Since July 1, 2014, the United States via threats threats of the FATCA Sanction, has begun a “world wide hunt” for people born in the United States (or are otherwise deemed to be “U.S. tax subjects”). A compilation of my posts describing the mechanics, effects and costs of FATCA and the FATCA IGAs is available in “The Little Red FATCA Book“. FATCA has spawned litigation against both the U.S. and Canadian Governments. A discussion of the “Alliance For The Defense Of Canadian Sovereignty” FATCA lawsuit against the Government of Canada is available here. Some thoughts on the “U.S. FATCA Legal Action” lawsuit against the U.S. Government are here. Both lawsuits have been vigorously defended by the respective Governments. The U.S. lawsuit may have reached the end of its viability (lack of standing and various procedural issues). The Canadian lawsuit continues.
With respect to those “Born In The USA”, the U.S. legal “claim of tax jurisdiction” is two-fold:
As the article referenced in the above tweet makes clear, many people “claimed” by the United States as “tax residents”have never had any connection to the United States except that they were born there. The article includes:
Awad Al-Zahrani, whose son has US citizenship, said he would give it up.
“My son got the passport since he was born there while I was studying in the country back in 2000. At the time, the Saudi embassy had told me that it would not be a problem for him to hold two passports. Now that we have to pay taxes, though, we’ll be giving the US passport up.”
Abdulrahman Al-Habib, head of journalism studies at KAU, argues that Saudis who were born in the US should be exempt from paying taxes.
“We should establish a unified center to help Saudis clear their former tax registers,” he said.
US Consul-General Todd Holmstorm,however, confirmed that US citizens should pay income tax and called on their international counterparts to help them eliminate tax evasion.
“The tax law is designed to combat evasion through increasing transparency in the financials of US taxpayers,” he said.
Mr. Holmstorm’s bio indicates that his career has had a Canadian connection in Ottawa, Canada. His comments in the above article imply that he believes that those (1) born in the U.S. who (2) do not live in the U.S. and (3) do not pay taxes to the U.S. are guilty of “tax evasion”. Strong language indeed. Yet, these are his words which clearly reflect the attitude and policy of the U.S. Government.
Last September, due to the efforts of Suzanne Herman,
Representative Bill Posey (R-FL) sent an excellent letter to Treasury Secretary Mnuchin,
asking him to deal with #FATCA.
This post included the text of the letter and some 60+ comments from Brockers. What Rep. Posey received is a stark contrast to the expectation expressed in this comment:
October 16, 2017 at 2:12 pm
According to RO on its FB page:
“At Republicans Overseas’ request, RNC Co-Chairman Bob Paduchik personally delivered Rep. Mark Meadows’ and Sen. Rand Paul’s joint letter on the Foreign Account Tax Compliance Act to Treasury Secretary Steven Mnuchin’s office. Secretary Mnuchin is fully aware that 9 million overseas Americans have been suffering under FATCA tyranny.
As a result, FATCA is included in the 2nd Report to the President on Identifying and Reducing Tax Regulatory Burdens by the Treasury (https://www.treasury.gov/press-center/press-releases/Documents/2018-03004_Tax_EO_report.pdf).
In the report to the President recommending actions to eliminate or mitigate burdens imposed on taxpayers by eight specific tax regulations, the Treasury indicated that it is considering possible reforms of regulations issued pursuant to FATCA. Thank you Co-Chairman Bob-Paduchick.”
This is the response Rep. Posey received from the Treasury Department:
November 8, 2017
The Honorable Bill Posey
U.S. House of Representatives Washington, DC 20515
Dear Representative Posey:
Thank you for your letter regarding the Foreign Account Tax Compliance Act (FATCA). As you are aware, Congress passed FATCA legislation in 2010 to strengthen the integrity of the U.S. voluntary tax compliance system and to combat the use of foreign financial accounts and foreign entities to facilitate tax evasion. FATCA provides the IRS with information about U.S. taxpayers’ use of foreign financial accounts and certain higher-risk foreign entities, so that these foreign accounts and investments are subject to disclosure to the IRS, similar to the disclosures for accounts and investments held or made inside the United States that the IRS already receives. Continue reading “Treasury Department Responds, so to speak, to Rep Bill Posey’s #FATCA letter”→
U.S. AKA American citizenship is very different from all other citizenships in the world. It is a difficult citizenship to maintain if you do NOT actually live in the United States. The reason is that the United States is the only (I am not counting Eritrea) country that requires ALL if its citizens to abide by the rules in the Internal Revenue Code, regardless of where they live in the world. I note that some of the answers to this question confirm that U.S. citizens are subject to U.S. taxation whether they live in the United States or not. Although U.S. citizens are subject to U.S. taxation regardless of where they live in the world, the requirements in the Internal Revenue Code are about much more than taxation. Here are some ways that the Internal Revenue Code imposes requirements that are not specifically about taxation:
The rules of the Internal Revenue Code treat “non-U.S. citizen” spouses differently from U.S. citizen spouses. Although not specifically stated the effects of this differential treatment appears to assume that a spouse who is NOT a U.S. citizen exists only at best as an opportunity for money to leave the U.S. financial system and at worst a form of tax evasion.
I could go on, but you get the point. The Internal Revenue is NOT only about taxation. It is about enforcing life and investment choices (and ultimately U.S. cultural values) that do NOT recognize that U.S. citizens living in other countries also have tax obligations to those other countries. The effect of (1) being subject to the restrictions imposed by the Internal Revenue Code and (2) being subject to taxation in their country of residence.
How is U.S. citizenship obtained …
One can become a U.S. citizen by either “birth” (either born in the USA or in certain cases born to a U.S. citizen outside the United States) or by “naturalization” (a choice made after birth). Most countries do NOT confer citizenship simply by virtue of birth in the country.
Interestingly, the United States is the ONLY country that both:
Imposes citizenship because one was born in the United States; and
Imposes a comprehensive tax code based on citizenship.
Therefore, those born in the United States are required to obey ALL the rules of the Internal Revenue Code (whether based directly on taxation or reporting …) for life.
In a Global World, there are many U.S. citizens who are citizen/residents of other countries …
The big problem is that under the guise of “citizenship-based taxation” the United States is imposing full taxation (and the requirements of the Internal Revenue Code) on people who are citizens and tax paying residents of other countries. Think of it! For more discussion of this issues see:
But, there are actually two kinds of U.S. citizenship and ALL U.S. citizens are “dual citizens” …
The first kind of U.S. citizenship is citizenship for the purposes of nationality. This is the what most people understand citizenship to be. This is what is meant when one enters a country with a passport. U.S. citizenship for nationality purposes gives one the right to “enter the United States”, to live in the United States, to vote in the United States, etc.
The second type of U.S. citizenship (first created in 2004) is citizenship for the purposes of the Internal Revenue Code. Let’s call this “tax citizenship” which means that you are considered to be subject to regulation and taxation by the Internal Revenue Code. Significantly one can cease to be a U.S. citizen for the purposes of “nationality” (no right to live and work in the United States), but still be a U.S. citizen “tax citizen” meaning that you are still subject to the requirements of the Internal Revenue Code. (This is a very difficult situation to be in. Incidentally Green Card holders have exactly the same kind of problem. They can lose their right to live in the USA but still be subject to the rules in the Internal Revenue Code.)
Relinquishing both kinds of U.S. citizenship – breaking the bonds of nationality and the requirements of the Internal Revenue Code …
Since June 16, 2008 (there was a different set of rules prior to that date) a “Certificate of Loss of Nationality” (“CLN”) is required to cease to be both a U.S. citizen for the purposes of “nationality” and for the purposes of “taxation”. A CLN is acquired by either formally renouncing U.S. citizenship or by applying to the State Department for a (“CLN”) based on another kind of relinquishing act. Here is a blog post that I wrote about that describes the issue in a general way:
Are U.S. citizens renouncing U.S. citizenship to avoid the payment of U.S. taxes?
Few people renounce U.S. citizenship because of taxes. Most people who renounce are residents of other countries and subject to the tax systems of those countries. They renounce bc the Internal Revenue Code prohibits them from financial planning in their country of residence.
In my experience no. Because of various tax mitigation rules (foreign tax credits and foreign earned income exclusion) many U.S. citizens abroad do NOT owe U.S. taxes. In fact very few of the people who I assist with renunciation owe U.S. taxes. Therefore, the notion that people renounce U.S. citizenship to avoid U.S. taxes is a a myth. As Ted Sorenson wrote for President Kennedy:
“For the great enemy of truth is very often not the lie–deliberate, contrived and dishonest–but the myth–persistent, persuasive, and unrealistic.”
People do renounce U.S. citizenship to escape the regulatory aspects of the Internal Revenue Code that make it very difficult to live productive lives outside the United States
Caution!!! Caution!! – Since June 16, 2008 relinquishing U.S. citizenship may subject you to the draconian Exit Tax rules found in S. 877A of the Internal Revenue Code!!!
Anybody contemplating relinquishing U.S. citizenship needs to be cautious. You need to understand what the possible U.S tax implications of renlinquishing/renouncing U.S. citizenship would be FOR YOU with YOUR SPECIFIC tax and FINANCIAL PROFILE. This is NOT a “one size fits all” kind of exercise. To learn how the S. 877A Exit Tax rules work see:
Do you have to be compliant with the requirements of the Internal Revenue Code to relinquish/renounce U.S. citizenship?
The answer is NO YOU DO NOT! But, a failure to be compliant with the rules in the Internal Revenue Code for each of the five years prior to renouncing/relinquishing would make you subject to the S. 877A Exit Tax rules.
In closing …
As you might have guessed, I spend a significant part of my professional life helping people terminate their relationship to the United States (both citizens and Green Card holders). I have written this detailed answer to correct a lot of the incorrect information found in various sources. That said:
Under NO circumstances should this answer construed to be legal advice or any other kind of advice. Furthermore, laws are subject to change and you should NOT assume that the information I have given is even correct. You should NOT relay on this answer and absolutely should seek a competent advisor who will help you understand your situation and come to an appropriate decision for you.
This week the Senate version of the tax reform bill will come to the Senate
floor. The Campaign to Repeal FATCA has learned that Senator Rand Paul
(R-Kentucky) plans to offer as a floor amendment his bill S. 869 to repeal
the so-called “Foreign Account Tax Compliance Act (FATCA).
The Campaign to Repeal FATCA is asking everyone immediately to contact your
Senators with this simple message:
“Support the Paul Amendment to Repeal FATCA!”
You can find the contact information for your state’s two Senators here. Given the partisan divide
in the Senate, it is especially important to contact Republican Senators. If
your state has one from each party, contact the Republican first!
Here is a suggested draft message you can use via the email contact. (NOTE:
If you are contacting a Democratic Senator, please delete the sentence in
red referring to the Platform.):
Dear Senator [Name]:
As your constituent, I strongly urge you to support the floor amendment to
be offered by Senator Rand Paul to repeal the so-called Foreign Account Tax
Compliance Act, or FATCA. Despite the claims of its sponsors when it was
passed in 2010, FATCA is a failure in its supposed aim to recover offshore
tax assets hidden by “fat cats.” Instead, it has imposed massive costs on
middle class Americans, violated Americans’ privacy without probable cause,
and led to a huge increase in U.S. citizenship renunciations. The 2016 GOP
Platform called for the repeal of this wrongheaded Obama-era law – and the
Republican Party should keep its promises! Please support the Paul Amendment
to repeal FATCA!
In addition, if you represent an organization, please issue a statement in
support of the Paul Amendment to repeal FATCA and send it to Senate offices
and distribute via social media.
Time is of the essence. Thank you for your help at this critical moment!
Further information points on why FATCA must be repealed follow:
The GOP called for repeal in its 2016 Platform. “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.
FATCA fails in its stated purpose of recovering tax revenues. On enactment
in 2010, FATCA was scored as raising about $800M per year. According to
Texas A&M law professor William Byrnes, actual recoveries are closer to
$100-200M per year and falling. FATCA will soon cost more than it brings in.
FATCA is an indiscriminate violation of privacy. FATCA data reporting
requires no probable cause or even suspicion. Unlike domestic 1099s and W2s,
no taxable event is required. Compliance burdens fall disproportionately
upon people of moderate means, few of whom are engaged in evasion or owe any
tax. Foreign banks’ denying services to Americans leads to increased U.S
FATCA is costly. Estimates of global compliance spending rely on aggregation
of per-institution costs: millions for each small bank, hundreds of millions
for a big one. One projection puts cumulative cost at $58 to $170 billion.
This is an order of magnitude greater than any recoveries from FATCA.
FATCA relies on Obama-era Executive overreach. Because of other countries’
privacy laws, FATCA is unenforceable without so-called “intergovernmental
agreements” (IGAs) invented by Tim Geithner’s Treasury Department. The IGAs
are not authorized by statute or submitted to the U.S. Senate as treaties.
FATCA threatens our domestic financial industry. Reciprocal “Model 1” IGAs
promise “reciprocity” from U.S. domestic banks. This threatens massive
FATCA-like costs on U.S. banks and consumers.
Keeping FATCA on the books risks future harm. The OECD, which for years has
sought to extinguish personal financial privacy and create a worldwide
financial data fishbowl, has praised the IGAs as a “catalyst” to that end.
If FATCA remains on the books, the next Democrat Administration and Congress
may press reciprocity on domestic American financial firms to create a
global FATCA – or “GATCA.” This is the opposite of what the GOP Platform
Transparency is when citizens monitor government.
When government monitors citizens, that’s tyranny.
Tomorrow’s the big day! Will there be something for us in tomorrow’s Ways & Means Committee bill? Lots of hints suggest something is there. Most seem to expect a shift to territorial taxation for individuals. That’s a great start! There are still likely to be lots of issues remaining and this comment from the Isaac Brock Society lays it out.
This is not meant to be negative in any way. However, to expect that suddenly ALL of our issues will simply disappear is extremely unlikely. Better to have a reasonable expectation to offset disappointment! But, who knows? Tomorrow will tell….
November 1, 2017 at 9:26 am
I’m sorry, but anything that truly makes life easier for US persons abroad is fine by me. I have been skeptical of TTFI, and dream of true simple RBT. But frankly, at this point, if the US says what you do abroad stays abroad, I’ll take it.
I wonder if TTFI would do away with FBARs. After all, if they don’t need to look at your income abroad, they don’t need to look at your accounts abroad. Well, I know that’s not true — they want to make sure people aren’t spiriting funds abroad to hide them there.
Fred (IMHO) they will NEVER get rid of FBAR. The FBAR statute in its purest form requires any person who enters the USA on business to report his/her foreign bank accounts. The original purpose of FBAR was not primarily about taxation. Treasury has considered getting rid of FBAR for Americans abroad and declined to do so. Recent events make it clear that FBAR is an effective tool of intimidation … Mr. FBAR embodies what it means to be an American.
A move to “territorial taxation” (what income is subject to U.S. taxation) has nothing to do with (1) the definition of “tax resident” (what persons are subject to the U.S. tax system) and (2) the FBAR requirements found in Title 31.
It follows from this that a move to “territorial taxation” (absent further legislative change) would in no way affect:
– FBAR rules
– the FATCA IGAs (which are based on the U.S. definition of “tax resident”)
– Chapter 4 of the IRC (Sections 1471 – 1474 which are FATCA)
– the requirement to file a tax return and other information returns
– the draconian “Exit Tax” rules
– gift tax rules
– estate tax rules (unless the estate tax is abolished)
and much more.
ONLY a move to RBT can affect the above …
Of course a move to “territorial taxation” is helpful to Americans abroad. But, (without additional changes) it is only a beginning.
What a move to “territorial taxation” would probably achieve is, that foreign source income would not be subject to U.S. taxation. I would think (but wouldn’t count on) that territorial taxation would lead to the elimination of certain information return requirements: 8938 and 8621 (which have already been eliminated for Green Card holders who make a treaty election).
But, these are just some thoughts. Who knows what the final product will look like? It’s possible to move to “territorial taxation” for individuals and retain A LOT of the pain for Americans abroad. On the other hand, a lot of the pain could be removed.
Neither RO nor ACA has proposed the elimination of CBT. The RO proposal makes CBT more tolerable for Americans abroad. The ACA proposal reinforces CBT, but allows a “buy out” for specified individuals (and is ultimately better for those who can take advantage of it).
DA has yet to make a specific proposal. But, in the DA worldview, CBT is essential to ensure that a small group of people don’t escape paying their “fair share”. For this reason, DA does NOT really support RBT – time for the loyal Democrats to stop drinking the “Kool Aid”.
The ONLY proposals for RBT are found in the some of the individual submissions to House Ways and Means (2013) and Senate Finance (2015).
But on the other hand: We don’t know what the proposed legislation will look like. It could incorporate various suggestions from various proposals and could actually be RBT. But, given the fact that there has been no organized support of RBT, I think this is unlikely.
OCTOBER 24, 2017 FATCA IGA legislation/FATCA litigation update.
Canadian (Alliance for the Defense of Canadian Sovereignty [ADCS] is the “client”) FATCA IGA legislation lawsuit:
We are suing (since 2014) the Government of Canada (specifically Justin Trudeau’s Attorney General and Revenue Minister), in Federal Court for rounding up Canadians having a U.S. taint and turning them over to a foreign government. We argue that this violates Canada’s sovereignty as an independent nation and its Charter of Rights that is meant to protect all Canadians.
As to next steps, it now appears likely that most, if not all, of our brave lay witnesses, who provided written affidavits demonstrating harm, will NOT be examined by the Government lawyers. This is good news as it means that we will get to trial “sooner”. We do expect, however, that our expert witnesses will be cross-examined by Government next.
We have not yet received all of Government’s affidavits (e.g., from their experts). When we do, our legal team will need to decide whether they need to cross examine any of the affiants. We are moving forward but I am sorry but I cannot give you a time frame on this.
It is the “job” of the Case Management Judge, who supervises our case, to keep our litigation “moving”.
U.S. Republicans Overseas (RO, the client) FATCA, IGA, and FBAR lawsuit:
Mark Crawford, Senator Rand Paul, Roger Johnson, Daniel Kuettel, Stephen Kish, Donna-Lane Nelson, and Marc Zell are Plaintiffs, Republicans Overseas is the client. The lawsuit is in the U.S. Court of Appeals for the Sixth Circuit.
From the petition: “This case challenges FATCA, the IGAs unilaterally negotiated by the U.S. Department of the Treasury (“Treasury Department”) to supplant FATCA in signatory countries, and the Report of Foreign Bank and Financial Accounts (“FBAR”) ad- ministered by the U.S. Financial Crimes Enforcement Network. These laws and agreements impose unique and discriminatory burdens on U.S. citizens living and working abroad.”
U.S. Government lawyers have been arguing, so far successfully, that none of the Plaintiffs have the necessary “standing” to go to trial. The RO attorney however, argues in part that a “certain” threat of harm/prosecution is not necessary, but that a “credible” threat of prosecution should suffice for standing.
On August 30, 2017, Plaintiffs filed a petition for rehearing to the 6th Circuit Court of Appeals, arguing that the original panel’s Opinion conflicted with two decisions of the United States Supreme Court. Plaintiffs asked that the original panel reconsider the case under correct standards, and absent such action by the original panel, we asked that the full Court consider the case en banc to establish and apply standing rules compliant with existing Supreme Court decisions.
The 6th Circuit has now denied rehearing. Plaintiffs’ next step will be to file (which they will) a certiorari petition to the United States Supreme Court, asking them to review the decision of the lower court on standing. This petition is due on Monday, December 25, 2017.
— I mention the U.S. negative court decisions on Plaintiff standing as I personally suspect that this general issue will be brought up by Government attorneys in the Canadian FATCA IGA legislation lawsuit — Mr. Trudeau’s Ministers arguing that there has been no “FATCA harm” caused to any Canadian. I personally dispute this as Government admits that the Canadian FATCA IGA legislation has directly resulted in over 100,000 Canadians (now up to 500,000?) being turned over to a foreign country — a clear harm that is a Charter and Constitutional violation.
Alliance for the Defeat of Citizenship Taxation (ADCT) litigation efforts in United States:
An aim of ADCT is to defeat by litigation in U.S. court citizenship-based taxation and related laws that we believe, in part, violate the U.S. Constitution. ADCT is not moving forward with any lawsuit in U.S. Court until the US tax reform legislation is passed by Congress (probably in 2018) and our legal claims can be clarified in light of that legislation (or absence of legislation) and established at that time as being reasonable to pursue.
September 29, 2017
The Honorable Steven Mnuchin
Secretary of the U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW Washington, DC 20220
Dear Secretary Mnuchin,
I am writing to you regarding the Foreign Account Tax Compliance Act (FATCA) [26. U.S.C. § 1471-1474; 26 U.S.C. § 6038D]. As discussed below, FATCA is an invasive, costly failure that I strongly suggest must be repealed at the soonest possible opportunity, hopefully in the context of tax reform enacted this year. In addition, the means adopted during the tenures of your predecessors Jack Lew and Timothy Geithner to implement FATCA via a series of legally dubious and constitutionally infirm non-treaty agreements with other countries must not be allowed to stand. I ask your assistance in assuring that FATCA repeal is part of any relevant legislation, and that the Treasury Department takes prompt action to cease the implementation of FATCA via Intergovernmental Agreements (IGAs).
FATCA’s proponents claim that it is simply a “transparency” measure – similar to a domestic 1099 – to ensure greater tax compliance for assets held offshore. This characterization is misplaced. Domestic tax law requires reporting of taxable events, such as income (a W-2 Wage and Tax Statement) or bank interest (a 1 099-INT). U.S. law, based on a presumption of innocence, does not generally require inquiry into asset principle unless there is reason to suspect wrong-doing. By contrast, FATCA requires wholesale reporting of Americans’ assets and transaction history absent any such suspicion, solely because the asset is held outside the United States. This is despite the fact that the IRS’s own Taxpayer Advocate Service reports that “the vast majority” of Americans residing abroad “actually appear to be substantially more compliant than a comparable portion of the overall U.S. taxpayer population.”
Despite such an invasion of privacy, FATCA has failed in its stated purpose of recovering revenue lost to offshore tax evasion. Last year the Internal Revenue Service (IRS) credited FATCA for “collecting” $10 billion from “taxpayers coming back into compliance, ,2 but that figure conflates genuine tax revenues with penalties for filing deficiencies and recoveries from all offshore enforcement programs, not just FATCA. In the estimate of Professor William H. Byrnes of Texas A&M University School of Law, the real net tax recovery of FATCA alone is about $200 million annually and may be only half of that. Professor Byrnes projects that FATCA may “soon cost more money than it brings in.”‘ Indeed, his view may actually be overly optimistic in light of the IRS’s commendable enforcement standard of recovering seven dollars for every dollar spent.4
By contrast, because of the IRS’s need to try to discern indicators of evasion within a sea of indiscriminate personal information belonging to non-evaders, W. Gavin Ekins of the nonpartisan Tax Foundation suggests that, under FATCA, finding “a dollar of tax evasion may cost us $5 of actually sifting through the data and compliance costs.”5 FATCA’s unsatisfactory ratio of return must also be weighed against the impact on taxpayers saddled with burdensome reporting paperwork. The Tax Foundation estimated in 2016 that these requirements cost individuals nearly four and half million hours and more than $165 million,6 an amount comparable to FATCA’s likely proceeds. This does not even take into count the massive compliance costs imposed 011 financial institutions.
The above summarizes the good and sufficient reasons why FATCA must be repealed and enforcement dollars spent on more effective programs to detect and punish actual tax evasion. While your support for that effort will be appreciated, it is a task primarily of Congress. But I now turn to a matter almost entirely within your purview, on which I ask your prompt and decisive action. This relates to IGAs invented by the Department in consultation with five European governments for the purpose of enforcing FATCA.
While the IGAs read like treaties and have the effect of treaties in purporting to create mutual obligations between sovereign states they are not submitted to the United States Senate for that body’s advice and consent to their ratification, though the non-U.S. “partner” country is required to do so under its necessary internal procedures for entry into force. In July 2013, I wrote7 to Secretary Lew with a specific request for the statutory authority for the IGAs. The Department responded, after a delay of nearly a year, with the following statutory justification: 8
“The United States relies, among other things, on the following authorities to enter into and implement the IGAs: 22 USC Section 2656; Internal Revenue Code Sections 1471, 1474(f), 6011, and 6103(k)(4) and Subtitle F, Chapter 61, Subchapter A, Part III, Subpart B (Information Concerning Transactions with Other Persons).”
None of the sections cited above confers on the Treasury Department any authority for making agreements with foreign governments for the furnishing of private financial information. In particular, there is nothing in the cited sections that allows the Department to promise (under the so-called “Model 1” IGA) on behalf of the United States FATCA-“equivalent” reporting to foreign tax services of private information obtained from domestic American financial institutions. Following through with this unauthorized promise would impose on American banks, credit unions, insurance companies, and other institutions crushing compliance costs of the magnitude already suffered by foreign institutions – costs that would inevitably be passed on to American consumers.
The IGAs represent a prime example of the kind of executive overreach that unfortunately typified the previous administration. I ask you to rein in this abuse by ceasing the negotiation of new IGAs and freezing the implementation of existing ones. This action should include a freeze on enforcement of FATCA regulations on taxpayers and financial institutions. Further, I ask that you notify IGA jurisdictions that these dubious pseudo-treaties are under legal review and that their nullification or abrogation from the U.S. side can be expected pending FATCA’s anticipated repeal.
Nothing in the foregoing should be construed in any way as being “soft” on tax evasion. Quite to the contrary, in addition to its other flaws FATCA is a distraction and a diversion of resources from effective tax enforcement based on standard investigatory techniques. As a member of the Financial Services Committee I look forward to working with the Department on measures to ensure effective tax enforcement that targets the guilty, without penalizing the innocent or
compromising our cherished American constitutional and legal norms. In the meantime, FATCA and the IGAs must go.
Thank you for your assistance on this critical matter.
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).
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 .
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
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.
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)
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.
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.
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.
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
The initial reaction of the Canadian government to FATCA can best be described by a letter then-Finance Minister, the late Jim Flaherty wrote, intended to be placed in major American newspapers.Virtually no one believed there would be any reason for the U.S. to impose this given Canada is a higher tax jurisdiction and owing annual income tax was rather unlikely. Back in 2012, in spite of all the scaremongering created by the IRS and foreign tax compliance practitioners, the underlying hope/belief of “US Persons” in Canada was that it would be impossible to get around the Canadian Charter of Rights and Freedoms. In spite of the fact that the first Model 1 IGA was released on 26 July 2012 by the US Treasury. The IGA was developed cooperatively with France, Germany, Italy, Spain and the United Kingdom.
The post below was written over a year before the Canadians signed the IGA agreement on Feb 5 2014. Interestingly enough, it was written on the same day as a letter written by Peter Hogg, perhaps THE most important constitutional lawyer in Canada. This letter was sent to the Department of Finance and was welcome news.
“Note that the prohibited grounds of discrimination
include ‘national or ethnic origin’, and the Supreme Court has held that
citizenship is an ‘analogous ground’ also prohibited by s. 15(1).” (Andrews v. Law Society of BC (1989) 1 S.C.R. 143)…
“The point of this letter is to urge the
Government not to agree to an IGA which would call for foreign
legislation which would offend s. 15
of the Charter.”
Perhaps I just have a bad memory but it is curious to me now, that there is such a difference in the time some of our main allies signed and when we signed. I only recently (and surprisingly) learned that the U.K. and Germany do not have anything comparable to our Charter. Could that be a reason they were more willing to sign earlier on in the process? Does it mean the Canadian government at first considered the possibility that any action they took would not be able to withstand a Charter Challenge? And if so, what was it that made them change their minds? How did they come to believe they could get away with changing a law to break the law? Bill C-31 is the only of the clearly unconstitutional laws that the Trudeau government refuses to budge on (the others being C-23 C-24 & C-51).
While Canada clearly failed when it had the chance to stand up to the U.S. government, perhaps we can count on the Supreme Court of Canada, in the end, to demonstrate leadership by living up to the ideals enshrined in the Charter.
Love him or hate him (and there was very little in between) former Canadian Prime Minister Pierre Trudeau left his mark on Canada. The Trudeau Liberals brought Canadians a set of entrenched constitutional rights. From April 1, 1982 the history of Canada was forever changed.
1982: The Charter was intended to give individual Canadians rights …
The Canadian Charter of Rights was intended to give individual Canadians (including permanent residents who were non-citizens) an important set of rights that governments could not (as a general principle) override. These rights included rights in a number of categories including: legal rights, rights to freedom of expression, mobility rights, equality rights and more. Although originally touted as the “biggest make work project ever for lawyers”, Canadians in general have benefited from these rights. The focus of the Charter was on “individual rights”.
2012: The Charter may be used to shield the country of Canada from the U.S. FATCA attack …
… the rights and protections of the Canadian Charter applied to permanent residents of Canada and that individuals in Canada are all equal and under the protection and benefits of that Charter regardless of race, nationality, ethnic origin, etc. He state unequivocably that Canada MUST obey the Charter (which would never allow for FATCA’s discriminatory parameters). He is a very well-spoken and articulate man and I was very impressed with his strong words and message about the importance of the Charter.
In other words, instead of the Government of Canada saying NO to FATCA, Canada will not enter into a FATCA IGA (which is what it should say):
S. 15 of the Charter may possibly be used for the Government of Canada to say:
No Canada will NOT enter into an IGA, because S. 15 of the Canadian Charter of Rights prohibits us from entering into an agreement with you that discriminates on the basis of citizenship and/or national origin.
Here is the text of Charter S. 15 (1):
Every individual is equal before and under the law and has the right to the equal protection and equal benefit of the law without discrimination and, in particular, without discrimination based on race, national or ethnic origin, colour, religion, sex, age or mental or physical disability.
Although S. 15 does not specify citizenship has a ground of discrimination the Supreme Court of Canada has included citizenship has a prohibited ground of discrimination. For the Government to help the IRS seek out U.S. citizens is to deny Canadians who are U.S. persons the equal benefit of privacy laws. (Now for the lawyers reading this, I realize that Charter S. 1 and the override are possible issues.) That said, the starting point in the analysis is the likely violation of S. 15.
For the government to sign an IGA is to give the Canadian banks the license to betray Canadians! This is another reason why there can be no IGA. Let the banks betray Canadians at their peril. Let the banks deal with the lawsuits. Let the banks absorb the costs! Let some banks advertise that they are a “FATCA Free Bank”.
The Financial Institutions are subject to provincial human rights codes that prohibit discrimination based on citizenship. It is up to Canadians to hold the Sun Life and Bank of Nova Scotia s of the country accountable.
We all spend tons of time wondering what individual effort might bring down FATCA. Will the Congress come to its senses and pass the Meadows/Rand bills to repeal FATCA? Will Nigel Green & Jim Jatras achieve a lobbying miracle? Could it be possible that the Appellate Court will come up with a different finding than Judge Rose in the “Bopp” case? Or will the Canadians be successful in striking down their IGA with other countries deciding they will do the same? Will the Treasury Secretary indicate that #AmericansAbroad are exempt from FATCA? Or somehow Treasury changes its mind and allows for Same Country Exception?
To the best of my recollection, when the post below was published NONE of the actions mentioned above had started. If somebody had predicted any of them (never mind all of them), I expect we would have thought they were nuts. It has seemed so overwhelming and so hopeless from the start. Yet we fought back from the very beginning, starting simply at first; researching information and making decisions on our own terms, being unwilling to just follow blindly what we were told by the IRS, the compliance community and so on. Little by little groups began planning how to approach their ideas of taking the battle to the next level. Everyone should be proud that so much has been done under such dire circumstances, the expat grassroots movement is alive & well!
Of course, there are always other currents flowing alongside all that is happening and usually the best results are the ones that are not planned per sé but come about as the interplay of all the factors as they work themselves out. Clearly, one of the most powerful would be the demise of the U.S. as the world’s biggest bully, police officer and holder of the most powerful reserve currency. Of course many Western business/financial leaders dismiss this idea as pure folly. “Impossible“ they say. However, look at the bank collapses of 2008. Would financial officers not have reacted the same, “Impossible” ?
Did we not react the same when we first started out? Impossible ?
There is reason to believe the BRICS nations might well succeed at creating a system that can bypass what the U.S. currently “owns”; the USD as the world standard reserve currency.
This will be the first of a few posts regarding BRICS. We truly may be witnessing the fall of the American Empire and the rise of a new ruling entity.