Defenders of the executive branch claim that U.S. Persons abroad should direct their anger at Congress, and not the IRS, for the current holy crusade against people who dare to live and save outside of the United States. But over at Tax, Society & Culture, tax prof Adam Rosenzweig makes an interesting argument which points to the hole in that logic:
Conventional wisdom seems to hold that Congress must act for there to be any reform of the taxation of “carried interest” (the type of fees earned by investment fund managers such as Mitt Romney) But if the goal is to tax carried interest at the same rate as, say, salary earned by auto workers, Congress need not act at all. Rather, the Treasury Department could accomplish this on its own today.
This somewhat surprising conclusion comes from the fact that the Code already authorizes the Treasury Department to prevent taxpayers from using partnerships to convert certain types of income that would have been taxed at the ordinary 35% rate into income taxed at the preferential 15% tax rate. For somewhat technical reasons, carried interest requires a partnership to be used for tax purposes. Thus, Treasury could simply issue a regulation disallowing the 15% rate for carried interest. Voila! Carried interest fixed.
So what other ridiculous aspects of the U.S. tax system might Treasury be able to fix through its power to issue regulations? Perhaps something related to U.S. Persons abroad?
Geithner can’t exclude us from payment of U.S. tax — but most of us barely owe any tax anyway. What he can exclude us from, however, is the need to pay the Tax-Industrial complex thousands of dollars to help us file thirty pages of useless forms every year, or from being subject to the life-altering penalties aimed at Homeland whales for not crossing our “t”s and dotting our “i”s, or from imposing punitive withholding taxes on banks which refuse to violate our countries’ democratically-enacted personal data privacy laws which are supposed to protect all residents of our countries regardless of their nationality.
Don’t believe me? Read the laws yourself, and look at how much power they give to Mr. Secretary. First, let’s start with 26 USC § 1471(a) and (f), “Withholdable payments to foreign financial institutions”, part of FATCA’s infamous 30% withholding regime:
(a) In general
In the case of any withholdable payment to a foreign financial institution which does not meet the requirements of subsection (b), the withholding agent with respect to such payment shall deduct and withhold from such payment a tax equal to 30 percent of the amount of such payment …
(f) Exception for certain payments
Subsection (a) shall not apply to any payment to the extent that the beneficial owner of such payment is … any other class of persons identified by the Secretary for purposes of this subsection as posing a low risk of tax evasion.
Like, for example, Americans overseas who do not owe you thieves any tax despite all this stupid paperwork you keep flinging at us to generate $10,000 penalties? So how about the next section of FATCA, 26 USC § 1472(a) and (c) (“Withholdable payments to other foreign entities”)?
(a) In general
In the case of any withholdable payment to a non-financial foreign entity, if—
(1) the beneficial owner of such payment is such entity or any other non-financial foreign entity, and
(2) the requirements of subsection (b) are not met with respect to such beneficial owner,then the withholding agent with respect to such payment shall deduct and withhold from such payment a tax equal to 30 percent of the amount of such payment.
(c) Exceptions
Subsection (a) shall not apply to … any payment beneficially owned by … any other class of persons identified by the Secretary for purposes of this subsection
That’s “any other class of persons”. Not just persons with a “low risk of tax evasion”.
So what about non-U.S. ETFs and mutual funds, which are supposed to be a way for unsophisticated investors to get some exposure to the markets, but with the U.S.’ PFIC laws turn into an accounting nightmare — effectively forcing U.S. persons to invest only through U.S. ETFs and mutual funds, regardless of what any free trade agreements might say about non-discrimination? 26 USC § 1298(f) (“Special rules”):
(f) Reporting requirement
Except as otherwise provided by the Secretary, each United States person who is a shareholder of a passive foreign investment company shall file an annual report containing such information as the Secretary may require.
What about our RDSPs, MPFs, CPFs, second pillars, and other tax-advantaged purpose savings schemes for education and retirement and the benefit of the disabled, which the legislatures of the places where we actually live have democratically granted simple tax and paperwork treatment? Does the IRS really have no authority whatsoever to save us from filling out 3520s and 3520-As intended for Mitt Romney and his multi-billion dollar blind foreign non-grantor trusts? Obviously they do, otherwise they couldn’t have created Form 8891 in the first place. How broad are their powers? 26 USC § 6048(d)(4) (“Information with respect to certain foreign trusts”):
(4) Modification of return requirements
The Secretary is authorized to suspend or modify any requirement of this section if the Secretary determines that the United States has no significant tax interest in obtaining the required information.
In the toy model of government that many of us learned in school, our (s)elected (un)representatives in Congress pass all the laws of the land, and the only job of the executive branch, including government agencies such as the IRS, is to faithfully execute those laws down to the last letter. Of course, back on planet Earth, practically every law passed by Congress gives the executive branch significant power to modify the execution of the law through regulations. And even if it doesn’t, the executive branch can always change its enforcement priorities. And of course, perfect enforcement of laws in general is not compatible with a free society.
So is Treasury going to use the power given to them by Congress to stop wasting the time and money of U.S. Persons abroad, even if that means a couple of dollars here and there slip through their grasp? Don’t hold your breath.
“Defenders of the executive branch claim that U.S. Persons abroad should direct their anger at Congress…”
What utter rubbish. Talk about abdication of responsibility. For the record, I am not happy with ANY of these jokers and that includes Obama. For Christ’s sake, you guys (and gals) stop with the, “it’s the fault of THOSE people over there.” Either you (and I mean ALL of you) are a bunch of ineffective idiots/squabbling children/moral midgets or you really are after us USP’s. I’m thinking the former myself. The latter would imply a perverse, if not downright diabolical, intelligence that I just don’t think they possess. 🙂
Don’t hold your breath is right. Obama and Jarret have an agenda and one part of it is reparations. The problem is that extracting reparations means increasing taxes, and as Colbert said: “The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing”.
Expats don’t hire lobbyists and even if they ever got elected to office they would no longer be expats. There is no expat revolving door. The is no special government favors to enrich expats and provide payoffs for politicians. Most expats cannot even vote for Senators or Congressmen. Expats have no hiss. To the political class expats are all but invisible.
Here is a great piece in this vein describing why we should withdraw consent:
America’s Crisis of Political Legitimacy
In Switzerland the banks and the government have sold out the peoples’ financial privacy to their banking interests. The handicapped and the government worked to increase the VAT to 8% to pay for “burnout” and other “disabilities”. The automobile importers and the greens made a new “green” tax to shutdown the auto import grey market. The police have radars and spot inspections all across the the country to raise revenue. The veternarians and the Government worked together to get mandatory animal chipping. I could go on an on, but the take over of government by special interests is proceeding along at a similar pace in Switzerland as in the US and I am certain that it is in Canada too. The welfare state is one big lie and the left are selling us into slavery.
I for one don’t think that they’re a bunch of bumbling idiots – Quite the opposite actually. FATCA, FBAR and the lot seem entirely intentional and meticulously planned in my head. Its also “win win” for everyone over there – The IRS gets free money from trumped up penalties, whilst the US political establishment has found the perfect scapegoat to blame all of the problems on: Overseas Americans who they know have a negligible effect in their reelection and whom homelanders all view as tax dodgers living the high life, so nobody will complain or care.
We have noted since 21 December, that the Secretary also has the duty under the Bank Secrecy Act to determine who must make reports, as Phil Hodgen writes:
So all the FBARs coming from people living overseas are completely unnecessary if Mr. Tim (tax cheater) Geithner decides. This is an executive problem as much as congressional one.
http://en.wiktionary.org/wiki/Appendix:List_of_protologisms/Q-Z
rulitis: slavish and blind adherence to rules at the expense of common sense
@Watcher, It’s worse than rulitis, stupid rules, stupid enforcement. Leads to disaster.
There are three other combinations: stupid law, smart enforcement; smart law, stupid enforcement; smart law, smart enforcement.
Obviously, we are dealing with the worst of combinations. This equals= Congress stupid, President stupid.
The Bank Secrecy Act’s FBAR would never work to accomplish their goals, since terrorists, money launderers and thieves never tell you where they are keeping their money. Stupid law, that wasn’t really enforced until we had a stupid adminstration (i.e., Obama).
@Don Pomodoro: I agree, it is far worse than just bumbling there is a coordinated assault against US persons with any remaining wealth. Check out this new one from Mark Steyn.
“I flew in to Montreal from an overseas trip the other day and was met by
a lady from my office, who had kindly agreed to drive me back home to
New Hampshire. At the airport she seemed a little rattled, and it
emerged that on her journey from the Granite State she had encountered a
“security check” on the Vermont–Quebec border. U.S. officials had
decided to impose temporary exit controls on I-91 and had backed up
northbound traffic so that agents could ascertain from each driver
whether he or she was carrying “monetary instruments” in excess of
$10,000. My assistant was quizzed by an agent dressed in the full
Robocop and carrying an automatic weapon, while another with a sniffer
dog examined the vehicle.”
Or this one from Jim Willie:
Firestorms & Currency Twisters
“3) The attack on money market funds is moving apace, in a stealth capital control concept. Systemic risk is posed by a run on money market funds. Oddly, money market funds are no longer the staid boring type sitting on an inert shelf. They are suddenly not cash, by official declaration. The Powerz cannot afford to see that liquidity removed. An attack on the $2.7 trillion in money market funds has come in response. The money market funds serve as scarce capital, a liquidity source that holds together the insolvent banking system. Given how money market funds are the last pool of liquidity that holds together the entire Western banking system, it is under attack to stay put. New rules could force a maintenance of a minimum amount in each account. The new rule concept is called Minimum Balance at Risk (MBR) and is direct capital control applied domestically within the United States. The MBR would be a small fraction (like 5 percent) of each shareholder’s recent balances that could be redeemed but with a delay. “
Capital controls are coming and the homelanders are going to get a much needed lesson about the true intents of their government.
@Confederate: Good find. The exit on land crossings has rarely been enforced in this manner. I’ve made your comment into a new thread.
*If FATCA gets implemented and the banks/governments start handing over the US persons details who are NOT tax compliant (FBAR etc) does this mean that the US will seize expats assets in their country where they live? OR is this a violation of law?
The IRS can’t seize assets in a foreign country with the same ease at which they can enforce their jurisdiction in the United States; Canada for example has said it will not collect FBAR fines. If the IRS deems that you owe them money, of course, whatever is in the US is open to the full force of the IRS’s ability to confiscate or place liens. I don’t know what they are obviously, but I don’t have significant US assets, as I don’t think investments in the US are safe in any case.
@Eric
This is a prime example of a government putting its own interests ahead of those of its country’s people. We are significant only to the extent that we are a source of revenue. The revenue generating fleece-n-free-@-$450-plus-exit-tax machine is complete. What greater benefit could we possibly offer?
@ConfederateH
The political legitimacy article is fascinating. You have definitely helped change how I view government. Do you believe at all in the concept of ‘good governance’, and if you do, what would it look like? In my post What President Obama Doesn’t Want You To Know About Canada the Canadian government has revealed a campaign to reduce government spending by tying senior bureaucrat’s bonuses to their ability to make spending cuts in their departments “This is just part of how we’re changing the attitude of government officials from spending enablers to cost containers.”
I’m curious to hear your, or anyone else’s, thoughts on that idea.
Rulitis –
Also an infectious disease that current Brockers seem to have adequate inoculation against
@usxcanada
Mine was through developing a resistance, but I’m still vulnerable. Exposure to Brock helps.
@bubblebustin:
“Do you believe at all in the concept of ‘good governance’, and if you do, what would it look like?”
Good governance would be by people from your community who you know and who mostly volunteer or get a small stipend. My experience in Switzerland is that when there is an issue (say problem with the neighbor or a building issue) from the local community (gemeinde) then you have a chance of some flexibility. As the law moves up to the Canton or Bund you can forget any flexibility and you NEVER win if you contest their decisions.
So I would say that good governance would be local, and if there is bad local governance then you at least have a slight chance of being able to change it.
I certainly don’t have all the answers and I lean towards being an Anarchist but I realize that some form of governance is probably necessary. But the entire western world has deviated so far from this path that for all intents and purposes I am an anarchist. When they get government and my total tax burden under 10% then I’ll be ready to start tweaking the system. Until then I say tear the sucker down.
*@Petros and everyone
We have no assets in US and have lived abroad in Australia all my life and built all my wealth abroad through hard work. It makes me sick to my stomach that the US has a right to one cent simply because you are born in US or born to US parents.
My hope is that because my assets are in Australia were I live is that they cannot seize them. I do not want to end up homeless because I did not file a form.
Does anyone know if the IRS has tried to seize assets abroad and through what means?
How safe does everyone feel with all assest with all this going on?
Thanks
@upset
I have not heard of the IRS trying to seize assets abroad. I believe the fear of most people is FATCA and the possibility/probability that the foreign (Australian in your case) financial institution will have to report your accounts to the IRS.
Do your financial institutions know that you were born in the U.S? Are you an Australian citizen? If you naturalized in Australia, then you would probably have a strong case to prove that you intended to relinquish your U.S. citizenship at that time.
I believe you might be new to this site. I suggest you read as much as you can, especially on the RELINQUISHMENT AND RENUNCIATION threads.
@Eric
Thanks for another great post. In the case of FBAR the Treasury Secretary (meaning the Obama administration) has the discretion to exempt US citizens abroad from FBAR. They have deliberately and consciously made a decision to NOT do this. This is of course has nothing to do with Congress. It is unbelievable to me that there is a single US citizen abroad who is going to vote for Obama.
*Upset. It’s not just a hope. They cannot seize your assets. To do so, they would have to get an Australian court to agree. A) they aren’t going to try because they don’t have the resources and B) Any Australian court or agency would tell them to take a hike. Tell your financial institution you are Australian. Don’t tell them where you were born. Don’t give your permission to them to give any of your private info. to the IRS. Relax a bit, calm yourself, educate yourself and you will learn that you truly have ‘no worries’.
*@ Petros, Corwalliscal, Eric and everyone
We are Australian Citizens born to US parents. We own no US taxes and have paid all taxes in Australia, but did not know to file the FBAR so have not done so. We are scared to file due to the threat of fines which would wipe out everything we have.
We have followed the OVDI etc and read about the unfair treatment of the people who have entered it so we will not go into that. We are scared.
We are not rich but have managed to buy a home and have an average Australian life. All we want to do is live in peace which is becoming impossible for US persons abroad.
@upset
It sounds like you were born as dual citizens and do not have a passport showing a US place of birth. In that case, you would be referred to as “Accidental Americans”. If you do, in fact, not have a US place of birth, it is very unlikely the IRS would ever find you. This would be particularly true if you have never filed US taxes, never voted in a US election, never applied for a US passport. If all of that is true, you can probably rest easy.
@confederateH
Thank you for answering my questions, but I don’t think being proactive in tearing things down will be necessary, at least in the US’s case.
@Upset
I’m a NZer who went through the OVDP as a temporary immigrant to the USA and now reside back in NZ with my American spouse. I urge you to write a submission to the Oz Treasury on the subject of FATCA (here) and the risks it poses to you as an Australian. Being an Oz citizen you also have the right to write to your represenattives and ministers; do that too, even if it is just a cc’ing of the Treasury submission. Get any other Oz/USAians you know to do the same.
I’ve been waiting for FATCA to rear it’s ugly head in Australasia so that I can start doing something about it. I’ll be writing a detailed and pointed submission to Oz Treasury as a starter. I have a compelling story to tell (see my opt-out story), but I need others to be telling corroborating stories. One person telling one story can be written off as a crackpot; a multitude of voices telling the similar stories cannot. I’m hoping to publish my submission here when I submit it so that others can feed off it too.
Just Me has Australian connections so I hope he does the same.
*Upset. You don’t need to do a single thing except educate yourselves. You will come to realize that you are perfectly safe and free.
*@ everyone
I was born in US moved to Australia very very young. I am an Australian Citizen and have been for a long time.
We know about the Oz Treasury FATCA and am going to make a submission. I will encourage everyone that I know to do the same. FATCA affects Australian spouses of US persons as well.
I worry that the Australian Government will not look after its citizens when it comes to FATCA.
I do not understand why the planet would go ahead with this. At a time when countries have so many financial problems they are going to spend a fortune for FATCA with no real benefit to them.
I am not concerned about taxes to the US as I own no US taxes. My only problem is not filing a form.
@Moby – I have read your story. It is amazing. Did you find the IRS sympathetic to your situation or did they just through to book at you?
This site has been a great help!
@Upset
Glad to hear you are making a submission and encouraging others too. I’m happy to collaborate or help in any way if needed.
My OVDP journey was very stressful. But by the time they got to my case I was back in NZ so that might have affected how they dealt with me and my lack of penalties (a penalty that can’t be collected isn’t worth assessing). The examiner did express sympathy for my case, as did his supervisor. However, who knows how it might have gone if I had wanted to stay in the US; I might have caved in and paid (the threatened opt-out penalties were highly distressing and they were definitely pushing for the in-lieu penalties), or they might have actually assessed penalties.
From an enforcement perspective you have nothing to worry about regarding FBARs and US taxation and general. The US government has no power to collect or seize ANY moneys/assets (tax, penalty or otherwise) in Oz; even in the unlikely event that they had information about you they couldn’t act on it. The Australian courts cannot enforce such judgments from foreign governments (under the Revenue Rule), and the ATO will not offer any collection assistance. You should absolutely stay away from OVDPs.
FATCA is a big unknown though. It is definitely a vehicle to extract money from people like us and who knows how it will evolve if it is adopted.