, a lot of it in very small print. I have separated where possible, individual letters. It is a lot to take in and I hope this is helpful.All bolding/italics are mine.

NB: Member names that are bolded/italicized still sit on the Ways & Means Committee

GPO PDF file

U.S. Government Printing Office Washington
Foreign Bank Account Reporting and Tax Compliance Hearing
Before the Subcommittee on Select Revenue Measures of the Committee on Ways and Means
U.S. House of Representatives

One Hundred Eleventh Congress First Session
November 5, 2009

Committee on Ways & Means
Charles B. Rangel, New York, Chairman
Fortney Pete Stark, California
Sander M. Levin, Michigan
Jim McDermott, Washington
John Lewis, Georgia
Richard E. Neal, Massachusetts
John S. Tanner, Tennessee
Xavier Becerra, California
Lloyd Doggett, Texas
Earl Pomeroy, North Dakota
Mike Thompson, California
John B. Larson, Connecticut
Earl Blumenauer, Oregon
Ron Kind, Wisconsin
Bill Pascrell, Jr., New Jersey
Shelley Berkley, Nevada
Joseph Crowley, New York
Chris Van Hollen, Maryland
Kendrick B. Meek, Florida
Allyson Y. Schwartz, Pennsylvania
Artur Davis, Alabama
Danny K. Davis, Illinois
Bob Etheridge, North Carolina
Linda T. Sanchez, California
Brian Higgins, New York
John A. Yarmuth, Kentucky
Dave Camp, Michigan
Wally Herger, California
Sam Johnson, Texas
Kevin Brady, Texas
Paul Ryan, Wisconsin
Eric Cantor, Virginia
John Linder, Georgia
Devin Nunes, California
Patrick J. Tiberi, Ohio
Ginny Brown–Waite, Florida
Geoff Davis, Kentucky
David G. Reichert, Washington
Charles W. Boustany, Jr., Louisiana
Dean Heller, Nevada
Peter J. Roskam, Illinois
Janice Mays, Chief Counsel and Staff Director
Jon Traub, Minority Staff Director

Subcommittee on Select Revenue Measures

Richard E. Neal, Massachusetts, Chairman
Mike Thompson, California
John B. Larson, Connecticut
Allyson Y. Schwartz, Pennsylvania
Earl Blumenauer, Oregon
Joseph Crowley, New York
Kendrick B. Meek, Florida
Brian Higgins, New York
John A. Yarmuth, Kentucky
Patrick J. Tiberi, Ohio, Ranking Member
John Linder, Georgia
Dean Heller, Nevada
Peter J. Roskam, Illinois
Geoff Davis, Kentucky

The subcommittee met, pursuant to notice, at 10:05 a.m., in Room B–318, Rayburn House Office Building, the Honorable Richard E. Neal [chairman of the subcommittee] presiding.

FOCUS OF THE HEARING:
The hearing will focus on non-compliance by U.S. taxpayers with foreign bank accounts,rules regarding foreign trusts with U.S. beneficiaries, and certain U.S. dividend equivalent payments to foreign persons to avoid U.S. taxes. The hearing will also focus on recently introduced legislation, HR 3933, the Foreign Account Tax Compliance Act of 2009.

BACKGROUND:
According to the most recent tax year data available (2003), more than $293 billion in U.S. source income was sent to individuals and businesses residing abroad.The United States imposes withholding taxes when U.S. source investment earnings are paid to a foreign person. Those withholding taxes were largely designed to collect tax on income earned in the United States even though the income is earned by a foreign person not subject to the jurisdiction of our laws. Those withholding taxes also play a role in preventing non-compliance by U.S. persons holding investment assets in accounts overseas.

The Internal Revenue Service (IRS) has established the Qualified Intermediary (QI) program that authorizes foreign financial institutions to collect withholding taxes on behalf of the U.S. government. The program was implemented to improve compliance for tax withholding and reporting on U.S. source income that flows offshore through foreign financial institutions. The recent UBS case revealed problems with the QI program that permitted tax evasion by U.S. persons. Further, even with jurisdictions in which the United States has a tax treaty, effective information exchange used by tax enforcement agencies may sometimes be undermined by local laws providing for banking secrecy that conflict with U.S. law.

In March of this year, this Subcommittee held a hearing on bank secrecy and tax evasion at which the Commissioner of the Internal Revenue Service testified (Ways and Means Committee Hearing Print, Serial 111-12, Hearing on Banking Secrecy Practices and Wealthy American Taxpayers). In May, the President released a fiscal 2010 budget proposal including a number of new requirements on taxpayers with foreign bank accounts and foreign financial institutions holding those accounts. Last week, Representative Charles B. Rangel filed HR 3933, the Foreign Account Tax Compliance Act of 2009 containing, among other proposals, many of the proposals from the Administration’s budget, including a mandatory 30 percent withholding on payments to foreign financial institutions unless they disclose information to the IRS on accounts owned by U.S. individuals or close the accounts, and a requirement on individuals and entities to report offshore accounts with values of $50,000 or more on their tax returns (see Joint Committee on Taxation Technical Explanation, JCX-42-09).

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reblogged from Allison Christians’ Tax, Society & Culture with permission

"The Offshore Tax Enforcement Dragnet" – how adversely affects immigrants, #Americansabroad #AccidentalAmericans https://t.co/7rqEzYYpqy

— Patricia Moon (@nobledreamer16) April 1, 2017

Shu Yi Oei (Tulane) has posted an important new paper on U.S. offshore tax enforcement, of interest. Here is the abstract:

Taxpayers who hide assets abroad to evade taxes present a serious enforcement challenge for the United States. In response, the U.S. has developed a family of initiatives that punish and rehabilitate non-compliant taxpayers, raise revenues, and require widespread reporting of offshore financial information. Yet, while these initiatives help catch willful tax cheats, they have also adversely affected immigrants, Americans living abroad, and “accidental Americans.”
This Article critiques the United States’ offshore tax enforcement initiatives, arguing that the U.S. has prioritized two problematic policy commitments in designing enforcement at the expense of competing considerations: First, the U.S. has attempted to equalize enforcement against taxpayers with solely domestic holdings and those with harder-to-detect offshore holdings by imposing harsher reporting requirements and penalties on the latter. But in doing so, it has failed to appropriately distinguish among differently situated taxpayers with offshore holdings. Second, the U.S. has focused on revenue and enforcement, ignoring the significant compliance costs and social harms that its initiatives create.
The confluence of these two policy commitments risks creating high costs for the wrong taxpayers. While offshore tax enforcement may have been designed to catch high¬-net-worth tax cheats, it may instead impose disproportionate burdens on those immigrants and expatriates who have less ability to complain, comply, or “substitute out” of the law’s grasp. This Article argues that the U.S. should redesign its enforcement approach to minimize these risks and suggests reforms to this end.

The paper provides a thorough review of the panoply of offshore enforcement programs and mechanisms and documents the harms of their dragnet approach, especially on the most vulnerable and least likely targets. A significant contribution to the literature.

cross-posted from renounceuscitizenship blog

U.S. citizens outside U.S. – Not what they take from you, it’s what they leave you with – #CBTax #FBAR r destructive https://t.co/LthGIGjI3M pic.twitter.com/f8VkU7BLeT

— Citizenship Taxation (@CitizenshipTax) March 26, 2017

Going back to a general thread from a few weeks ago – on law and morality – this post speaks more to the effects of the law when it is not rooted in morality. On one level, an apologist might claim that “doing one’s duty” and “paying one’s share” is moral and is necessary to maintain funding and order in a society. However, when such a law is applied to those who live outside that society, as we all know from experience, unexpected conflicts, resulting punitive actions and penalties tend to denigrate the quality of life. We are not talking about “quality of life” amounting to physical comforts or financial wealth. By “quality of life, what is referred to is mental stability, emotional trustworthiness and the ability to move through difficulties with a sense of direction and confidence. When these parameters are stifled by confusion/lack of clarity of what is expected, and ridicule and negativity is directed toward those affected, the result is a not an issue of lack of compliance but rather, wrongly imposed requirements that simply make people anxious, immobilized by fear, depression and a general inability to adjust to the situation. How this can be justified when those same people ARE compliant in the society where they live, strikes many as simply being immoral.

*****

The Wisdom of Moe Levine Moe Levine (not that I ever met him) was considered to be one of America’s greatest trial lawyers. Although he died in 1974, his wisdom lives on his book (appropriate called) “Moe Levine on Trial Advocacy“. He (legend has it) was a master at delivering the closing statement in his jury trials. When arguing for a severely injured plaintiff he (according to the commentators of his time) would tell the jury (referring to a badly injured client):

“It’s not what you take from them it’s what you leave them with.”
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Solving US Citizenship Problems Toronto Sat March 25 2-4 pm 100 St. Joseph St. #FATCA #FBAR #CBTax Get the facts! https://t.co/9MwpNgP9Mj pic.twitter.com/SSP2tZMpIt

— Patricia Moon (@nobledreamer16) March 8, 2017

FATCA is in full swing. The fear-mongering of the tax compliance industry continues. A recent suit involving a dual U.S.-CDN citizen is launched and while NOT typical of the average Canadian, major fears arise. Will the IRS extend its program of penalties to the minnow? Will the U.S. Republicans manage to achieve Tax Reform that would include a move to RBT? Will FATCA finally be killed off?

If you are still sitting on the fence wondering what to do and where you stand, now is a good time to make sure you have the facts. Many are still choosing to #RenounceAndRejoice! Should you?

Next meeting is in Vancouver, Tuesday, May 23, 2017