The scope of advocacy in the 21st century – It all starts with the U.S. Extra-territorial tax and regulatory regime …
US citizens who move from the United States and becomes a tax resident of another country:
1. Continue to be subject to the U.S. Internal Revenue Code (the extra-territorial tax regime); and
2. Are subject to more punitive U.S. taxation and reporting than are resident Americans!
“The Unknown Ambassadors” describes a history which:
– documents the horrible discrimination against Americans abroad in the area of the “citizenship rights” (of children born outside the United States to a U.S. citizen parent – between 1959 and roughly 1980)*****;
– documents the history of a time when Americans abroad had no voting rights (up until 1976); and
The battles won by Ms. Michaux (enhanced citizenship and voting rights) were impressive. Yet the successes of the past have exacerbated the problems that Americans abroad experience today. (There are more people born abroad who are American citizens. The right to vote is frequently used to justify U.S. citizenship taxation.) Of course, nobody could have foreseen: the growth in the number of U.S. citizens abroad (resulting from the Afroyim decision), the nasty evolution of the U.S. tax system, the activation of citizenship taxation under the Obama administration, the Obama Offshore Voluntary Disclosure Programs, the dusting off of Mr. FBAR after 911, the discovery of PFICs in the OVDI programs, the Clinton Treasury 877A expatriation tax and the implementation of FATCA.
– documents the collective advocacy undertaken by Ms. Michaux (and others) to reverse this discrimination (there are lessons to be learned from their success).
(While acknowledging the existence of citizenship taxation, Ms. Michaux seems to accept it as part of what it means to be American. Significantly, Ms. Michaux was recounting a period of history before FATCA and the other aspects of citizenship taxation that are forcing Americans abroad to renounce U.S. citizenship.)
There are at least four reasons why the situation for Americans abroad has escalated and is far worse in 2024.
Four significant escalations since the Phyllis Michaux era
1. The expansion of U.S. citizen individuals who are “Overseas Americans” – Before And After the 1967 Supreme Court Decision In Afroyim***
As documented in Amanda Frost’s “You Are Not American“, the United States has a long history – through Congressional legislation – of stripping Americans of their citizenship. To put this in context, imagine a situation where a majority could use the democratic process to simply exclude one or more individuals from the political process (and more) by stripping them of their citizenship.
In the 1967 U.S. Supreme Court decision in Afroyim v. Rusk, the court ruled that Congress could NOT strip people of their U.S. citizenship. Interestingly it took almost 20 years (and several more court decisions) for the Immigration and Nationality Act to make this change and for the State Department to recognize it.
Prior to Afroyim U.S. law stripped Americans of their citizenship for a variety of reasons. These reasons included (but were not limited to) naturalizing as a citizen of another country! Therefore the result of Afroyim was that more and more U.S. citizens were also citizens of another country. Dual citizenship became and increasingly becoming more common.
Notably the increase in the number of dual citizens has significantly changed the composition of who an “Overseas American” actually is. In the days of Phyllis Michaux, an “Overseas American” was much more likely to be an expat or government worker who identified as a U.S. citizen. U.S. citizenship laws, made it difficult for an “Overseas American” to be anything else. This means that the Ms. Michaux group was likely to be the dominant group lobbying for changes in U.S. laws. They (because they identified as U.S. citizens) were also a more sympathetic group than the diverse groups that exist today (accidental Americans, emigrants, expats, retirees abroad, etc.)
2. The inclusion (since 1984) of “Green Card holders (like U.S. citizens) as U.S. tax residents
U.S. “residents” have always been subject to U.S. worldwide taxation. That said, U.S. “residents” include individuals who are NOT actually “resident” in the United States. Nonresident U.S. citizens are treated as though they reside in the United States. Prior to January 1, 1984, whether “Green Card” holders were treated as U.S. residents was a question of fact. Effective January 1, 1984 the Internal Revenue Code was amended so that “Green Card” holders are deemed to be U.S. residents regardless of where they live in the world. This change in the definition of U.S. tax residency has swept another large group of people into the U.S. tax system.
3. The expansion of ways “Overseas Americans” can be subjected to U.S. taxes, forms and penalties
Since Ms. Michaux’s time the expansion of taxes and forms applicable to Americans abroad (and enforced against them) has been shocking. In a previous post I described some of the forms and information returns that are likely apply to Americans abroad.
Forms that are common today, but did not exist or were not known in Ms. Michaux’s time include:
– Mr. FBAR – FinCEN 114: Although it has existed since 1970, but remained virtually unknown since 2003
– Form 8938: Part of FATCA and the HIRE Act of 2010
– Form 5471: Existed but not known by Americans abroad with small businesses
– Form 3520: The result of 1996 changes to the Foreign Trust rules
– Form 8621: The result of the creation of PFICs in the 1986 tax reform (but not applied to non-US mutual funds until the 2010 Offshore Voluntary Disclosure Programs)
The encactment of FATCA in 2010 was the circumstance that unleashed the horrors of the U.S. extraterritorial tax regime on the world.
There is no comparison between the taxation of Americans abroad in the time of Phyllis Michaux and the environment that exists today.
4. The decline in pensions and the necessity of individuals taking responsibility for their retirement and financial planning
1976 was 50 years ago. In 1976 pensions were far more common than they are today. In 2024 individuals have a responsibility to themselves and to their families to engage in responsible financial and retirement planning. Unfortunately the U.S. tax system (largely because of the tax treaty “saving clause” has made this increasingly difficult for individual “Overseas Americans”. The biggest cost of U.S. citizenship for Americans abroad is the opportunity cost associated with not being able to participate in tax advantaged retirement programs in their country of residence. Many U.S. emigrants are forced to choose between retaining their U.S. citizenship or renouncing U.S. citizenship in order to participate in financial planning programs in their country of residence. Unsurprisingly, many are choosing to simply renounce U.S. citizenship.
Then and now …
We all respond to the circumstances of our time. Ms. Michaux’s advocacy took place during a time of (relative) tax simplicity and a much smaller and well defined group of “Overseas Americans”. Significantly, in the Phyllis Michaux there is no evidence that “Overseas Americans” were under pressure to renounce U.S. citizenship.