Month: January 2018
Meet the Proposed Commissioner of the IRS – A Welcome Change?
cross-posted from Brock.
Politico announced Trump’s nomination Of Charles P. Rettig, including the following excerpts:
Rettig, who specializes in settling complex tax disputes between his taxpayer clients and authorities like the IRS, known as tax controversies, has for more than three decades represented clients before the IRS, the Justice Department, state tax authorities and other jurisdictions.
Rettig is no stranger to the Washington tax policy community. Many IRS officials would be familiar with him because of tax litigation in which he’s been involved.
Rettig’s nomination would break a nearly two-decade practice of naming commissioners from the general business world, a trend that began after the IRS Restructuring and Reform Act of 1998. Prior to that, commissioners generally had tax backgrounds.
Continuing with the conversation from Media & Blogs thread, I see many mentions of the fact that his firm represented some 100 UBS clients (which may be why some of his articles concern the OVDP). I am trying to locate some actual court cases but the site that keeps coming up in references seems to be down. He also clearly, is respected for his work representing clients by his peers:
Rettig would also oversee the implementation of tax reform. Rettig has been a friend and mentor to many of us in the tax controversy bar over the years, and we are encouraged by the selection of someone from the private bar to the post.
Given he is a tax litigator, I don’t expect he would support a change to RBT (hope I am wrong about that) but some of his comments certainly suggest he understands what has happened and that our situation is very different from that of U.S. residents with foreign accounts.
Forbes IRS FBAR Streamlined Procedures Revisited, Am I Non-Willful
If, as some believe, the Streamlined Procedures are being used to entice unsuspecting taxpayers into placing their head onto the FBAR chopping block, the government should be held accountable. However, if, as most believe and our experience seems to support, the Streamlined Procedures were designed to provide not quite willful taxpayers an opportunity back into compliance through a simplified and expedited process, the IRS should respect the vast majority of Streamlined submissions (and requests for transitional treatment) and move on.
Forbes IRS FBAR Voluntary Disclosure Program Taxpayer Interviews
It should be anticipated that the IRS will pursue examinations of the amended returns of taxpayers residing in the United States in some manner. It remains uncertain whether the IRS would or could effectively pursue those residing outside the United States in any realistic manner. It should also be acknowledged that there remain viable alternatives to the OVDP, including the voluntary disclosure practice of the IRS set forth in Internal Revenue Manual (IRM) 9.5.11.9 [see Example 6(A)], Section 4.01 of the Criminal Tax Manual for the U.S. Department of Justice, and Section 3, Policy Directives and Memoranda, Tax Division of the U.S. Department of Justice.
Certainly, given the complexities of the Internal Revenue Code, other relevant statutes and life in general, many of the indiscretions associated with an income tax return or FBAR are anything but willful or intentional and definitely not fraudulent or criminal in nature. In these situations, an interview of the taxpayer and/or their return preparer can lead to an extremely quick and reasonable resolution.
Many, many articles penned by Mr. Reddig are available via SSRN and listed here.
Bubblebustin asked for this post to be based upon this paper. Unfortunately the most we can offer is the link and a few excerpts. Strongly suggest everyone read this particular article- Why the Ongoing Problem with FBAR Compliance? from the Journal of Tax Practice & Procedure, August-September 2016, published by CCH, a part of Wolters Kluwer.
A major point in the article is when government is trusted, is seen as legitimate, compliance tends to be a result. It probably does not help that the IRS emphasizes submissions coming from OVDP and Streamlined will be examined “in an effort to uncover leads for criminal prosecutions.” Mr. Rettig is also aware that eighty percent of non-resident filers will have no U.S. Tax Liability. Though again, that is a reference to income tax and does not cover some of our worst grievances.
Potential government actions should consider the
impact on those six-plus million U.S. people (and their
advisors) sitting in the bleachers domestically or in various
foreign countries trying to determine how best to pursue
some form of voluntary compliance, expatriation or to
possibly just continue sitting in the bleachers … “History
repeats itself because no one was listening the first time.”
The Conscience of a Lawyer and “The FBAR Fundraiser” Revisited
The compliance community leads the @USTransitionTax charge: "TCJA’s transition tax could hit cross-border biz owners" https://t.co/jQwJ1sUomM
— U.S. Transition Tax – Subpart F (@USTransitionTax) January 24, 2018
Many of you may remember this outstanding post (below) from the early days……when the incessant torment was massive fear of “#FBAR penalties.” Compounded by #OVDP, (or #OVDI in 2011); FAQ35, minnows, whales, LCU’s, FATCA, DATCA, GATCA, FATCAnatics, JustMe, Opting out, in lieu of FBAR penalty etc ad nauseum. People who were minnows, tax compliant but did not know about FBAR being fined $75,000; Just Me engaging the Taxpayer Advocate to get his ridiculous fine of $172k lowered to “only” $25k. Those were days of real terror. Now time has passed, those who want to be compliant can do Streamlined, many have seen they can remain under the radar. The strong possibility of Tax Reform had everyone feeling “safe” again (relatively speaking). About the last thing expected, was that things would get worse. Well guess what, they did.
Anyone who owns a small corporation is being told a one time transition tax is part of the new Tax Cuts and Jobs Act. Now this is a very curious thing as not one word was said about the expat situation during the House or Senate sessions; all of the talk focused on changing the status of large non-resident corporations to a territorial model. I actually watched a very good portion and listened carefully for any mention of us and for any information about this tax. It was clearly concerned only with these large corporations. How many compliance people watched? Can the intent of the law be determined only from a strict reading without any regard for context? The transition tax was a way of the US extracting something from large multinational corporations’ earnings that would never be repatriated. This is the context, the situation the law was meant to address. Shortly after the first version of the bill was passed by the House, the first Canadian tax lawyer wrote that this same tax would apply to smaller corporations, single-shareholder owners in spite of the fact that they will not be able to transition to a territorial system after this “tax” is paid. An excellent discussion took place at Brock between USCitizenAbroad & Karen.
This is like a repeat of a very bad movie, one which we all should take a close look at.
Like the OVDP, expats are at risk of confiscation of a considerable portion of wealth based on a non-event.
And like the OVDP, the enforcers will not be the IRS but the cross-border tax compliance community.
Remember how strongly OVDP was pushed, due to the fact there would be no criminal charges? It was revoltingly referred to as an “amnesty program.” It was a program for criminals, and was not intended for people who had in no way, consciously chosen to omit filing an FBAR. Virtually no one had ever heard of it and it had never been unforced prior to the Swiss bank debacle.
How about all the hoopla about “quiet disclosures” which were misunderstood (misrepresented?) as amounting to a first disclosure filed without going through the program/without anything to flag it as new (i.e., likely delinquent for FBAR). As I recall, a real “quiet” disclosure was amending a previous return without calling the IRS’ attention to it.
As has been said, the law says “you have to file” it does not say you have to go through the OVDP/OVDI. Fear of being labelled a “quiet disclosure” stopped people from following the actual law, of just entering the system. There was no way many of us would have entered OVDP, even without the FactSheet 2011-13 (which did not say that one had to enter OVDP).
Yet the tax compliance community pushed OVDP and many people who did not belong there went through 2+ years of pure hell plus penalties. And later, so many lamented the fact that it was clear OVDP was not for minnows………….However, the fact remains that the actions of the compliance community at the very least, established themselves as “IRS agents-at-large.” Many feel the influence of the tax compliance community amounts to actually making the law, rather than deferring to what Congress passed (case in point – the “retroactivity” of 877A).
If it were not for the tax community, nobody would have noticed anything in the bill to suggest this idea that small foreign corporations (who do NOT have shareholders resident in the U.S.)would be required to pay the Transition Tax. No one would ever have imagined nor come to the conclusion that this portion of the law would apply to them. While we wait for some kind of indication from Congress as to their intention, the compliance community continues to engage in an education campaign; more and more articles are appearing. Some make reference to the fact it is not entirely clear whether it applies or not yet all are claiming it does. In other words, this is absolutely a creation of the compliance community.
Are we about to see a repeat of the tax compliance community insisting the transition tax applies which will cost people many thousands of dollars just to compute the actual retained earnings figure and an obscene amount of tax that will transition expats nowhere? Let’s not forget that for the 5 countries with Mutual Collection Agreements (Canada, Denmark, France, Sweden & the Netherlands), people who were citizens at the time the tax was incurred do not at this time, have any reason to fear.
As far as we know, RO was unable to get clarification from the Congress before the bill was passed. Guidance from the IRS only gives examples for large corporations. Guidance also here
And while we assume penalties for non-compliance will be threatened, has anyone actually seen, read or heard of anything specific?
Will this be the “straw that broke the camel’s back?” How many will refuse to turn over their pensions to the IRS? Where will this end?
It is still clear that the best protection is renouncing U.S.citizenship.
********************
The Conscience of a Lawyer and “The FBAR Fundraiser”
Cross posted from RenounceUScitizenship.
Having a license to practise law (bar admission) does not a lawyer make.
Admission to the Bar, gives an individual the legal right to conduct oneself as a lawyer. A lawyer operates within a specific construct of ethics and morality. The American Bar Association Model Rules of Professional Conduct make it clear that
A lawyer has an obligation to the client that is more important than loyalty to any other person or entity. This principle is made clear in Rule 1.7 of The American Bar Association Model Rules of Professional Conduct. Rule 1.7 clarifies that a lawyer should not act for a client if there exists any conflict of interest. It reads as follows:
Continue reading “The Conscience of a Lawyer and “The FBAR Fundraiser” Revisited”
Taxation of #AmericansAbroad in the 21st Century: “Country of birth” Taxation vs. “Country of Residence” Taxation- Part V (Final)
cross-posted from citizenshipsolutions
Update January 2018: This post has been updated with some new links and discussion
Part I is here.
Part II is here.
Part III is here.
Part IV is here.
*******
Taxation of #AmericansAbroad in the 21st Century: “Country of birth” Taxation vs. “Country of Residence” Taxation- Part V (Final)
What the U.S. calls citizenship-based taxation is actually a U.S. claim that it has the right to impose “worldwide taxation” on the residents and citizens of other countries.
Specifically the U.S. claims the right to impose taxation on:
1. Who: residents and citizens of other countries; and on
2. What: income earned in other countries or property situated in other countries.
(The U.S. also taxes U.S. corporations on profits earned in other countries when those profits are taxed by those other countries. This has led to “inversions” which are the corporate equivalent to renouncing U.S. citizenship. Note that the 2017 “Tax Cuts and Jobs Act” has resulted in “partial territorial taxation” for certain U.S. corporations.)
Under the guise of what the U.S. calls “citizenship-based taxation, it actually taxes people who are neither U.S. citizens nor people with an actual residential connection to the United States and are “tax residents” of other countries.
The two obvious examples are:
A. Permanent residents of the United States (AKA Green Card holders) who do NOT live in the United States (having either moved away or in some cases having never moved there – see the story of Gerd Topsnik); and
B. Non-citizens who are NOT Green Card holders. The obvious example are people who have lost their U.S. citizenship for immigration purposes but are still treated as taxable U.S. property for tax purposes. The S. 877A Expatriation rules clearly contemplate this reality. Furthermore, there are certain U.S. tax treaties that specifically allow the U.S. to tax people who were but are non longer U.S. citizens. (Furthermore, the “savings clause” found in all U.S. tax treaties “saves” the right of the United States to impose full taxation on its citizens.)
My point is that the U.S. has long since separated the idea of being “taxable U.S. property” from being a U.S. citizen for nationality purposes.
Therefore, although birth in the U.S. makes one a U.S. citizen, a U.S. birth should NOT make one taxable U.S. property for life. Surely citizenship should mean more than taxation.
The U.S. is laying claim to people because they were born in the USA. There is no reason why it has to. They just do it because they think they can. The U.S. is the only developed country in the world that attempts to control the lives of its citizens (under the guise of taxation) when they move from the United States. This is an intolerable and grossly unfair policy.
The discussion and debate at the Toronto Conference on “U.S. Citizenship-based taxation” demonstrated that citizenship should be neither a necessary nor a sufficient condition for taxation. Taxation should be based on some kind of voluntary connection to the United States. It is submitted that those in Categories:
(A) Border babies
(B) Those who move from the U.S. with their parents as children
(C) Those non-U.S. residents who were born outside the U.S. to U.S. citizen parents
(D) People who left the U.S. as young adults, have never returned to the U.S., and have accumulated all of their economic assets outside the U.S.
do NOT have any connection to the U.S. that could possibly justify U.S. taxation. In each of these cases, taxation is NOT based on a connection to the U.S., but only on the circumstance of a U.S. birthplace! Can it really be that the United States of America is the only advanced country in the world where:
“The circumstances of your birth determine the outcome of your life?”
To tax those who are not residents of the United States solely because they were born in the United States:
“Is unjust and is inhumane. People do NOT choose where they were born!“
What about the person in Category (E) above? This is the U.S. citizen and resident who leaves the United States temporarily with the intention of returning. This is the ONLY kind of U.S. citizen that could rationally be subjected to U.S. taxation while living temporarily outside the United States. But, to tax even this person is incompatible with the realities of the modern world.
Citizenship imposed vs. citizenship chosen
The current practice of U.S. “place of birth taxation” is much more analogous to a “property interest” that a country has in it’s citizens than a voluntary commitment to the engagement that should characterize good citizenship. It is respectfully submitted that “citizenship” should imply a voluntary connection to a country and not a form of “ownership” where the citizen exists only to serve the government.
Taxation of #AmericansAbroad in the 21st Century: “Country of birth” Taxation vs. “Country of Residence” Taxation- Part IV
cross-posted from citizenshipsolutions
Update January 2018: This post has been updated with some new links and discussion
Part I is here.
Part II is here.
Part III is here.
*****
PART IV
U.S. Citizenship law of the present – Breaking The U.S. Connection – Relinquishment
Relinquishing acts – How to lose U.S. citizenship – S. 349 of the Immigration and Nationality Act
Once upon a time, the U.S. would “strip citizens” of their U.S. citizenship for voluntarily becoming naturalized citizens of another country. Like many aspects of U.S. nationality law, this was considered to be a “punitive measure”.
Prior to the U.S. Supreme Court decisions in Afroyim and Terrazas, S. 349 of the Immigration and Nationality Act, mandated an automatic loss of U.S. citizenship for those who became citizens of another country. S. 349 now clarifies that, U.S. citizens who become citizens of another country, will lose their U.S. citizenship only if they intended to relinquish their U.S. citizenship by becoming naturalized citizens of the second country. In other words, U.S. citizens have the right to NOT (absent their consent) be stripped of their U.S. citizenship even if they maintain neither ties nor “connection” to the U.S.
U.S. citizenship law of the past – The requirement of a voluntary connection
Conditions Subsequent – Automatic Loss of Citizenship For Those Born In The U.S.
Conditions subsequent to the retention of citizenship – Retention requirements for those born in the U.S.
In the past, U.S. nationality law has included provisions which resulted in the automatic loss of U.S. citizenship for those born in the U.S., and find themselves in the circumstances described in Categories A and B above (born in the U.S.). This was reflected in the old S. 350 of the Immigration and Nationality Act (which has been repealed) and pre-1986 S. 349 of the Immigration and Nationality Act. The general principle was that children who:
– acquired U.S. citizenship as children; and – subsequently left the U.S., and – did nothing to assert a VOLUNTARY connection to the U.S.,
would lose their U.S. citizenship. This was a clear recognition that “citizenship” was more than a “legal status” and required a “voluntary affirmation of citizenship” and/or “connection” to the community.
Automatic Loss of Citizenship For Those Naturalized in the U.S
Interestingly the old S. 352 of the Immigration and Nationality Act mandated the loss of U.S. citizenship (in some circumstances) for naturalized U.S. citizens who left the U.S. after becoming U.S. citizens.
To use an analogy to contract law, there were “conditions subsequent” for certain 14th Amendment citizens to retain their U.S. citizenship.
Conditions Precedent to Citizenship – Inability To Gain Citizenship For Those Born Outside The U.S.
American Citizens Abroad was a pioneer in fighting for the rights of “American Citizens Abroad”. Much of their early work was aimed at ensuring that children born outside the United States to Americans abroad would become U.S. citizens. At one time the U.S. had laws which required those born abroad to U.S. parents to establish residence in the U.S. or lose their U.S. citizenship. As Phyillis Michaus author of The Unknown Ambassadors notes:
“It all started back in 1961, when Phyllis Michaux, an American woman married to a Frenchman and living in France since 1946, found a friend in a similar situation. They began talking about the future of their children, their American and French citizenship and wondered whether there were other women “out there” in a similar position.
They had a question and an idea. The question was, “How many people are affected by the citizenship law 301(b)?” At the time under section 301(b) of the Immigration and Nationality Act of 1960, children born overseas of one American parent would lose their American citizenship unless they lived five consecutive years in the United States between the ages of fourteen and twenty-eight. Essentially, the children would have to move to the United States sometime before their twenty-third birthday to retain their American citizenship. The idea was to find out how many families were affected. This they did. And they did a lot more along the way.”
For this reason, I submit that the problems of Americans abroad, may be more rooted more in the laws of citizenship than in the law of tax.
U.S. citizenship law no longer based on the assumption that “citizenship” requires a voluntary connection to the community. Combining “citizenship” with “taxation” means that the U.S. claims the right to tax large numbers of people with no connection to the U.S.
Significance of U.S. citizenship law of the past …
There was a time when a voluntary affirmation and connection to the U.S. was required to retain U.S. citizenship. One would lose U.S. citizenship without the voluntary affirmation – an “citizenship opt in”. This ensured that those without a connection to the U.S., would NOT be subjected to U.S. taxation.
The repeal of Sections 350, 352, 301(b) (of the 1960 law) and the 1986 amendment of S. 349 of the Immigration and Nationality Act, mean that, it is NO longer a requirement that the children described in Categories A, B and C, affirm a connection to the U.S. in order to retain U.S. citizenship. Absent an “relinquishing act”, the circumstances of birth will be sufficient to establish (under U.S. law) citizenship and a lifetime of tax obligations.
U.S. citizenship law of the present. A relinquishing act is now required to terminate U.S. citizenship – an “citizenship opt out” (with all the horror of the possible S. 877A United States expatriation taxes)
“For those who had no choice of where or to whom they were born, surely there should be an “opt-into” US citizenship – rather than an “opt-out” of US (or any other country’s) citizenship. Anything else is ENTRAPMENT. I find that very punitive.”
For those with the “legal status” of U.S. citizens abroad, the evolution from the “opt in model” to the “opt out model” reflects a principle that citizenship is defined more in terms of a “legal status” (conferred by birth) than a “voluntary acceptance” of citizenship. This is neither desirable nor consistent with a world of increased mobility and multiple citizenships.
The problems of U.S. citizenship have been exacerbated by the twin principles that:
1. U.S. citizenship has become less and less dependent on the existence of a “voluntary” connection to the U.S.; and 2. U.S. citizenship is now a status imposed on the individual, rather than a status chosen by the individual. (Although the 14th Amendment may have been motivated by a desire to “end slavery” it is now being used as a mechanism to “create tax slavery”.)
To put it another way: U.S. citizenship has become less “something that one chooses to voluntarily connect to” and more something “one is through an accident of birth, chosen for”. This is of huge significance because the U.S. (under the guise of citizenship-based taxation) attempts to control the lives of its citizens living abroad.
What is the justification for “place of birth” taxation? The closest rationale that can be discerned is the idea that:
1. All U.S. citizens must pay taxes to the U.S.
2. U.S. citizens, regardless of where they live are still U.S. citizens.
Therefore, U.S. citizens regardless of where they live have to pay taxes to the U.S.
Interestingly, U.S. Taxation Abroad includes, but is not limited to U.S. citizens
A recent post on the Isaac Brock Society included:
“According to the 14th Amendment of the United States Constitution anyone born in the United States is a de facto US citizen regardless of whatever other citizenship they may hold in the course of their lifetime. Therefore, with the existence of CBT anyone with a United States birth certificate is forever taxable by the US even if they have never lived there as an adult or earned any money there.”
Are those “born in the U.S.” really doomed to a lifetime of U.S. tax servitude?
Taxation of #AmericansAbroad in the 21st Century: “Country of birth” Taxation vs. “Country of Residence” Taxation- Part III
cross-posted from citizenshipsolutions
Update January 2018: This post has been updated with some new links and discussion
Part I is here.
Part II is here.
*****
PART III
Legal Status of Citizen vs. The Engagement Required By Citizenship
Is the “legal status” of being a citizen sufficient? Is there a difference between the “legal status” of being a citizen and the “voluntary engagement” that is required by “true citizenship”? The “legal status” of being a citizen may NOT be voluntary. But, the voluntary engagement required by “citizenship” is voluntary.
The legal status of “citizen” vs. the voluntary engagement of “citizenship”
There is a difference between the “legal status” of being a citizen and the voluntary engagement with the community that is required for meaningful “citizenship”. To put it another way: Citizenship involves more than the “legal status” of being a citizen. As President Obama said in his 2013 State Of The Union Address:
“We are citizens. It’s a word that doesn’t just describe our nationality or legal status. It describes the way we’re made. It describes what we believe. It captures the enduring idea that this country only works when we accept certain obligations to one another and to future generations; that our rights are wrapped up in the rights of others; and that well into our third century as a nation, it remains the task of us all, as citizens of these United States, to be the authors of the next great chapter in our American story”
It is clearly true that many people born in the U.S. and NOT living in the U.S., have the “legal status” of being a citizen, but have not accepted the voluntary engagement that is required for meaningful “citizenship”. The story of London Mayor Boris Johnson (who was born in the U.S.) is a case in point.
Does the “legal status” of being a citizen justify imposing taxes on a person who does NOT live in the country?
The U.S. currently takes the position that the “legal status” of being a citizen is sufficient to impose taxes on a person who does not live in the U.S. Some of those with the legal status of U.S. citizen were born in the U.S. (making them 14th amendment citizens) and some were born outside the U.S. (making them citizens by an Act of Congress). There are many categories of people born in the U.S.
Five Possible Categories of Those Deemed to be U.S. Citizens Abroad and Their U.S. Connection
Those Born In The U.S. – 14th Amendment Citizenship – Who at a young age are taken by their parents to live outside the United States
The vast majority of U.S. citizens acquired U.S. citizenship because they were born in the U.S. The U.S. is aggressively taking the position that the following types of people, born in the U.S., but residents in other countries, with no economic connection to the U.S. are required to pay taxes to the U.S.:
A. Border babies: Those who were born in the U.S. and returned to Canada within months. (If their parents were Canadian citizens those border babies (who were dual citizens from birth) can renounce their U.S. citizenship without paying an Exit Tax. If their parents were U.S. citizens (meaning the children were not a dual citizens from birth) they are NOT permitted to relinquish U.S. citizenship without being subject to the Exit Tax.)
B. Children born in the U.S. who permanently left the U.S. with their parents as children (before reaching the age of majority) and who never returned to the U.S. They have never worked in the U.S. and have no connection to the U.S.
Members of Group A or Group B do not have and have never had a “voluntary connection” to the U.S. that could convert their “legal status” of citizens to the “voluntary acceptance” of the obligations of “citizenship”. Their birth in the U.S. and their moving from the U.S. were the results of decisions made by their parents. It’s hard to see how the “legal status” of being a U.S. citizen, is sufficient to require the payment of taxes to the U.S. Surely a demonstration of a “voluntary connection” to the U.S. should be required before an obligation to pay taxes is triggered.
Those born outside the U.S. – They choose neither their parents nor where they are born
C. In certain cases, the children of U.S. citizens who are born outside the U.S. are considered to be U.S. citizens. Examples include (but are not limited to), those born in Switzerland to U.S. parents. U.S. laws for the transmission of citizenship from U.S. citizen parents to children born abroad, have a long and complicated history. In fact – “American Citizens Abroad” – was founded to facilitate the acquisition of U.S. citizenship for children born abroad to U.S. citizen parents.
It is clear that that those born outside the U.S. have no connection whatsoever to the U.S. At most they have a connection to a U.S. citizen (that may or may not have a connection to the U.S.)
Those who choose to leave the United States as Young Adults Adults
D. U.S. citizens who were “Born In The USA” but who moved to other nations as young adults (not forced to move with their families), have developed their careers outside the U.S., married, had children and raised their families outside the U.S., done their financial and retirement planning outside the U.S., never had an economic connection to the U.S., and whose lives are have become citizens of their countries of residence.
Many in this group may have left the U.S. under unclear circumstances. Some may have left the U.S. with the intention of returning, some with no thoughts on whether they would return, and some with the clear intention of never returning. Regardless of their intention when leaving the U.S., many gradually become citizens (in a legal and voluntary sense) of their new countries and gradually lost any connection to the U.S. that they may have had.
Members of this group (especially in Canada and Western Europe) fully consider themselves to be primarily citizens of their new countries and no longer U.S. citizens. Example: “You know you are Canadian when you start rooting for Canada over the U.S. in hockey.”
Adults who moved from the USA with the intention of returning to the United States
E. U.S. citizens who move outside the U.S. for short periods of time with the full expectation and understanding that they are returning to the U.S. They live outside the U.S. as Americans and typically neither become citizens of their country of residence, nor disconnect from the U.S. In other words, they are truly “U.S. citizens abroad”. Their situation is very different from those described in Categories A, B, C and D. They have more than the “legal status” of being U.S. citizens. They have a voluntary connection to the U.S.
Citizenship-based taxation and a voluntary connection to the U.S.
It is clear that many of those with the “legal status” of U.S. citizen (Categories A, B, C, and D) do NOT have the “voluntary” (or any other) connection to the U.S. that could reasonably justify U.S. taxation.
The fact that those in Category (E) have a voluntary connection to the U.S. does NOT mean that good tax policy would subject them to U.S. taxation. It does mean that (if citizenship requires a connection to the United States that this is the group which might be subject to “citizenship-based taxation”).
Therefore a “Voluntary connection” to the U.S. is a necessary but NOT a sufficient condition for the taxation of Americans abroad
Is “citizenship-based taxation” justified even with respect to Americans abroad who DO have a voluntary connection (Category E) to the U.S.? It’s hard to understand the justification. No other country imposes taxes on its citizens abroad. Americans abroad already pay taxes in their country of residence. No scholar has ever explained exactly what it is about a “voluntary” connection to the U.S. that justifies taxation. Life is full of “voluntary connections” that do NOT require the payment of taxes. What is it about a “voluntary connection” (by way of citizenship) to the U.S. that means Americans abroad should be taxed at all, or (worse yet) taxed according to the same rules as U.S. residents?
Taxation of #AmericansAbroad in the 21st Century: “Country of birth” Taxation vs. “Country of Residence” Taxation- Part II
cross-posted from citizenshipsolutions
Update January 2018: This post has been updated with some new links and discussion.
Part I is here.
*****
We are witnessing what McGill law professor Allison Christians once referred to as the “Story of The Century“. To borrow from Professor Christian’s post:
The US is right now imposing enormous penalties and unleashing general chaos on people living in other countries with US citizenship, both by newly enforcing long-ignored rules and by layering on top of these rules a new and more draconian layer of enforcement. The chaos comes in the form of fear-inducing, devilishly complicated and duplicative paperwork, and penalties, most of all penalties, and it is being piled on to millions of people around the world, many of whom, like Cruz, are very possibly only beginning to understanding that citizenship status is mostly conferred upon rather than chosen by individuals.
Ted Cruz should consider himself very lucky. The Canadian citizenship he claims he didn’t realize he had, doesn’t carry any punishment IN CANADA for his failure to recognize it. Moreover renouncing Canadian citizenship, if he really intends to follow through on that promise, will be relatively simple, cheap, and painless other than any damage (if any) to his US political career. (Interestingly Australian Green Party Senator Larissa Waters was forced to resign because she was born in Canada and still (although she was unaware of it) held Canadian citizenship.
Not so if Mr. Cruz he had lived his life in Canada with his current apparent dual status. US citizens abroad now understand that discovering ties to the US means discovering a world of obligations and consequences flowing from citizenship that one was expected to know and obey. Ignorance of the law being no excuse, the punishments range from the merely ridiculous–many times any tax that would have ever been due–to the infuriating: life savings wiped out and many future tax savings sponsored by your home government, such as in education or health savings plans, treated as offshore trusts and therefore confiscated by the US. Moreover there is no ready escape hatch for the newly discovered and unwanted US citizenship: five years of full tax reporting compliance must be documented, appointments must be made with officials, fees must be remitted, interviews must be conducted, and in some cases exit taxes must be paid. If some in Congress get their way, renunciation could even mean life-time banishment from the US someday soon.
In the grand scheme of things Ted Cruz’s citizenship is a non-story. But for what it illustrates about citizenship-based taxation, it could be the story of the century.
The Debate – Taxation Based On The “immutable Characteristic of Place of Birth”
Toronto – Reinventing Citizenship Conference – May 2014 http://t.co/h1NwmnqD5D pic.twitter.com/vxnXfiqP2f
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) November 1, 2014
In May of 2014 I presented a paper at the “Reinventing Citizenship” Conference hosted by Alternative-Academia and run in Toronto, Canada. The Conference was approximately two weeks after the Toronto Conference on Citizenship-based taxation organized by American Citizens abroad.
The paper I presented at the Alternative Academia conference was influenced by the Michael Kirsch Bernard Schneider debate held in Toronto on May 2, 2014. The May 2 conference was a great success. Among other things, it spawned the New York Times op-ed by David Kuenzi discussing the absurdity of the FATCA rules as applied to Americans abroad.
As might be expected my paper focused on Citizenship-based taxation in general and the question of what kind of “connection” (voluntary or otherwise) to the United States must be established to justify the taxation of a U.S. citizen residing outside the United States.
The complete paper may be read here:
Taxation of Americans Abroad in the 21st Century
Toronto – Conference on U.S. Citizenship-based taxation – May 2, 2014
ND Law Prof Michael Kirsch explains rationale 4 US taxation of #Americansabroad Read: http://t.co/fR5q40nwj0 Listen: http://t.co/AiCbR3bK3R
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) November 6, 2014
“Citizenship does reflect a voluntary identification with society – Professor Michael Kirsch”
On May 2, 2014, the first ever conference on U.S. citizenship-based taxation took place on the campus of the University of Toronto. The conference – sponsored by ACA Global Foundation – featured a debate between Dr. Bernard Schneider (who opposes citizenship-based taxation) and Professor Michael Kirsch (who supports citizenship-based taxation). Both Dr. Schneider and Professor Kirsch have authored leading papers on this topic. There was general agreement that a discussion of U.S. citizenship-based taxation necessitated a discussion of (at least) the following two issues:
1. Whether it is appropriate to use citizenship as a criterion for the imposition of taxes under any circumstances (can the U.S. levy taxes on its non-resident citizens on income that is not earned in the U.S.?); and
2. If the U.S. can levy taxes on its citizens who do NOT live in the U.S., are there limits to how far this taxing power can extend? At what point does something cease to be a tax and become a form of “life control”? (In addition, at the present time, the U.S. taxation of its citizens abroad amounts to a tax on the country where the U.S. citizen resides. The days of the world accepting that the U.S.has the right to tax its citizens in any way that it chooses are numbered.)
I was the moderator of this fascinating debate. Significantly, both scholars seemed to agree that (with respect to the second question) the practical application of U.S. citizenship-based taxation was excessive and unworkable. In other words, if U.S. citizenship-based taxation can be justified at all, the current U.S. rules of U.S. citizenship-based taxation are too onerous and excessive in their reach. (Those who doubt or don’t understand the practical reality of U.S. citizenship-based taxation are advised to reread the opening paragraphs in the Introduction to this paper.) Commentary on the conference from third parties may be found here and here.
This conclusion is not surprising, given that U.S. citizenship-based taxation in practice results in disadvantages which include:
– U.S. citizens abroad being subjected to significant double taxation (Social Security taxes in some countries and the Obamacare Surtax)
– U.S. citizens abroad being subjected to taxation on things that are exempt from tax in their country of residence (example the principal residence)
– U.S. citizens abroad being disabled from effective retirement planning if they live outside the United States (the prohibition on foreign mutual funds, life insurance policies, etc.)
– U.S. tax rules being used as a mechanism to control the activities of its citizens abroad (for example U.S. citizens who marry non-U.S. citizens are subjected to problematic tax consequences)
– U.S. citizens abroad being subject to “reporting requirements” (including but not limited to the FBAR) that impose limitations on their professional mobility (the requirement to report on non-U.S. business partners)
– U.S. citizens who relinquish their citizenship are potentially subject to “Exit Taxes” on assets acquired with money earned in their country of residence
– The effect of taxing U.S. citizens abroad, is that capital is siphoned from their country of residence to the U.S. To put it another way: to tax the U.S. citizen abroad, is to tax the country in which he lives.
Where the scholars disagreed, was on the first question:
Is it appropriate to use citizenship as a criterion for levying taxes at all?
When considering the appropriateness of using “citizenship” as a criterion for levying taxes one must ask the question:
What is it about citizenship that makes it an appropriate criterion to impose taxes?
Taxation of #AmericansAbroad in the 21st Century: “Country of birth” Taxation vs. “Country of Residence” Taxation- Part I
cross-posted from citizenshipsolutions by John Richardson
Update January 2018: This post has been updated with some new links and discussion.
Prologue – The “Story Of The Century
200,000 Saudi US citizens liable to pay taxes | Arab News — Saudi Arabia News, Middle East News: http://t.co/lPmRfQ5gf5 via @Arab_News
— John Richardson – U.S. Citizenship Lawyer (@ExpatriationLaw) November 3, 2014
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:
1. Those born in the United States (unless they have relinquished U.S. citizenship” for both tax and nationality purposes) are U.S. citizens.
2. Citizens of the United States are subject to the provisions of the Internal Revenue Code regardless of where they live in the world. The Internal Revenue Code (“IRC”) includes but is not limited to the obligation to pay taxes according to U.S. tax rules. The “IRC” also includes a wide range of “penalty laden reporting requirements“. The “IRC” also strongly discourages (through penalties and sanctions) participation in non-U.S. pension plans, non-U.S. investments (including non-U.S. mutual funds), the use of “non-U.S. business corporations” and (incredibly) non-U.S. spouses. (Even the divorce of a U.S. citizen and non-citizen is likely to be significantly more expensive.) As a result, the “extra-territorial application of the “IRC”) has the effect of exercising U.S. “control” over the lives of it’s citizens who do NOT live in the United States. Therefore, it is clear that the “extra-territorial” application of the “IRC” both (1) imposes the full force of the “IRC” on the resident/citizens of other countries and (2) has the effect of imposing the U.S. cultural values mandated in the “IRC” on those other countries. One can identify a list of the “10 Commandments” which are imposed on Americans abroad in an FBAR and FATCA world.
(Note that with the exception of U.S. citizens and “permanent residents”, as per Internal Revenue Code Sec. 7701(b), an actual physical connection to the United States is required to establish U.S. tax residency.)
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.
What is the international reaction to the latest US Tax Reform by President Trump? Is there any Concern for worldwide tax competition?
Cross-posted from Quora
Contrary to the early answers to this question, there is (internationally) a great deal of interest in U.S. tax reform and a great deal of reaction to it. All you need do is read the London Financial based Financial Times (and other publications) to read about this. A ten second search reveals (by way of example):
Canadian firms prepare for impact of U.S. tax changes /via @globeandmail https://t.co/kGqcdlTtI4
— John Richardson – U.S. Citizenship Lawyer (@ExpatriationLaw) January 3, 2018
The “international interest” has been focused on (but not restricted to) three key areas:
First, the reduction in corporate tax rates (falling from 35% to 21%). Countries around the world compete for investment capital by offering lowering tax rates. Higher U.S. tax rates encourage companies to earn their profits in countries with lower tax rates. Lowering the U.S. corporate tax rates will lessen that incentive.
The global tax war may already be under way /via @globeandmail https://t.co/OFa67txVaO
— John Richardson – U.S. Citizenship Lawyer (@ExpatriationLaw) January 3, 2018
Second, there has been and continues to be concern that U.S. tax reform has NOT considered U.S. tax treaty obligations (non-discrimination clause, etc.) and could result in the USA violating its WTO (and possibly NAFTA) obligations. (At one point the Republicans were considering a “border adjustment tax” – disallowing a U.S. tax deduction if a component was purchased outside the USA.) The “border adjustment tax” was viewed negatively by Canadian Prime Minister Trudeau.
Justin Trudeau pleased after U.S. officials scrap border adjustment tax plan https://t.co/qzCLVSkeL4
— John Richardson – U.S. Citizenship Lawyer (@ExpatriationLaw) January 4, 2018
Third, U.S. tax laws imposes “worldwide taxation” on many residents of other countries. This is the result of what a U.S. tax system that defines U.S. “tax residents” in a way that includes certain individuals who are “tax residents of other nations”.
ALL individuals who are NOT “nonresident” aliens. Leaving aside the legal jargon, the simple fact is that the United States is attempting to impose “worldwide taxation” on the residents of other countries.
It is disappointing that the United States continues its obsession with defining the “tax residents” of other nations as U.S. tax residents”.
Yes, excellent initiative from @ACAVoice – it's important that all stakeholders commit to the principle that: "The USA should NOT impose worldwide taxation on individuals who do NOT live in the USA and have @TaxResidency outside the USA! https://t.co/8tGVBdn075
— John Richardson – U.S. Citizenship Lawyer (@ExpatriationLaw) December 29, 2017
So, there are just a few areas of concern and reaction.
Epilogue …
Those interested in a more academic response might read:
The author concludes that:
“The underlying problem is that the international provisions have been crafted on the unstated assumption that the U.S. is the only country whose tax policies matter. That is unfortunate not simply because it is untrue but because it holds the potential for serious harm to U.S. interests. It is a shame to see the country fritter away a position of world leadership in a field as important as international taxation – a field that has gained immeasurably in international recognition as a result of BEPS and other developments in the OECD, the European Union, and at the UN. The fact that the U.S. Congress pretended for years that the BEPS project did not exist is emblematic of the attitude that is now manifest in the new international provisions. Our companies are likely to pay a price for the decline in U.S. leadership but, make no mistake, it will ultimately have negative influence in many corners of our national life.”
***
About the Author John Richardson
John Richardson
Toronto citizenship lawyer: FATCA U.S. tax + renunciation of citizenship
Lawyer 1982-present
B.A., LL.B., J.D. (Of the bars of Ontario, New York and Massachusetts)
Co-chair of the Alliance for the Defence of Canadian Sovereignty and the
Alliance for the Defeat of Citizenship Taxation
Lives in Toronto, ON
Appears U.S. can Suggest but Cannot/Will not Force Citizenship on Those Born Outside the Country
This post appeared at reddit. It is interesting that while the Consulate in Montreal asked “why we did not want to apply for citizenship of our son” several years later, there had been no efforts to impose or force it. This gentleman explains it as pressure however, the lack of any follow-through by the Consulate suggests strongly that the U.S. simply cannot or will not impose citizenship on persons born outside the U.S., simply because they are eligible for it.
It should also be considered that while it is commonly understood that the INA establishes certain situations that define when one can be a citizen, it does not say that one must. The underlying assumption is that one would automatically want to be a U.S. citizen but this does not constitute a “law.” There is no reason to assume U.S. law has power over individuals who are citizens and residents of other countries.
Pressure to have kids become US citizens by consulate in Montreal (self.expats)
submitted 14 hours ago * by UncutExpat American living in Montreal
I’m a US expat living in Montreal for many years. My wife is Canadian and we have two kids born here (who have Canadian passports). My wife’s also an accountant who does tax returns (Canadian and US). She told me that if our kids are also US citizens, then our paperwork for US tax returns is more complex.
We have education funds for both kids, so we need to legally declare that revenue to the US. They need at least a tax ID number, so we want to fill IRS W-7. That form requires certified copies to the of the supporting documents, and the information shown on the form is as follows:
You may be able to request a certified copy of documents at an embassy or consulate. However, services may vary between countries, so it is recommended that you contact the appropriate consulate or embassy for specific information.
For our first son, several years ago, we were able to get the certified copies in Montreal (for $50), but it was not easy. We had to speak with three different people at the consulate who asked us why we did not want to apply for citizenship of our son. At first I thought it was really none of their business, but by the end of the last meeting, I politely said I would do the US citizenship application if someone paid for my wife’s time with the additional paperwork that would be required for the next 18 years at least! The whole deal took more than 3 hours.
This time, for our second son, we only had to see two people (who asked us the same pressuring questions as before). The second person finally told us (after speaking to a colleague when we explained it was for accounting reasons that we did not want to apply for citizenship now) that since the form was 4 pages, it would cost $200.00 for the certified copies ($50 per page). We asked why it was so much, and they told us the policy had changed since the last time. We politely declined and left, realizing the whole episode was a waste of time. We often visit Boston or other cities, and it can be done there in an IRS office.
Just wondering if anyone else had such annoyances, and how they solved the problem. Needless to say, I’m not happy with this policy of the consulate (and actually wonder what is the benefit to the US, given that immigration is a big issue these days).
EDIT: the Tax ID is needed mostly for me to claim them as dependents (it’s not much of a deduction, as we don’t pay much income tax to the US now — however, it could be worth it in the future and my accountant says it’s a red-flag to suddenly claim children as dependents when they weren’t on last year’s return). Also, if my kids grow up in Canada and never want to move to the USA, they’ll be stuck with an obligation to declare their income every year as long as they have a US passport (huge paperwork burden with no real benefit).