Retain or Renounce US Citizenship with John Richardson and Karen Alpert
John will also be doing information sessions in Sydney (Nov 1) and Auckland (Oct 31). See details and email the address given to register.
Alliance For The Defeat Of Citizenship Taxation
Dedicated To Ending The Immoral and Unjust U.S. Place Of Birth Taxation
Excerpted from ENFORCING THE EXIT TAX AGAINST EXPATRIATES: CALIFORNIA STATE BAR RECOMMENDS CHANGE by Joseph R Viola December 8, 2017
This piece is a report of an article by Helen S. Cheng and Dina Y. Name of Withers Bergman LLP by was originally published in the November 13, 2017 issue of Tax Notes.
Here is a summary (leaving out details of the Exit Tax with which we are all already familiar):
In theory, surrendering your U.S. citizenship for tax purposes can be expensive. However, the IRS sometimes has difficulty enforcing the exit tax against expatriates. Now the State Bar of California is recommending legislative changes that would make enforcement easier and expatriation more expensive.
Once an exit tax is assessed, the IRS has authority to place tax levies on the person’s domestic accounts, but has limited authority to collect the amount owed from any property held overseas.
To correct this, the State Bar of California’s proposal recommends that the U.S. legislature amend the Internal Revenue Code and related laws to close the information gaps and improve communication between the departments. The proposed laws, if adopted would essentially change the order of filing, requiring a U.S. taxpayer to complete Form 8854 and pay the exit tax before completing expatriation through the State Department or Department of Homeland Security. They would also allow the departments to exchange information about expatriating taxpayers, to the extent necessary to enforce the exit tax.
In addition, the Bar recommends requiring expatriates to consent to ongoing personal jurisdiction in the U.S. for five years.This would allow the IRS to seek enforcement in U.S. courts, rather than filing tax collection matters abroad.
I haven’t seen anything else about this idea and have no knowledge that it has gained ground. However, were this to happen, presuming those who can remain under the radar will continue, those who need to renounce may find it a lot harder……….
cross posted from Quora
If I have an American citizenship, am I stuck paying taxes to them for life unless I get rid of the citizenship? How do you get rid of the citizenship?
U.S. Citizens are subject to extreme regulation wherever they live in the world…
Q. Why are people getting rid of their US citizenship? A. It's because of the "10 Commandments of U.S. Citizenship" in a #FATCA and #FBAR world by John Richardson https://t.co/cbjEJ91Ijw
— John Richardson – Citizenship Lawyer (@ExpatriationLaw) January 3, 2018
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:
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:
Why is the United States imposing full U.S. taxation on the Canadian incomes of Canadian citizens living in Canada?
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:
Renunciation is one form of relinquishment – It’s not the form of relinquishment, but the time of relinquishment
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.
— John Richardson – Citizenship Lawyer (@ExpatriationLaw) January 8, 2018
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:
Renouncing US citizenship? How the S. 877A “Exit Tax” may apply to your Canadian assets – 25 Parts
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.
Citizenship Counselling For U.S. Citizens in Canada and Abroad
About the Author John Richardson
Toronto citizenship lawyer: FATCA U.S. tax + renunciation of citizenship
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
The following was written by John Richardson and is a section of a larger piece yet to be published. I will provide the link at the time it is available and of course, have permission to publish this.
When I first read this, two things occurred to me. The OVDP/OVDI process represented a penalty for a failure to report. A failure to report is not a transaction to be recorded or that can be measured in relation to tax that is owed. The “in lieu of FBAR” penalty. The percentage was a figure set by the Treasury Dept with no clear connection to anything other than the value of an asset. So one agreed to allow a certain level of confiscation not based upon any amount of tax owed. The other issue with OVDP/OVDI was that it was an incredible deal for “whales”-that percentage represented far less than what they would have paid all-told. The transition tax is a gift for multi-nationals; moving to a territorial system, they will not pay what they would have been required to pay were they to repatriate the income that they will now, never be required to do.
Notably the Transition Tax is part of reforms to international taxation. The centerpiece of the reforms is that for US corporate shareholders of foreign companies there will no longer be US taxation of foreign earnings. (In other words, the US has forced corporations to move in the direction of territorial taxation). The transition tax is imposed as a mechanism to fund territorial taxation. Corporate shareholders are subject to the Transition tax and receive the benefits of territorial taxation. Individual shareholders (including possibly Americans Abroad) are subject to the Transition tax but do not receive the benefits of territorial taxation. Americans Abroad, who carry on business through non US corporations may be required to fund the move to territorial taxation (unlike corporate shareholders) and will continue to be taxed and taxed in an even more punitive way.
Of course, referring to OVDP/OVDI &/or the Transition Tax as a “gift refers only to multi-national corporations or people of wealth. For “minnows” OVDP/OVDI was an absolute abomination. The Transition Tax, should it apply to small CFC’s ( read “individuals”), will provoke the largest number of renunciations whether official or via “feet”.
This is an absolute breaking point in our process. Now that the rate on liquid assets is highter (15%), once the calculations are done, the effective rate applied to individuals will be over 18%. It will not be a matter of refusal as much as the simple inability to pay it. No one can continue to contribute to financial suicide, law or not.
Why the proposed transition tax, if applied to individual U.S. shareholders living abroad, is analogous to the “Offshore Voluntary Disclosure Program (OVDP)”
Significantly, the “transition tax” is NOT based on any income realization event. It is based only on the fact of legally earned retained earnings, which are subject to taxation in the country where they were earned.
The transition tax is a calculation based on an “account balance” – specifically the “retained earnings” account balance on the greater of two dates.
It is a mandatory payment which is based on the value of a “foreign asset”.
Therefore, the “transition tax” as applied to Americans abroad has characteristics that are more like “OVDP” than an income tax (which would be based on a realization event).
In any case, the “transition tax” is nothing more than an asset confiscation with nothing in return.
The application of the “transition tax” to Americans abroad would raise U.S. “citizenship-based taxation” to a new and UNPRECEDENTED level of unfairness and obscenity
John Richardson, Lawyer (1982-present)
Answered Dec 5, 2017
Which country’s citizens enjoy more freedoms than Americans?
The short answer is: The citizens of many countries enjoy more freedoms than Americans.
The answer to this difficult and interesting question should be considered from at least 3 perspectives:
Perspective 1: Do American citizens have the right to leave the United States and to make a new life outside the United States?
Perspective 2: How do the freedoms of American citizens living in the United States compare to the freedoms of (for example) a Russian citizen living in Russia?
Perspective 3: How do the freedoms of American citizens compare to the freedom of the citizens of other countries from the perspective of international human rights instruments?
Perspective 1: Do American citizens have the right to leave the United States and to make a new life outside the United States?
There are presumably some countries that make it impossible to physically leave the country. Certainly the United States does not (except that U.S. law requires U.S. citizens to have a U.S. passport to leave the United States) prevent its citizens from leaving the United States. What the United States does do, is make it difficult for U.S. citizens to survive outside the United States.
As long as they remain U.S. citizens, Americans do NOT really have the freedom to leave the United States, settle in other countries and fully participate as residents of other countries.
The primary reason is because U.S. citizens who leave the United States are still (as long as they remain U.S. citizens) subject to U.S. tax and reporting requirements. These requirements are so onerous (FATCA, FBAR, PFIC, CBT, etc.) that more and more U.S. citizens are renouncing U.S. citizenship so that they have the freedom to live outside the United States. There is no other country in the world that attempts to impose domestic laws on its citizens after they leave the country.
For a particularly graphic description of how America treats its citizens who attempt to live abroad, read about the Nightmare of Mexican residents who have U.S. citizenship”.
Conclusion: From perspective 1, Americans are the LEAST free people in the world.
Perspective 2: How do the freedoms of American citizens living in the United States compare to the freedoms of (for example) a Russian citizen living in Russia?
I suspect that Americans living in the United States have more freedom than citizens of some countries and less freedom than the citizens of other countries. But again, it depends how freedom is defined. Is freedom objective or is it subjective? What are the areas of human activity that are relevant?
The United States has a Federal Government and 50 states AND is a “mature country”. The country necessarily has a large number of laws and regulations (many of which cannot be easily understood).
Americans in the United States are clearly much more free than North Koreans living in North Korea. But, for the reasons given in the answer by Sindhu Mahadevan (below), I suspect that Americans living in the United States are not more free (and possibly less free) than the citizens of other first world democracies.
Americans live in a constant state of fear. Fear of illness, fear of violence, fear of terrorism, etc., fear of not being able to pay for post-secondary education … This is a big problem.
Two possible additional considerations:
The United States has the highest incarceration rate in the world.
The United States does have a “death penalty”
Can a country that has the highest incarceration rate in the world really be considered to be a country with maximum freedoms?
Perspective 3: How do the freedoms of American citizens compare to the freedom of the citizens of other countries from the perspective of international human rights instruments?
Interestingly Americans have CONSTITUTIONAL rights that are enshrined in the U.S. constitution. They do NOT have many “human rights” as guaranteed by international human rights documents. In many cases, the rights guaranteed by the U.S. constitution do NOT provide the protections afforded by international human rights documents. This may be surprising to Americans reading this. But, you might find the following to be of interest:
Human Rights and the United States
On the other hand, American systems do have access to a legal system and courts that can be used to enforce the CONSTITUTIONAL rights that they do have.
Barbara left the following comment at Brock earlier today. Her story is different in that she lives in a lower-tax based country (easier to owe US tax) where gaining citizenship is very difficult, if not impossible. I think this situation has come up far less often in public discussions and all of us should be aware of all the ways US tax policy is abusive to expats.
Agree with Mike : Renouncing is not only not easy, it’s excruciating. On that annual Greenback Tax expat survey, they often come up with a number like 37% of expats “considering renunciation”. My husband and I are two of those. I’ll bet the majority our fellow would-be renunciants have not taken the plunge, not because they don’t want to bother, but because the obstacles are just too extreme.
Sure, if you’re a lifelong Canadian, it may be administratively simple to renounce. Sure, you have to deal with is the boo-hoo emotional part, and 5000 bucks; I get that. But if you’re one of the tens or hundreds of thousands of Americans living in Saudi or Korea or Nigeria or China or Iceland, or other such places where it is either nearly impossible, or extremely unattractive, to take on local citizenship–even if we choose to or even enjoy living there–then renunciation is one of the most difficult decisions one can face.
We took years to make the decision. It isn’t costing us $2350 plus a few tears. It’s costing us our entire life’s savings to buy a passport of convenience through a property purchase, one which seems safe, but certainly not the best of all potential financial investments. Then we get to wait three years. Then we get the passports, we think. Then we deal with whether or not changing citizenship might affect our permanent residency status where we live. Only then do we face the pleasure of renouncing.
No matter what happens with the current tax reform, we’re determined to go through with it. We’ve lost all faith in the US government. There’s no doubt in my mind that the next administration will be a reaction against this one, and will be all Democrats, out for blood. And there’s no question the economy and national deficit will be in a worse mess than it is now. And us rich squillionaires hiding money abroad will be the first to be roped right back in.
Anyone who claims renouncing is easy, try thinking outside your own borders.
And I too hate all Homeland Americans. I find it hard to talk to them at all anymore. Who gives a damn about talking about Harvey Weinstein? I want to talk about TTFI.
Courtesy of Andrew Grossmann@andygr 28th May 2017 from TwitLonger TwitLonger
This is a transcript from the FATCA Hearing held in Washington D.C on April 26, 2017.
I think it is interesting to actually read the testimonies that we heard that day. Some of the more striking aspects seem even more shocking and the mistakes stick out like sore thumbs……………..All emphases are mine – Patricia Moon
HOUSE COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM, SUBCOMMITTEE ON GOVERNMENT OPERATIONS HEARING ON THE FOREIGN ACCOUNT TAX COMPLIANCE ACT
APRIL 26, 2017
SPEAKERS: REP. MARK MEADOWS, R-N.C. CHAIRMAN REP. JIM JORDAN, R-OHIO REP. THOMAS MASSIE, R-KY. REP. JODY B. HICE, R-GA. REP. MARK SANFORD, R-S.C. REP. RON DESANTIS, R-FLA. REP. DENNIS A. ROSS, R-FLA. REP. ROD BLUM, R-IOWA REP. JASON CHAFFETZ, R-UTAH EX OFFICIO
REP. GERALD E. CONNOLLY, D-VA. RANKING MEMBER REP. CAROLYN B. MALONEY, D-N.Y. DEL. ELEANOR HOLMES NORTON, D-D.C. REP. WILLIAM LACY CLAY, D-MO. REP. BRENDA L. LAWRENCE, D-MICH. REP. BONNIE WATSON COLEMAN, D-N.J. REP. ELIJAH E. CUMMINGS, D-MD. EX OFFICIO
WITNESSES: SEN. RAND PAUL, R-KY.
JAMES BOPP, JR., ATTORNEY, THE BOPP LAW FIRM, PC
MARK CRAWFORD, DIRECTOR, AKSIONER INTERNATIONAL SECURITY BROKERAGE
DANIEL KUETTEL, FORMER U.S. CITIZEN LIVING IN SWITZERLAND WHO RENOUNCED HIS U.S. CITIZENSHIP DUE TO FATCA
ELISE BEAN, WASHINGTON CO-DIRECTOR, LEVIN CENTER AT WAYNE LAW WAYNE STATE UNIVERSITY
[*] MEADOWS: (OFF-MIKE) hear from our witnesses about FATCA’s effect overseas and on our treasury. However, our first witness, Senator Rand Paul, a friend, a patriot – truly someone who is willing to not only put his money where his mouth is but someone who has defended liberty and freedom each and every day, and you’re certainly welcome.
He has a briefing, as I understand it, at the White House coming up so we’re happy to have you testify first, Senator. And then the Ranking Member Connolly and I will give our statement.
So in recognition of that, I’d like to recognize the Honorable Senator Rand Paul.
PAUL: Thank you, Chairman Meadows. And thank you for inviting me to this hearing on the unintended consequences of the Foreign Account Tax Compliance Act.
And also for allowing the American people an opportunity to hear how FATCA undermines their privacy through the bulk collection of their foreign financial records. I opposed FATCA for two reasons. First, it violates our privacy rights and second, I think the compliance costs actually exceed the revenue that it brings in.
Regarding privacy, the Fourth Amendment prevents the government from seizing or searching a person’s house or papers, including their financial records, unless the warrant shows individualized suspicion and probable cause.
This protection was included in the Bill of Rights in response to general warrants that have been issued by the British.
FATCA, I think, undermines the very heart of this privacy right. It forces foreign financial institutions to hand over U.S. citizens’ personal financial records without a warrant, without a probable cause, and without naming them individually.
FATCA also violates the Fourth Amendment by demanding all data on all Americans with overseas accounts. The demand is not individualized but collected rather, in bulk, without specifying a specific suspicion or cause.
The government is using the heavy hand of the IRS to tell foreign financial institutions that they must hand over the records of all U.S. citizens and if they dare to defy the government, they will be hit with a crippling tax penalty that no business could survive.
This turns the Fourth Amendment on its head. It presumes that every American with money overseas is a criminal with no proof or even suspicion of criminal activity.
You are guilty until proven innocent. These are not the principles on which our country was founded and we should not stand for it.
This is not just my concern. In January, the IRS’s own Taxpayer Advocate raised the same concern in her annual report saying that FATCA’s operative assumption appears to be that all such taxpayers should be suspected of fraudulent activity unless proven otherwise.
Think about that. Guilty until proven innocent. No one should be deceived that the data being collected by the IRS is somehow harmless or benign.
In addition to having to report the name, address, taxpayer identification number of each account holder, the government requires financial firms to report the account number, the account balance, the value at the end of the reporting period, and all the inflows and outflows of the account.
Basically every one for whom you’ve had a financial transaction or written a check to.
Comparable information is not required to be disclosed for those who have domestic accounts. So it’s a double standard.
You have one standard for Americans living overseas and another standard for Americans here.
The government has no business asking for or knowing this information about its citizens and certainly not without a reason to believe that the person is doing something wrong.
FATCA essentially gives the IRS all your overseas financial data without going through any court to decide if the government has a right to see your documents.
FATCA seems to be also a solution in search of a problem. The Taxpayer Advocate finds also a lack of comprehensive statistical data establishing the existence of widespread, non-compliance or fraud by taxpayers with foreign accounts.
They don’t find evidence that there is excessive problems with people not paying their taxes. It’s about the same rate as people domestically.
So why will we be giving the government special powers a lower standard to look at our information?
My biggest concern about FATCA is that it treats all nine million Americans living abroad as guilty until proven innocent.
FATCA acts as if the Bill of Rights does not apply to citizens dealing with their U.S. government depending on where they live.
After FATCA was passed, some foreign banks even began to refuse to do business with Americans. Even canceling their accounts to avoid the red tape and possible draconian penalties.
Individual Americans are not the only ones bearing the burden either. Estimates of initial cost of compliance reach into the tens of billions of dollars globally.
Ongoing compliance just for U.S. companies cost more than $160 million dollars a year.
In addition, FATCA has led to foreign countries seeking information on citizens residing in the United States. Indeed, over 60 countries now have signed reciprocal Intergovernmental Agreements called IGAs.
The IGAs allow bilateral exchange of financial data meaning that the U.S. will now spy on foreigners who have accounts in our country as well, and we will aid and abet foreign countries in invading their citizens’ privacy as well.
Think about this. This may mean sending financial information to countries who are known as human rights abusers such as Saudi Arabia, China, Tunisia.
One can imagine the risks to a political dissonant who comes to our country to escape tyranny and then we find that we’re going to be sending their information back to a tyrannical government? The tyrannical government they fled? These bilateral agreements, these IGAs have not received any senate certification, no vote, no vote in the House, no congressional authority at all. They are just done by the administration with no authority.
Their constitutionality is currently being challenged in court and I think you will hear from some of those involved in that challenge.
My hope is that this hearing will shed some light on this abusive law and lead to a demand for action.
Chairman Meadows and I have sponsored a bill to correct this injustice and repeal FATCA. Congress should pass our bill this year and put an end to this madness.
Thank you very much for letting me testify.
MEADOWS: Thank you, Senator. And you’re very complimentary in terms of my involvement but it’s basically been your leadership, Senator, that not only has highlighted this but that continues to stand as a — a vigilant sentinel to protect our Fourth Amendment privacy.
And — and I just want to say thank you and it’s — it’s an honor to have you articulate this. You brought this issue to light when no one was paying attention, and yet I found that universally you’re being applauded for your protection of those constitutional rights that our founding fathers so wisely enshrined.
PAUL: This is a big, big deal to the nine million Americans who live overseas. And you know, we’re getting ready to come up on tax reform. While this may be a small issue to many other Americans, it’s a big deal to them.
My hope is that the bill we have worked on maybe we could try to get into the tax reform package because it’s an — it’s an issue I think that should bring right and left together because, you know, sometimes the right is more concerned with financial affairs and the left more concerned with privacy and with civil liberties.
But really I think right and left could come together to say, “You know what? We should protect everybody’s Fourth Amendment rights.”
Thank you for letting me attend.
MEADOWS: Well, thank you. I know you’ve got to go to the White House so you’re hereby dismissed. Thank you for your testimony. Your entire written testimony will be made part of the record.
I thank the ranking member for allowing you to come in and testify early. The Chair now recognizes himself for his opening statement.
We’re certainly pleased to hold this hearing to examine the Foreign Account Tax Compliance Act, also known as FATCA.
FATCA requires foreign financial institutions to investigate their own account for suspected ties to the United States. Now hear that again: investigate their own accounts for suspected ties to the United States and then report those accounts to the IRS for further investigation.
Now that doesn’t sound crazy in its face, but as it turns out, FATCA is a failure at a number of different levels.
By its drafters own estimate, of whom we’re going to hear expert testimony today, and certainly the work that has been done in some of those investigative modes is to be applauded.
I’ve looked at the record and — and — so I look forward to seeing that.
But even by those — those own estimates of the drafters, it was seeking to reduce tax evasion overseas and it only does that by less than one percent.
The senator mentioned this, you know. So less than one billion out of an estimated $100 billion in lost revenue overseas.
Commissioner Koskinen, who has testified before this committee a number of times, has given sworn testimony regarding the high rate of return on investment for spending on the IRS with normal enforcement activities.
In fact, his public statements indicate a return of up to $20 for every $1 that is invested on enforcement.
So a $20 return in revenue for $1 invested in enforcement. By contrast, FATCA brings in well under, by any estimations, half of that amount on a per dollar basis that is invested.
So the IRS has asked for about $200 million to implement FATCA in FY 2017 budget. So by the commissioner’s own estimates – not by mine, not by any think tank – by the commissioner’s own estimates of enforcement returns, just shifting the money from FATCA to the general enforcement areas would increase our tax revenues by over a billion dollars.
And so if we’re looking at proper allocation — and this is without spending one more penny on the overall budget for the IRS — it’s just shifting it. And so when we look at that, that’s a significant return.
FATCA also unfairly and unilaterally burdens our biggest trading partners and strongest allies.
I found out about this really by some of the people that we’ll hear from today when I was in Israel And with — with some of the issue that they started referring to this thing called FATCA that I had no idea what it was. And — and so, you know, as a good politician I was saying, “Well, I’ll get back to you on that.” And so I went very quickly and googled it to figure out exactly what we were talking about.
And so as I — I look at this, we are looking at unbelievable implications here. When we look at the compliance cost on foreign banks and international — on the international economy, we’re looking at up to $200 million dollars per bank to comply and potentially hundreds of billions of dollars overall.
Other countries are understandably upset that we’re hurting their economies and are doubly upset that we have not yet offered them access to our own taxpayer data.
So we — we basically said, “You have to comply.” There was this reciprocal agreement and we’ve said, “Well, you have to comply but we’re not going to comply.”
It was a double standard that we see. And so many of the foreign financial institutions have tried to avoid these FATCA compliance costs by refusing to take U.S. citizens. That’s what highlighted it for me.
And I said, “You’ve got to be kidding me?” They’re saying, “Well, if you’re a U.S. citizen they don’t want to touch you in some of these foreign financial institutions just because of the compliance costs.”
So expatriates have had to make the tragic choice between keeping their citizenship and preserving their financial stability.
And to illustrate that point, I want to share a video that has been shared with the subcommittee, to this committee. And so if we pause and maybe take a look at this video.
It’s approximately three minutes in length.
VIDEO: I’m Donna Lay (sic) Nelson (ph). I come from proud New England Yankee stock. In fact, my ancestors came over on The Blessing in 1635 to the Massachusetts Bay Colony.
I’m a life long Democrat and an activist. I’ve often written Congress, I’ve called Congress members on issues I care about, and I have always voted.
My career was working with credit unions, often helping middle class and lower class people with their finances.
Because of FATCA, I am no longer a U.S. citizen. I had to choose between a normal financial life in Switzerland and my birth country. That decision was so painful that after I renounced, I thought I died (ph). It still hurts today.
I’ve always paid my U.S. taxes and in many ways, I was double taxed. I needed a specialized accountant to keep me in compliance even though my income was low. It cost me about $1,200 a year to pay about $700 in taxes, which does show my income was limited.
After FATCA was passed my Swiss bank called me and in the meeting they told me if I did anything wrong my account would be closed and I could not get another. The reason: I was American.
About the same time, I began my first of two battles with breast cancer. It was a very difficult period.
I started to research FATCA and its implications. At that point, many American expats were talking about being denied financial services as well as having job problems because of FATCA.
I realized if I wanted to continue living in Switzerland, I would have to renounce my U.S. citizenship.
Once inside the embassy, a woman explained to me that I could never, ever get my passport back. I was shaking. Would I be able to visit my daughter and my beloved stepmother in the states? I was crying. I took the oath, separating me forever from my birth country.
As I walked back toward the bakery, I threw up. On behalf of myself and millions of Americans living overseas: please, please, please repeal FATCA.
MEADOWS: Donna is not alone. FATCA has led to a number of U.S. expatriates renouncing their citizenship. And so hopefully today we’ll hear from some of our witnesses on how we can address this particular issue in a meaningful way and hopefully return the accountability that we’re all for to the proper balance of protecting our — our personal Fourth Amendment rights and yet still making sure that we hold our — our government accountable.
And with that, I’d like to recognize the ranking member for his opening statement.
CONNOLLY: Thank you, Mr. Chairman. And thank you for having a hearing and — and maybe this slightly different point of view about the issue.
While acknowledging there are problems with the act and with its implementation, the United States taxes the foreign income of its citizens.
And we’re not alone. Most countries with income taxes do the same. Citizens pay taxes on all the income they earn regardless of where they earned it.
There are benefits to the system. Americans are the most productive in the world and the system ensures that the wealthiest among us cannot avoid paying taxes simply by moving money abroad.
It’s quite simple. If you receive benefits by being an American, you should pay your fair share.
And I say that, but no American ought to have to forswear his or her citizenship in turn to comply with the law.
We obviously are very sympathetic to the woman we just saw on that video.
This tax system assumes everyone plays by the rules and pays their taxes according to the law.
We know, unfortunately, in the past not everyone did play the game fairly. While the law has, for decades, required offshore account holders to file reports with the Treasury Department, not everyone did.
Extremely wealthy tax cheats, not the woman we just saw on that video, hired expensive lawyers who knew how to evade the system.
Whistleblower leaks changed things. Congress learned of thousands of Americans who were willfully avoiding paying their taxes in overseas income without disclosing that information to the IRS.
These weren’t simply inadvertent mistakes, they were willful efforts to avoid taxes.
Congress chose to take some action. That action came in the form of this act: FATCA – the Foreign Account Tax Compliance Act.
Under that act, foreign financial institutions are required to disclose to the IRS the accounts of U.S. taxpayers.
The Wall Street Journal reported that an IRS limited-amnesty program pursuant to this act brought in $9.9 billion dollars in taxes, interest, and penalties from 55,000 taxpayers who hadn’t paid their taxes on income earned abroad.
FATCA is an incremental step in terms of tax collection. U.S. companies and financial institutions already provide taxpayer information to the U.S. government through 1099 forms.
And taxpayers with assets abroad file with the IRS the same information FATCA collects.
Now that information is also coming from foreign financial institutions since many taxpayers previously had not been filing.
Despite the new law, banks are still lending and it is possible for Americans to get accounts. Citigroup, for example, operates in more than 160 countries and will give Americans abroad bank accounts and mortgages.
Because of this act, international tax collection has changed. Countries around the world are adopting the common reporting standard which is based on FATCA.
Under the common reporting standard, countries collect identifying information from account holders.
They then share that information with the foreign account holders’ country of citizenship and receive information on the accounts of their own citizens.
The information collected under the common reporting standard is broader than that required by FATCA.
Common reporting standard countries collect information on all account holders, not just U.S. citizens.
With a hundred such nations committing to implementing the standard by 2018, efforts to evade taxes are expected to diminish.
I certainly don’t mean to suggest there haven’t been problems with FATCA, we just saw one.
Although it’s important, the law does not require anyone to give up their citizenship.
The advice came, as I understand it, from a Swiss bank. But nonetheless, we have a victim here.
Nobody ever should feel they have to give up their U.S. citizenship. So there are kinks clearly to work out and I think that’s why this hearing can be very helpful.
And we want to make sure that people like Ms. Nelson and Mr. Kuettel are protected.
Repealing FATCA, however, entirely would not restore their citizenship and could harm our government’s ability to collect the taxes owed.
We’ve had hearings in this committee about the fact that hundreds of billions of dollars, not overseas, but hundreds of billions of dollars go — are left on the table uncollected because the IRS doesn’t have the staffing or resources or mechanisms, frankly, to collect taxes owed but not collected.
And so, you know, as we wrestle with the fairness of this act and its implementation problems, and certainly the injustice that individuals such as the one we just saw in that video have experienced, so we want to — we certainly want to address that.
But we also want to make sure that the United States government is — is being fair to all of its citizens by making sure everybody pays their fair share.
So I look forward to the hearing. I look forward to hearing testimony from our witnesses. And with that I yield back, Mr. Chairman.
MEADOWS: I thank the gentleman for his thoughtful opening statement. And we’ll now go ahead and allow the witnesses — if you’ll make your — your way forward. And I appreciate your flexibility with regards to allowing Senator Rand Paul to go first.
And so we would love to welcome — and we’re going to keep these introductions brief. I understand we may have votes coming up here at 2:45 to 2:50 range and — and so we’re going to try to push a little bit quicker here. But I’ll hold the record open for five legislative days for any member who would like to submit a — a written statement.
So in recognizing our panel of witnesses, I’m pleased to welcome Mr. James Bopp, Jr., welcome. Mr. Mark Crawford, welcome. Mr. Daniel Kuettel, welcome. And Ms. Elise Bean – welcome to you all.
Pursuant to committee rules, witnesses will be sworn in before they testify. So if you will please rise and raise your right hand.
Do you solemnly swear or affirm that the testimony you’re about to give will be the truth, the whole truth, and nothing but the truth?
Thank you. You may be seated. And please let the record reflect that the witnesses all answered in the affirmative.
In order to allow time for discussion, I’d ask that you limit your oral testimony to five minutes, but your entire written statement will be made part of the record.
And so we’ll now recognize you, Mr. Bopp, for five minutes. You need to hit your — your little button right there.
BOPP: Thank you. Thank you, Chairman Meadows, and thank you for the opportunity to testify.
In my oral presentation, I will summarize the key points of my written testimony.
Republicans overseas, for which I serve as treasurer and general counsel, advocates for the rights of interests of overseas Americans.
As this hearing will demonstrate, our overseas Americans are the victims of a draconian system of tax laws that disrupts their lives, deprives them of living, and strips them of their basic constitutional rights as U.S. citizens.
At the heart of this is the fact that U.S. — the United States is only one of two countries in the entire world that tax its citizens based upon their citizenship, not their residence.
So the long arm of the IRS reaches out to the nine million U.S. citizens overseas and taxes them on — on — and taxes them.
For the same reason that President Donald Trump has advocated for territorial taxation on corporations, U.S. citizens should also be taxed where they reside. The 2016 Republican National Platform calls for this.
But it is worse than this. The Bank Secrecy Act resulted in U.S. citizens being required to file a FBAR report which applies to U.S. citizens and requires them to report to the IRS for any account which they have in a foreign bank or foreign asset and if the value is greater than $10,000 dollars.
Willful violation of this law results in a 50 percent penalty on the highest value of that account.
On top of this, in 2010, the Democrat Congress passed FATCA, which requires more reporting of personal and financial information by individuals and by foreign financial institutions.
Individuals are required to file a FATCA report annually if they have $50,000 dollars in foreign accounts or foreign assets, whether they are in the United States — living in the United States or living abroad.
That report includes the name, account balance, maximum value of the account – and there’s a $10,000 dollar penalty.
In addition, foreign financial institutions have one of three choices. One is to report to the IRS on every single U.S. citizen account holder the account information, the value, and then the gross receipts and gross withdrawals of that account or two, purge themselves of all U.S. account holders and certify that to the IRS or three, suffer a penalty of 30 percent of all transfers of all funds for all purposes from the United States to that bank.
In addition, the Obama administration has negotiated illegal Intergovernmental Agreements which provide, in most cases, that the banks, instead of reporting to the IRS, report to the foreign government — require the foreign banks to report to the foreign government of information about U.S. citizens which is then reported by the government to the IRS.
These agreements have not been approved and are unconstitutional. Thus, FATCA is a sweeping financial surveillance program of unprecedented scope that allows the IRS to peer into the financial affairs of any U.S. citizen with a foreign bank account.
In so doing, FATCA has imposed enormous costs on individual Americans abroad, as this hearing will demonstrate.
And as the Democrats abroad found out in a survey of Americans overseas, these survey results show the intense impact FATCA is having on overseas Americans.
Their financial accounts are being closed. Their relationships with non-American spouses are under strain. Some Americans are being denied promotion or partnership in business because of FATCA reporting. And some are planning to — contemplating renunciation of their own U.S. citizenship.
A decade ago, about 200 renounced. Now the number is up to 6,000 last year. These Americans are in many ways ordinary, middle class Americans being affected in extraordinary ways.
FATCA has also imposed an enormous financial cost on foreign financial institutions, and through the IGAs, has converted foreign governments and foreign banks into IRS agents who are surveilling U.S. citizens and reporting to the IRS.
FATCA has furthermore denied U.S. citizens basic constitutional rights: equal protection, due process, Fourteenth Amendment protection against unlawful search and seizure, Eighth Amendment protection against excessive finds.(sic)
I’m lead attorney in Crawford v. United States Department of Treasury that is making these claims.
At the bottom — the bottom line about all of this is that the Americans abroad are U.S. citizens who should enjoy the individual right and freedom to reside overseas if they choose without penalty.
And American — America benefits when they do. They are ambassadors for America who promote this — this country and its values and often are directly involved in promoting American business and products overseas.
However, the U.S. government has placed a scarlet letter on the forehead of every American and it is stamped U.S.A. And as a result, they are treated as pariahs by foreign banks and employers. This is wrong and it needs to stop.
MEADOWS: Thank you, Mr. Bopp. Mr. Crawford, you’re recognized for five minutes.
CRAWFORD: Thank you very much for allowing me to be here today to share my firsthand experience regarding the consequences of FATCA from the perspective of an international businessman.
My name is Mark Crawford. I’m an American citizen and I do not hold any other citizenship.
But various times I’ve been a resident of the United Kingdom, Albania, Montenegro, and Greece.
The politics that divide Americans at home don’t often divide those of us abroad. Most of the nine million Americans living overseas are ordinary citizens who are living their lives, raising families, studying, and working.
We are just Americans, and though we’re often far from home, America is still our home and the U.S. Constitution is still our Constitution.
In my written submission, I outline in more detail about my personal background having lived and worked across three continents over a 25-year period as a teacher in China, a missionary in Albania, a graduate student in England, a venture capitalist in the Balkans, a banker in Montenegro and Serbia, and now as an entrepreneur involved in finance, natural resources, and film production. I’ve employed hundreds of people and increased economic (ph) activity between the United States and its friends around the world.
Throughout my work abroad, I’ve remained active assisting U.S. interests whenever called upon, regardless of which party controlled the Congress or the White House, including having worked for appointees of the Clinton administration, supported USAID financial inclusion projects, voluntarily chairing Chamber of Commerce affiliates, advising leaders of several American allied governments, and more recently volunteering to assist the Treasury Department in Kosovo.
Having worked in finance around the world, I returned to Albania in 2010 to pursue a business opportunity and I ran into the consequences of FATCA.
In smaller developing markets, there often isn’t enough volume to support stand-alone financial products so it’s important for such markets to leverage off larger ones.
Albania’s domestic capital market is still developing and in order to connect Albania to international capital markets, I’ve founded an Albanian introductory brokerage firm that would work with Saxo in Denmark offering basic brokerage services to Albanian residents.
When I sent the first 10 applications to Saxo Bank, they responded approving only nine.
I reached out to Saxo Bank to see who was rejected and they responded to say that I was rejected.
I own the company. I was told that though I was an Albanian resident at that time, I was rejected solely because I was an American citizen, because of fears because of the FATCA law.
I realized that due to FATCA I could not serve U.S. persons in my Albanian brokerage firm because of the carry-on impact of the Saxo decision.
The introductory brokerage vision that I had was alive but the idea of working with Americans and American persons was dead.
I’m the pro-bono Chairman of the American Chamber of Commerce in Albania and I work closely with our U.S. Embassy there in a private sector capacity trying to promote American business.
A brokerage firm owned by myself that markets itself as an American lead by the American Chamber chairman that does not accept American citizens is a logical anomaly to most in Albania and understandably so.
The introductory brokerage products became sidelined and Saxo Bank eventually grew so unhappy with me that they dropped my firm altogether. The obstacle to my brokerage business created by FATCA was a deal breaker. Proposals to address the unintended consequences of FATCA have been considered by both parties and candidates on both sides of the aisle in the most recent presidential election.
In recognizing the problems of FATCA, some have suggested implementing a safe harbor exception that would help Americans solely within the country of their residency.
Such a safe harbor exception would not have solved the negative impact that FATCA had on my situation.
I have never been a resident of Denmark. Thus, an exception would not have alleviated Saxo Bank’s relationship with me or other potential clients that I was bringing through my introductory brokerage firm from Albania.
In conclusion, my experience is that the American entrepreneurial mentality sets our culture apart.
Americans do not restrict their investments based on their personal residency. Rather, they pursue opportunity according to the market. Access to international financial services is critical for all such projects and FATCA’s impact has already harmed some of my businesses and if left unrepealed, will risk others.
It is ironic that after spending much of my career helping advance U.S. interests by expanding financial inclusion, through FATCA the United States has inadvertently restricted inclusion for its own citizens.
The fact that an increasing number of banks and financial institutions reject working with United States citizens outright harms our interests.
It is my belief that the best way to improve the current situation is not to make the situation more complex by creating carve- outs or safe harbor exceptions or other partial fixes. Therefore, I do support a full repeal of FATCA and I look forward to your comments and questions in the future.
MEADOWS: Thank you, Mr. Crawford. Mr. Kuettel, you are recognized for five minutes.
KUETTEL: Thank you, Mr. Chairman, for allowing me to speak on the negative consequences of FATCA.
I’m here — my name is Daniel Kuettel. I live in Switzerland and I am here to tell you why FATCA forced me to renounce U.S. citizenship.
As you see here, I brought my army — U.S. army jacket. I served in the army, I served in the army reserves, and then I got married in the Philippines I asked my wife to come join me in America but that was during the dot-com crisis. I lost my job, couldn’t find work. I sent my resume around the nation but had no luck so I took my chances in Europe. I did not leave the U.S. to evade taxes. I paid my taxes. I enjoyed paying taxes.
I’m an economic refugee. I don’t have a lot of money, I’m not wealthy.
In Switzerland, we saved up to be able to finance a small condo. And then in 2012, I needed to investigate refinancing that condo. In — in Switzerland, every few years, you have to refinance.
But when I went to a bank to ask them if they would allow me to refinance my mortgage, when they heard that I was a U.S. citizen, they denied it.
I went to another bank, I was denied again, and another. I called them. I was denied – rejected, rejected. It was horrible, terrible. I mean, if you’ve ever lived anything like this, this type of discrimination, it’s — it’s unacceptable.
I was worried that I would not be able to refinance my home. And so I called HUD, I called the VA, but they told me that they only support — they only help Americans residing in America. They don’t help expats.
I called the Department of Justice to inquire why this law prohibiting national origin discrimination is not being applied and they refered me to some statute that I could never find which was supposed to state that also the law only applies to U.S. residents.
So I had to renounce and it was a difficult decision to make. I went to a small village in Switzerland that I went to the first time that I came to Switzerland at the age of 10, where I was able to gather the strength to — to renounce.
And afterwards, I was able to refinance my mortgage. But today I’m here because I’m having a problem again because of FATCA and that is with my children.
My daughter is still a U.S. citizen. My son, on the other hand, he is not a U.S. citizen.
So my son, he can have a bank account with any bank in Switzerland. My daughter – about 310 out of 320 banks reject her.
And this is going to become a problem later on when she is 16. In Switzerland, it’s a common practice to get an apprenticeship where she would go to work, earn money, she’ll need a bank account.
But having a bank account means she would have to file FBAR. She would have to be subject to FATCA.
And — I mean, assuming that she even can get a bank account. And this is just a problem which rolls over. She is going to have to relive what I relived. Go through what I went through. She is going to have to decide if she wants to have U.S. citizenship or if she wants to have a normal life in Switzerland with a normal bank account.
Thank you, Mr. Chairman.
MEADOWS: Thank you for your testimony. Thank you for your service to our country and you are in a minority. You’re the only witness, I think, that I’ve ever heard who says they enjoy paying taxes.
So — but Ms. Bean, you’re recognized. And before I recognize you, I want to just say that this hearing, where it’s highlighting some of the difficulties with FATCA, I want to recognize, as I did in my opening statement, the — the great work that you did with UBS and the investigation.
And so nothing in this is meant to be disparaging of the — of the consequences of what I believe are unintended consequences of — of really your fine work. And so I recognize you for five minutes.
CONNOLLY: Mr. Chairman?
CONNOLLY: Could I just ask unanimous consent request before we hear from Ms. Bean — I meant to do this in my opening statement. I — I have a — a statement from the FACT (ph) Coalition opposing H.R.2054 I’d ask be entered in the record?
MEADOWS: Without objection.
CONNOLLY: And I would also comment on the chairman’s comment to Mr. Kuettel. Actually there are only two kinds of people who oppose taxes: men and women.
MEADOWS: We’ll now recognize the — the — Ms. Bean for five minutes.
BEAN: Well, thank you, Chairman Meadows, Ranking Member Connolly, and the members of the subcommittee for inviting me here today to present another view of FATCA.
I was asked to testify because for many years I worked for Senator Carl Levin on the Senate Permanent Subcommittee on Investigations and we held a number of hearings looking at how foreign banks were helping U.S. clients hide assets and evade U.S. taxes.
To give you a couple of examples, we had a gentleman named John Mathewson who testified in front of us. He set up a bank in the Cayman Islands called Guardian Bank & Trust. Had about 2,000 clients, $150 million dollars in assets, and he said, in his opinion, virtually all of his clients were engaged in tax evasion.
He said the standard practice to handle them was he would set up a shell company in the Cayman Islands, open up an account in the name of the shell company, the client would supply the money, and then he would give the client a credit card in the name of the shell company, and he would advise them to sign it illegibly on the back.
That way they could use the credit card in the United States to withdraw funds from their Cayman account without anybody linking their name to their shell company.
We looked at two banks in Switzerland: UBS – the largest bank in Switzerland and the second largest, Credit Suisse.
UBS was shown that they had 52,000 undeclared accounts – meaning accounts opened by U.S. clients that had never been disclosed to the IRS with about $18 billion dollars in assets.
They were sending Swiss bankers to U.S. soil. It wasn’t a case of us going there but sending their Swiss bankers here to yachting races, art shows, tennis tournaments, quietly handing around their business card and trying to convince people to put their money abroad.
They were very successful. They had tens of thousands of clients through those methods.
They eventually pleaded guilty. They paid a fine of $780 million dollars and they eventually disclosed about 4,500 names to the U.S. But 4,500 is nowhere close to the 52,000 undeclared clients.
Credit Suisse had at their peak about 22,000 undeclared accounts with about $10 billion dollars in assets.
They too pleaded guilty. They paid a fine of about $2.6 billion dollars. But guess what? They never disclosed any of those 22,000 accounts to the U.S. The U.S. had to find those people on their own and they haven’t found very many of them.
We did identify two clients. One told us about an occasion where his Credit Suisse banker met him at a luxury hotel here in the U.S. over breakfast. Slipped him a Sports Illustrated magazine and in between the pages was his bank statement so that he could know what was going on in his Swiss account.
Another gentleman told us about how he went to the bank’s headquarters in Zurich. He was ushered into an elevator with no buttons, it was remotely controlled. He was taken up to a floor and shown to a room with all white walls. The whole point being how the bank was so secret and actually told him they did not file the forms that required disclosure of his account to the IRS.
In short, our investigations — and by the way, we also looked at a bank in Liechtenstein and there we were able to get very detailed records on about 150 U.S. clients who had accounts there.
And we gave examples at our hearing. Just to give you one. A Florida contractor in the construction business set up four Liechtenstein foundations, opened up accounts in the name of those foundations, and stashed about $49 million dollars in those accounts that had not been disclosed to the U.S. until a whistleblower turned over the documents to the agency.
In short, our investigation showed that opening up offshore bank accounts for U.S. clients was big business. Billions of dollars, tens of thousands of clients.
Additional evidence of the scope of the problem is the IRS Offshore Volunteer Disclosure Program.
The latest statement from the IRS says that they have now had word from 100,000 Americans – 100,000 Americans who have admitted to having an undeclared offshore account – and in order to get it right with the government, they have now, as Mr. Connolly said earlier, paid a total of about $9.9 billion dollars to get — to satisfy the back taxes that they owed.
That’s the backdrop for FATCA. That’s why FATCA was enacted on a bipartisan basis.
The first thing to understand about FATCA is that it does not impose a tax on anyone here or abroad. It does not impose a tax, it is simply a transparency measure.
And it matches what every American citizen has been doing for decades. All of us get 1099s that are turned into the IRS about our domestic bank accounts. All of us do. It simply institutes the same program so that Americans living here who open up a U.S. bank account is treated the same way as any American living here or abroad opens up a foreign bank account.
Recent research has shown that FATCA and other offshore account disclosure programs are working.
Preliminary results from this 2017 study says that since 2009, the number of individuals reporting offshore accounts to the IRS has increased by 19 percent. And they have disclosed additional account assets of over $75 billion dollars.*
*NB It is difficult to understand how FATCA “is beginning to work” given reporting began in 2015 and there have been no reports of the IRS actually contacting anyone, much less, actually collected any money. Ms. Bean must be referring to OVDP/OVDI. see ** where Ms. Bean indicates she does not know how much FATCA brings in
It’s starting to work. We’re starting to change and end these offshore abuses.
Now how has FATCA helped? Well, first of all it leveled the playing field between Americans who open accounts here and Americans who open accounts abroad. It treats them the same way.
It also leveled the playing field between U.S. banks and foreign banks. U.S. banks no longer see their wealthiest best clients leaving the U.S. bank and going to a foreign bank because they can open up a secret account.
U.S. banks first. This restored a level playing field between U.S. banks and foreign banks.
At the same time, everybody is correct that FATCA did not have a smooth implementation. It had a very rough beginning. There were a lot of banks that were furious at this U.S. attack on their secrecy and on — on their business model to open up these accounts, particularly in Switzerland.
We went after UBS, Credit Suisse, and we had — we had a program to go after another hundred banks. Switzerland is very unhappy with the U.S. But you know what? Those banks have adapted. Those banks have said that they will comply with FATCA.
And in fact today, seven years later, there are over 274,000 foreign financial institutions have signed up to FATCA and agreed to comply with it.
In addition, that’s 100 countries have adopted a similar FATCA program under the leadership of the OECD to do the exact same thing that we’re doing.
So disclosing foreign account information is becoming the global norm. So while it was a very rough beginning, people were very angry, particularly in Switzerland – that’s not the case seven years later, today. Now many banks have agreed to comply with FATCA.
Ms Bean seems to be suggesting that the banks are no longer angry or unhappy about complying. One could surmise it is not due to agreement but rather, the desire to survive financially, given the penalties etc imposed upon UBS, Credit Suisse etc.
Now we have heard today about how some American citizens are saying that FATCA is forcing them or leading them to give up their citizenship.
But I have to also point out that that’s affecting a very small number of people. In 2015, about 4,300 people gave up their citizenship. That same year, we got new citizens of 730,000 people willing to pay U.S. taxes.
And when you compare that 4,300 figure to the nine million Americans living abroad, you’re talking about a rate of less than one- tenth of one percent.
To conclude, I wanted to say that repealing FATCA today would be a mistake. It would hurt honest taxpayers who have to disclose their account information on a bulk (ph) basis every year to the IRS. That’s what honest taxpayers do and whether you’re honest or not, that’s how the banks treat your bank accounts here in the U.S.
But it would hurt honest taxpayers here, living in the United States, to allow people who have the wherewithal to go abroad to not play by the same rules.
It would encourage Americans to move more of their money offshore to get some of that secrecy. It would disadvantage U.S. banks who would, again, have to compete against foreign bank secrecy.
It would also waste all of the investments made by those foreign banks to comply with FATCA. They have all done it. They’re complying.
We began disclosures in 2015. All of that money would be wasted. And finally, it would return us to an era where it was much easier to have an offshore account hide your assets and evade your taxes.
So that’s why I think repealing FATCA would be a tragic mistake. Thank you.
MEADOWS: Thank you, Ms. Bean. The Chair recognizes himself for a series of questions.
So Ms. Bean, let me — let me go because you made some very profound statements there that I’m not sure you — you want to carry them out.
Are you suggesting that the whole reason to do this is that U.S. banks want us to do it?
BEAN: Well, it’s my understanding that when FATCA passed the first time around . . .
MEADOWS: I’m just asking for your sworn testimony. Are you suggesting that U.S. banks are — are really supportive of — of this law?
BEAN: Yes. I think banks do not want to compete against foreign banks . . .
MEADOWS: So — so if I get the banking institutions to say that they don’t have a problem with us repealing that, you would change your opinion?
BEAN: Well, many of those banking institutions have foreign banks as members.
MEADOWS: No, I know — I know that. That’s why I’m saying — so at this point, if they change their position, would you change yours?
BEAN: I think U.S. banks do not want to compete against foreign banks that can take their wealth . . .
MEADOWS: That’s not the question I asked. That’s not what — I said if they changed it, would you change your opinion?
BEAN: If they — you mean, if U.S. banks . . .
BEAN: . . . not their — not their trade associations, which have foreign banks in them. But if you could get U.S. banks alone to say, “We don’t want FATCA anymore.” They’d still have to comply, by the way, with all of the other . . .
MEADOWS: Well, they’re about to have to comply. See, we haven’t forced them to comply on this side, you know? And . . .
BEAN: They do.
MEADOWS: And — in — in a different way. We — we do not require them to comply with foreign entities at this particular point. So if France . . .
BEAN: Yes, we do.
MEADOWS: We’re not forcing them to do that unless there’s a reciprocal agreement. I’ve — I’ve looked at it, Ms. Bean. And so we can argue the point. So let — so let me go to one other side of this.
So you’re saying it’s the investment that we made. Even if it’s bad policy, we shouldn’t go the other direction because we made a substantial investment and everybody is getting used to it. Is that your testimony?
BEAN: It is. Foreign banks — by the way, these weren’t U.S. banks but these are foreign . . .
MEADOWS: OK. I’ve got five minutes. So yes or no answers are the best for me. But you can explain, that’s fine.
So — so GAO did a study in 2013, and they suggested that really it’s the voluntary disclosure that has most of this. It’s not the IRS coming in, it’s the voluntary disclosure that comes up with this.
In fact, they said in that study 80 percent — now these are the high income people, so the lower income people like Mr. Kuettel would not be actually in this study — but they said 80 percent of the high income individuals, the income that we recovered actually came from fees and — penalties and fees, not actually income tax.
Does that strike you as surprising? So of the $800 million that we actually got last year, 80 percent of that were fees and penalties, it wasn’t really taxes.
BEAN: When people don’t pay their taxes and they’re caught by the IRS, they do impose penalties.
MEADOWS: Listen, this isn’t my first rodeo. I get that. What I’m saying, does that surprise you that 80 percent of the money we have coming in is actually fees and penalties is not tax avoidance, it’s a penalty or a fee that goes with that.
So the number we’re — we’re collecting — the vast majority of it is just a — a fee and a penalty for voluntary disclosure. Does that surprise you?
BEAN: It did not surprise me but it also includes interest, I believe. Not just penalties but also interest.
MEADOWS: Well, when we — when we look at this, when we look at . . .
BEAN: I think it’s the biggest part of it.
MEADOWS: It was 80 percent. I mean, I’ve — I’ve got the study right here. I’ll be glad to share it with you. It’s 80 percent where basically “come from penalties and fees”, quote.
And so when — when we look at that, you know, then what you’re doing is you’re taking this number down and so we’re investing $200 million to try to go over and we’re assuming that they’re not doing legal activity.
I think most people actually agree with Mr. Kuettel. They may not be happy about they’re (ph) paying taxes, but they agree that it is their civic duty to do so.
BEAN: I would agree with that.
MEADOWS: And so when — when we see that, we’re making an assumption that activity is illegal, just like Senator Rand Paul was talking about.
So what you’re saying is that it’s OK for us to go in and get details on their private accounts, and making sure that we understand that in case there is illegal activity. Is that your premise today?
BEAN: I don’t like getting a 1099 on my bank account. I’m an honest taxpayer.
MEADOWS: That’s not what I asked. Is it your sworn testimony . . .
MEADOWS: . . . that’s it’s OK for us to go look at the private individual account with the suspicion that there may be illegal activity and that’s OK?
BEAN: I treat all Americans the same. 1099s or 1042s, I treat them all the same.
NB: Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding – It is not clear how a 1042s would apply to an American given it is designed for a foreign person
MEADOWS: Ms. Bean, you’re — this isn’t your first rodeo either. You’re not answering my question.
Is it your sworn testimony that it’s OK to go into the private individual accounts under the suspicion that there may be illegal activity and look at that as FATCA does?
BEAN: As FATCA and American law does, yes. I think that . . .
MEADOWS: Alright. So let’s look at it a little bit differently. So I am assuming you’re a law abiding citizen. Would it be OK, under that same premise then, for me to go look at all of your e-mails and all your private correspondence – which some would argue is not as intimate as your financial details. Would it be OK for me to go in there looking for suspicious activity? Would — would you think that that would be appropriate?
MEADOWS: OK. I agree with you. And so . . .
MEADOWS: But what we’ve done . . .
BEAN: . . . the other one is about private communications. There’s a difference there. All of us . . .
MEADOWS: Listen, my son is — is graduating from law school. His specialty is Fourth Amendment. So — I mean, we’ve had these arguments at the dinner table.
And so when we look at that, I understand the difference. But as we start to see this, Ms. Bean, here’s what I’m saying.
We’re investing money which forces a compliance nature that is making people where they can’t bank or where actually being a U.S. citizen is a detriment internationally for any financial whether you’re in a single household or whether you’re a financial corporation.
Do you think that that was the intended purpose of this bill?
BEAN: ,The Supreme Court . . .
MEADOWS: Was that the intended purpose of the bill? Yes or no.
BEAN: Was the intended purpose to denigrate Americans? Absolutely not.
MEADOWS: Alright. Thank you. I will recognize the ranking member.
CONNOLLY: Thank you. I — I do want to, you know, one — one — one wants to caution about only looking at extremes.
So we can ask about, you know, intrusion into Americans financial information as if all of it’s extreme.
So I’ll pose the opposite question to you, Ms. Bean. Would it be OK if we completely repeal FATCA and while we’re at it, say that anybody is free, as an American citizen, to have a secret bank account in Switzerland and should never have to report on it and should never have to pay taxes on it unless they feel like it?
What’s wrong with that?
BEAN: Well, what’s wrong with that is we have tens of thousands of people who are cheating on their taxes . . .
BEAN: . . . honest taxpayers . . .
CONNOLLY: Right. FATCA — FATCA didn’t just come out of, you know, a busy bodies who love putting their nose in private business and there was no problem to solve and it was just another perverse liberal thing to do in Congress. Right?
CONNOLLY: I mean, there was actually a problem identified which was rather substantial tax evasion in the billions of dollars. Hard working Americans pay their fair taxes and none of us like to see anyone cheating. Right?
CONNOLLY: OK. Now, here’s my question. Having said all of that, the testimony we’ve heard from your three colleagues at the table would suggest that sometimes, though, we’ve gone too far.
That maybe the intention was good but it’s disrupted people’s lives. We’ve had testimony from two — two Americans that they had to renounce their citizenship because a bank in Switzerland told them they had to, if I got the testimony right.
And — and surely you would agree that’s not an intended consequence of FATCA.
BEAN: No, it is not.
CONNOLLY: So would you consider — you said something about the roll-out, you admitted was rocky. So is the implementation still rocky? Are there still unintended consequences that maybe Congress needs to address? Or — or someone implementing needs to address?
BEAN: FATCA still is not — is far from a perfect law. There are things that could be improved.
CONNOLLY: Well, no, no — nothing’s a perfect law. I hate that expression. I mean, that implies something could be perfect – nothing is perfect. I wish there were, but there isn’t. So we’ll put that aside.
It — it has problems in its implementation still?
CONNOLLY: OK. And — and listening to the testimony of the three gentlemen to your left — left? Right.
BEAN: My right.
CONNOLLY: Right, sorry. Do they have a point? I mean, can — do you recognize what you’re hearing here as a fair critique? Maybe not a comprehensive critique – you and I would stipulate that.
The purpose of FATCA is a good one. And it has done some good, clearly, in promoting an international standard and then collecting taxes that otherwise would have been foregone.
But in doing that, either in the zeal (ph) or in the reach, it’s hurt people unintentionally. That’s really what we’re hearing here. And I’m concerned about that as a member of Congress. I – I don’t want to see fellow citizens hurt. I — I want to see tax cheats brought in. I want to see everybody pay their fair taxes. And maybe not everyone up here shares that philosophy. I do.
But I don’t want to be hurting people in the process who are innocent victims of, you know, a well-intentioned piece of legislation that’s overly broad or is badly implemented.
And that’s — that’s what I’m asking you to comment on.
BEAN: I really think their concern is misplaced.
BEAN: The — the people to my right.
BEAN: I think what they’re concerned about is they feel, in some cases, it’s unfair to tax them because they don’t live in the United States . . .
CONNOLLY: Can I just say, I’ve seen this, Mr. Chairman, if I can interrupt one second.
I would ask everybody to forebear civility and acceptance. This is not a hearing where you shaking your head because you don’t like what somebody says.
We’re going to hear everybody and we’re going to try to be fair. But you’re — you’re not free to be, you know, commenting through body language on whether you approve or disapprove of somebody’s right to express themselves.
You know, if you’re at the table, you get to express yourself. If you’re not, please be forbearing and polite.
BEAN: I was just going to point out that even if FATCA were completely repealed, you’d still have all of the same problems about people saying we’re getting taxed when we shouldn’t be or getting taxed too much or the process for renouncing citizenship is too complicated or too expensive.
All of those things would still be true because FATCA itself does not impose any tax and it does not, of course, require anybody to renounce their citizenship.
I think Switzerland was a particularly tough place to be that the banks there were particularly upset because FATCA was aimed, in part, at Swiss bank secrecy.
I think that a lot of those Swiss banks now have changed their practice. UBS and Credit Suisse now agree to open up accounts for American citizens and report them to the IRS . . .
CONNOLLY: Ms. Bean — OK. Thank you. Unfortunately most have been called. Mr. Chairman, just one — I would like, if it’s alright to have Mr. Bopp just comment on that, if he — if he would like to.
I’d like to hear the other point of view.
MEADOWS: Yeah. Very quickly . . .
CONNOLLY: Very quickly.
MEADOWS: We only have a couple of minutes left and we’re going to need to — to recess and reconvene. So very quickly.
BOPP: Thank you. I — I would just make a couple of points. First, this is not an unusual or rare problem that is affecting Americans overseas.
The Democrats abroad survey of Americans overseas found that 65 percent of married Americans overseas have lost bank accounts because of FATCA.
Secondly, this does not level the playing field. U.S. banks have to file, you know, 1099s regarding interest income. Under FATCA, foreign banks have to not only identify income but also gains and losses, et cetera. Also gross receipts, gross withdrawals, account information, value of it – no — no taxpayer in the United States reports that information to the — to the IRS.
And finally, regarding the penalty point that you made. The $9.7 billion that she’s talking about of taxes, interest and penalties – most of those penalties we know anecdotally were not because these people needed to pay any taxes and failed to do it, but because they failed to file this form. This one lousy form that generates a 50 percent penalty of the highest value in the account.
If you do it the second year, failed to file your form, you’re now at 100 percent. That’s the penalty. And — and you know, that is something that this committee should force the IRS to explain to the American people about how FATCA is working.
MEADOWS: Alright. We’re going to reconvene probably for planning purposes no sooner than 3:35. So you can go get coffee, do whatever you want and so this committee stands in recess.
MEADOWS: Alright. If you guys can make your way back to your seats. I think the ranking member is probably on his way and we’re going to go ahead and get reconvened at this point.
Seeing a nod from actually the people that do the work – the staff – we’ll — we’ll go ahead and the Subcommittee on Government Operations hereby reconvenes.
Chair recognizes the gentleman from Georgia, Mr. Hice, for five minutes.
HICE: Thank you, Mr. Chairman. Ms. Bean, I want to pick up with you, if we can continue here.
Any idea how much revenue is lost to offshore tax evasion each year?
BEAN: Estimates have been between $100 and $150 billion dollars per year is lost to offshore tax evasion.
HICE: Alright. Between . . .
HICE: . . . $100 and $150 billion. And you’re — you’re satisfied with that estimate?
HICE: OK. And how much is — revenue is brought in because of FATCA?
BEAN: **I don’t know. It’s such a new law. They just started the reporting in 2015. I don’t know if they have any statistics yet.
HICE: OK. Well, the Joint Committee on Taxation estimated $870 million. Are you familiar with that estimate?
BEAN: That is being brought in per year? I wasn’t familiar but OK.
HICE: OK. Based on that, assuming that the Joint Committee on Taxation is accurate, at least in the ballpark, it is very poor math.
We’ve got a loss of $100 to $150 billion, we’re only bringing in $870 million. And that’s just part of the problem.
I mean, we’re spending — figures have been going out today – $200 billion spent on this. The estimates on that range from a little less than that.
The $200 billion is kind of a middle-of-the-road estimate. I’ve seen as high as a trillion, as low as eight billion. But the middle- of-the-road guess – $200 billion.
And besides all that — just — I mean, I listen to these witnesses and read your testimonies and the harm that is being caused individuals around the world and the harm that has come about to some of our allies.
You even mentioned yourself how — you know, you said that in your opinion things are changing. How many of our allies have been hurt because of this?
Obviously, it’s not a very efficient use of IRS resources and quite frankly, I have questions as to just whether or not this thing’s even constitutional or not.
There are tremendous constitutional questions that come up with this. The fact that Americans living overseas are forced to provide financial information that would normally require a warrant – it is just amazing to me. There’s obviously an issue, at least, with the Fourth Amendment there.
We have heightened reporting requirements that treat Americans living overseas more harshly than those living here. And that, obviously, is a Fifth Amendment concern. You just wonder even how constitutional this thing is at its very foundation.
And then the fact that this was instituted without congressional authority. President Obama — the — the agreements were made — I mean, you’ve got to — separation of powers is — I guess my point is it’s over and over and over.
There’s just questions on this thing as to even how effectively it’s working. If we’re bringing in $870 million, but the cost is some $200 billion, it doesn’t take a whole lot of math to figure out this is not a very efficient thing.
And you add to it the harm that’s being caused and the constitutional issues that are being raised. It — it appears to me that although this may have been implemented with good intentions, as has been mentioned here today, there’s enough information that’s come forth here about FATCA that frankly, I find this thing not only to be disastrous as a law but dangerous potentially, constitutionally.
And it just seems to me in every way this ought to be repealed, if not majorly modified.
Just a quick yes, no, would — would you all agree or disagree that this needs to be either repealed or modified?
BOPP: I definitely agree it needs to be repealed. We — we have thought about, you know, fixes — alleged fixes being proposed by various people and the problem is it leaves all the essential elements of the FATCA regime in place.
The burden’s on most individuals. The burden’s on financial institutions don’t change, but — in any of the proposals that we are aware of. And — and — and the constitutional issues remain.
And we — we just should not be treating people that are U.S. citizens, because they’re residing abroad, stripping them of their rights as if they were second class citizens.
HICE: OK. My time has expired. Mr. Crawford and Mr. Kuettel, yes or no – repeal it, modified?
CRAWFORD(?): Yes, I’m support of repeal.
KUETTEL(?): Yes, I support repeal.
BEAN: No, I don’t. And just so you know, the courts that have looked at these types of issues have . . .
HICE: Nor — nor do you believe that it should be modified? You like it just as it is?
BEAN: I think there’s some modifications that would be appropriate.
HICE: OK. Thank you, Mr. Chairman.
MEADOWS: I thank the gentleman. The Chair recognizes the gentlewoman from New York, Ms. Maloney, for five minutes.
MALONEY: Thank you, Mr. Chairman. I want to thank you very, very much for your focus on this issue. It’s an extremely important one as we move into more of a global world with many Americans living abroad.
And of course, thank Ranking Member Connolly. And thank you to all the witnesses who’ve come from all over the corners of the globe to testify about the future of this important law.
I — I represent a district that has many Americans that live abroad that have expressed the concerns of Mrs. Nelson, although I have never had a first family who came over on the first ships testify to me.
But many people have told me the excruciating experience of renouncing their American citizenship and their inability to open up bank accounts or being forced off the bank account of their spouse.
But likewise, I’m very sympathetic to the points that Ms. Bean has raised about the need to crack down on terrorism financing, drug financing, human trafficking financing, and just plain crooks.
But I — I — I do think that we could reach some type of agreement in — in going forward.
I personally do not think FATCA should be abolished. But certainly the reporting procedures should not subject ordinary Americans, in my opinion, to the same scrutiny as criminal tax evaders, money launderers.
And coming from New York, which is constantly a — a terrorist target, the extreme concern that law enforcement has in — in New York and I’d say around the country of terrorism financing.
I’ve been particularly interested in this issue for some time now. As co-chair and founder of the Americans Abroad Caucus, I have heard reports from constituents overseas detailing how FATCA’s expensive and risky reporting requirements have had a negative impact on access to banking services for Americans living abroad.
FATCA was passed to fight overseas tax havens and make sure that American money could not be hidden from tax obligations, which is something I strongly support and I’m sure most members do as well.
It does this by requiring foreign financial institutions to disclose certain information to the IRS about American-held accounts or the institution will be subject to a 30 percent withholding tax on all of its income from U.S. sources.
Unfortunately, in order to minimize their exposure to FATCA reporting requirements and avoid any withholding fees and potential penalties, some foreign financial institutions have decided to simply close accounts for U.S. citizens or refuse to open new ones for them or have asked them to get off the account of their spouse.
As a result, many law abiding American citizens living overseas have lost access to everyday financial tools such as mortgages, bank accounts, insurance policies, and pension funds, all of which are critical services in a modern economy regardless of your place of residence.
Now I believe it is essential that the Treasury Department has the tools it needs to fight overseas tax havens and make sure that any American money around the world remains compliant with the U.S. tax code.
But the current FATCA reporting procedures subject ordinary Americans to the same scrutiny as criminal tax evaders.
It’s gotten so bad that some Americans have resorted to renouncing their American citizenship in response and that’s unacceptable.
Of whether it’s one or two or 2,000, we should not live in a world where people feel they have to renounce their — their citizenship in order to comply with — with basically transparency laws.
Recognizing the consequences that the reporting requirements have had on Americans living abroad, the IRS Taxpayer Advocate Service 2015 annual midyear report to Congress recommended that the IRS exclude from FATCA reporting financial accounts maintained by a financial institution in the country in which the U.S. citizen is a bona fide resident.
And I — I have here a — a letter that — about 20 members of Congress joined me in — in signing and sent to — to — to Treasury and IRS supporting this idea – this — this narrow, narrow exemption for American taxpayers.
The report details how this proposal would mitigate concerns about unintended consequences raised by overseas Americans, reduce the reporting burden on FFIs (ph), and allow the IRS to focus its enforcement efforts on identifying and addressing willful attempts at tax evasion or money laundering or money hiding through foreign accounts.
The IRS would retain access to foreign financial account information as citizens would still be required to submit the report of foreign bank and financial accounts.
Additionally, the Financial Crimes Enforcement Network, or FinCEN, the (inaudible) system ensures IRS employees direct access to FBAR data.
The Treasury Department has not yet implemented this recommendation and I wrote this letter on September 15th of 2015, which I’d like to submit to the record, Mr. Chairman . . .
MEADOWS: Without objection.
MALONEY: . . . to the IRS and Treasury Departments urging adoption of this reform, but still nothing has happened.
So today I — as we hold this hearing, they haven’t taken any — been taken to institute a policy to alleviate the burden on overseas Americans as a result of FATCA.
That is why last night I introduced the Overseas Americans Financial Access Act, which would implement the recommendation and exempt Americans from FATCA reporting if their accounts are held in the same country where they are bona fide residents.
It is a narrowly tailored change that could drastically improve the financial conditions for Americans living abroad. I — I hope my colleagues will join me in this good faith effort to make FATCA more effective in its intention and yet less burdensome on law abiding Americans living and working abroad.
And I — I request permission to place in this record, I think, an excellent document that was prepared by the Foreign Account Reporting on the issue in ways that could be improved which included the recommendation that I legislated last night. And — and I have the bill here and I’d also like to put that in the record.
I feel that this narrowly tailored approach would relieve the burden on American residents, members of — Americans yet keep the benefit of cracking down on terrorism financing, drug financing, human trafficking financing, and just plain criminal behavior.
My time is long over expired. I thank the gracious chairman for — for allowing me this time to speak and I — I — I look forward to a second round where I can participate in asking questions. Thank you.
MEADOWS: I thank the gentlewoman. Her two unanimous consents without objection so ordered.
And the chair recognizes the gentlewoman from the District of Columbia, my good friend, Eleanor Holmes Norton.
NORTON: And let me thank you, Mr. Chairman, for this really interesting and important and revealing hearing.
I was pleased to hear my good friend, Ms. Maloney, take a stab at how we could, in fact, go at the probable unintended consequences of going after bad guys and getting good guys while at the same time not opening the gates altogether to the bank.
Indeed I was a little surprised to hear some of your responses to the question that was asked by my colleague on the other side whether repeal or modification was appropriate.
Let me remind you what it takes in this Congress and what it took in the Congress that passed this to get legislation through, to recoup taxes, or to tax anyone.
The evidence was overwhelming of human trafficking, of — of — of drugs smuggling, of — of tax cheats. So overwhelming that in a Congress which is not known as passing a lot of bills.
And in a Congress which has caught the IRS more than it has caught any other part of the government, this legislation, FATCA was passed.
So I have to ask you, when you say you would like repeal, do you really mean you want no law on the books that went after the bad guys so that we could make sure that the good guys weren’t, in fact, caught?
I’m going to ask you to think about that. Because this is the kind of modification that is going to take bipartisan support and you just heard a member offer at least one version of modification.
But if you come to the Congress of the United States who passed a law like this after being overwhelmed by evidence and say, “The only thing we want is a wide open gate.” And ask you to throw all of that away, then you’re not really helping us.
So I’m asking you whether you would consider the notion of — of modifications that would, in fact, help us deal with what moved all of us during your testimony?
Mr. Bopp, let me hear all down the line on that.
BOPP: Thank you. And — and of course, we have considered the possibility of changes such as proposed and other proposals. And the problem is is we do not find that they will be effective in — in relieving the burden . . .
NORTON: Alright. Mr. Bopp and — and my time is . . .
BOPP: And I can tell you why.
NORTON: You know, you may not have seen any yet, but you see what you give us: an all or nothing kind of resolution. And that, of course, it tells us – who don’t do much in the first place – nothing.
I just want to ask — maybe the chairman would grant me some time as well, because I — I — I want to — I want to see whether any of you would be open to modification going back to where we were.
The fact that you haven’t seen one there . . .
MEADOWS: The chair will give that.
NORTON: . . . doesn’t mean that there isn’t one in existence. And there haven’t been hearings like this doesn’t mean that working with people couldn’t help us.
But I do have to ask Ms. Bean about this — this what looks like the — the — the rest of the country moving toward us with this common reporting standard.
Does that, in fact, share much of what we’ve been talking about in FATCA, Ms. Bean? This common reporting standard? This OECD effort to collect and share information about foreign held accounts?
BEAN: It’s modeled on FATCA. It’s very similar to it. It’s not identical. Buy yes, over a hundred countries have now signed up to that system.
NORTON: So if anything, it looks like the rest of the world is moving toward what FATCA — because of hearings which opened up this matter up, in fact, found.
So could they work together to stop the kind of tax evasion we’ve been talking about? The common core — common reporting standard in FATCA, Ms. Bean?
BEAN: That’s the hope that with the — most banks around the world starting to report account information to governments that this whole problem of secret bank accounts that, as you said, are used not only by tax evaders but terrorists and criminals, sex traffickers, drug lords. That that whole problem would be much more manageable because of the transparency.
NORTON: Would — would the information of U.S. account holders still be collected if Congress repealed FATCA but the common reporting standard continued and existed?
BEAN: I don’t know the answer to that. I believe it would be but I’d have to look at it more detail.
NORTON: I wish you would get that answer back to our chairman. I have to tell all of you sitting at the table, I was a tenure professor of law before I came to Congress.
And essentially I taught one of the — one of the — in addition to the hard letter (ph) courses I taught, one was negotiation. So I came kind of with the frame of mind as every lawyers can be most helpful if they understand that we live in a world where each side can’t get what he wants but can, in fact, be satisfied.
And it’s that kind of problem solving approach I’ve tried to bring to the Congress as well. So I must tell you, when somebody tells me to take back a piece of legislation that could have passed only if we were deluged (ph) with information that made it irresistible, if you tell me that that is the only answer, I have to tell my friends at the table that you’re asking for the status quo.
And I would ask you to work with Ms. Maloney, with me, with the chairman to find a way out of this dilemma so that in trying to help the good guys, and you represent them, we do not go back to opening the gate to all the bad guys we were after in the first place. I thank the chairman for his indulgence.
MEADOWS: I thank the gentlewoman. I would like to make note that the chair did give the additional two minutes to the gentlewoman from D.C.
NORTON: That’s why I love him so much.
MEADOWS: We’re going to go ahead — since the gentlewoman from New York wanted a second round — we’re going to go ahead and do a — a brief second round. So I’m going to recognize myself for a series of questions.
But let me clear up, I guess, some testimony. I’ve got sworn testimony that Ms. Bean says that we’re not asking financial institutions abroad to do anything that the United States banks do.
And Mr. Bopp, your sworn testimony seems to be at odds with Ms. Bean’s. So help me clear up. Mr. Bopp, I think you said that more than just a 1099, they are required to have all kinds of other — other information. I want to give you a chance to correct the record if you are not correct in your sworn testimony.
BOPP: The 1099 that American banks are required to send in to the IRS and to the taxpayer, of course, reports the interest income on the account.
It does not report gross receipts. It does not record gross withdrawals. It does not report the value of the account. These are things that FATCA requires foreign banks to provide to the IRS.
MEADOWS: Alright. So you’re saying that foreign banks have to do that and U.S. banks don’t. OK.
I think we will get a different opinion here, but Ms. Bean, go ahead. Are you saying that his testimony is not correct?
BEAN: Mr. Bopp is correct. There is additional information under FATCA from foreign banks than there is in the U.S. banks.
MEADOWS: Why — Why is that?
BEAN: I think that’s just the way the law was written but one reason . . .
MEADOWS: What — do you not see that as problematic?
BEAN: Well, I think one reason is that U.S. banks are subject to subpoena from U.S. law enforcement in the way that foreign banks aren’t. So U.S. law enforcement . . .
MEADOWS: Whoa So you’re saying . . .
(CROSSTALK) MEADOWS: FATCA’s intent — from someone who should know — FATCA’s intent was to allow a way to access information without a subpoena? Is that what you just said?
BEAN: Yes. Just like 1099s. There’s no subpoena for 1099 either.
MEADOWS: Right. But you’re saying that because we did FATCA, we’re going to have our constitutional protections violated because of a law? Is that your sworn testimony here today?
BEAN: The courts have said it is not unconstitutional. The Supreme Court has said you can get . . .
MEADOWS: Well, but you’re saying that getting around a subpoena is you’re saying they’re subject to a subpoena and somebody else is not subject to a subpoena.
BEAN: I think you were asking me why would FATCA require more information . . .
MEADOWS: No. I was asking you if it was different because your sworn testimony from my first round of questions is you said that we weren’t asking them to do anything that a U.S. bank was asked to do.
That was your sworn testimony and I can get them to read back the transcript. But I assume that you’re saying now you want to change that to say that, “Yes, we are asking foreign banks to do something that a U.S. bank doesn’t have to do.” Is that correct?
BEAN: What I meant in my testimony is that we’re requiring foreign banks to file a form on all accounts opened by U.S. clients. And we have U.S. banks that have to file a form on all accounts opened by U.S. banks.
But Mr. Bopp is correct. There are a couple of additional items of information primarily . . .
MEADOWS: So you would be OK with waiving those couple of additional items and amending the law because obviously that’s — we’re not treating people the same in the United States as we do abroad?
BEAN: I would not because from a foreign bank, U.S. law enforcement . . .
MEADOWS: I’m going to go back to what the gentlewoman from the District of Columbia says. You can’t have it the other way either. I mean, they may not be able to give full repeal, but you can’t keep the full law and — and sit here and negotiate in good faith and assume that everything with FATCA is correct.
BEAN: In fact, the rest of the world has noticed the same difference . . .
MEADOWS: They’re being forced to notice the world because of what we’re doing.
BEAN: . . . by that additional information.
MEADOWS: Would you not agree with that? They’re being forced to do it because of what we’re doing from — from our law and forcing them to do it?
BEAN: We are forcing them through the 30 percent excise tax.
MEADOWS: And do you not see that some of these side effects – that we’ve had expert testimony from Mr. Kuettel and Mr. Crawford – that those side effects of our forcing financial institutions to do it are having repercussions that were not intended in the original law?
BEAN: My entire adult life, I’ve had to file a 1099 on every bank account I’ve ever opened.
MEADOWS: So you were OK — so you’d be OK . . .
BEAN: I’m OK with that.
MEADOWS: Alright. So let’s — let’s go there. And maybe that’s a reasonable compromise.
We repeal FATCA in that we require foreign institutions to have to file a 1099 to the IRS on interest income. Would you be OK with that?
BEAN: I’d prefer that the 1099 to be expanded to what FATCA requires.
MEADOWS: Therein is a deeper problem, but we won’t go there.
MEADOWS: Ms. Bean, we’re not going to ever agree on that.
MEADOWS: So let’s — let’s go ahead with this. Are you OK, yes or no, with us just repealing back and saying that a foreign account has to do a 1099 on interest income as a U.S. bank would do, as Mr. Bopp (ph)? And that’s — that’s all they have to do. Are you OK with that?
BEAN: No, I’m not.
MEADOWS: OK. You know, I — I find it challenging that — because apparently — so what are the problems that you see with FATCA, Ms. Bean?
BEAN: Well, one of the — there are a number of problems. One of the problems is . . .
MEADOWS: How many problems would you say there are with FATCA?
BEAN: Well, I haven’t counted them up but let me give you two of them.
BEAN: One is that when the IRS started to penalize people for violating the law, their penalties — they had a range of penalties they could do. They were very unreasonable and the penalties they apply . . .
MEADOWS: So what would a reasonable penalty be?
BEAN: Well, one of the things that the IRS did at the insistence of the Taxpayer Advocate is they came up with a system that if you had an inadvertent violation of the law . . .
MEADOWS: Inadvertent by who?
MEADOWS: Now I will sometimes tell my wife that I forgot to take the trash out inadvertently.
Is that — I mean, inadvertent by who’s standard?
BEAN: I think they require a certificate from the taxpayer and if the taxpayer will certify that they — it was inadvertent, they didn’t realize they were violating the law, they would then be . . .
MEADOWS: I would think that would happen 100 percent of the time. Wouldn’t you?
BEAN: About that. And they then are qualified for much lower penalties. So that’s a system that’s been . . .
MEADOWS: So what should the penalty be, Ms. Bean?
BEAN: That’s a very complicated question because there are a lot . . .
MEADOWS: But you’re an expert witness. You’re here — you are here at the request of the minority as an expert witness. I would assume you have an opinion on that since you were involved in part of this.
What would be an appropriate penalty?
BEAN: Well, I’ll give you an example. There was a gentleman that they found at a bank in Israel.
He had hidden $21 million dollars in those accounts – never been reported to the IRS. The IRS then ended up hitting him with a fine of $8.3 million dollars for the many years that he hid those accounts. And he went through a lot of machination (ph) to hide them from the IRS in Egypt.
MEADOWS: But that’s criminal. That’s criminal. I mean — so here’s what we’re talking about is — is — is when we are looking at that, if indeed he went through all kinds of issues — I mean, we’ve got laws that say we have to disclose those accounts.
I know every year my accountant would — would ask that. But what — what you’re saying is — is that — so a big penalty if he’s got a lot of money is OK but a big penalty if they don’t have a lot of money is not OK. Is that what you’re saying?
I’m trying to figure out what — I’m trying to answer the question for you since you don’t seem like you want to answer the question. What’s an appropriate penalty?
BEAN: Well, the penalties currently are gauged to how much money is in the account. So that’s one thing they do take into account. And another thing they take into account is whether it was inadvertent or not.
MEADOWS: So are you going to answer the question or not? What’s the appropriate penalty?
BEAN: Sometimes the appropriate penalty is zero. If you didn’t know you were violating the law, the penalty could be zero.
MEADOWS: Alright. So if you — so you’re — you’re OK if we say you didn’t know that you were violating a law, that the penalty would be zero?
BEAN: In some cases, yes.
MEADOWS: OK. We’re not getting much of anywhere. What would be the other example? So penalties being outrageous is one. What’s the other problem? You said there was two.
BEAN: The other one I would mention is that we’ve had the FBAR for many years where people have to identify their foreign accounts.
BEAN: But now under FATCA, we created another form that seems to be very duplicative of the first form . . .
BEAN: . . . and I’m not sure that we need that second form. And as people have said, there are a lot of trips and traps to complying with FATCA and that seems to me to be one of them, to have that extra form.
MEADOWS: Alright. So — so let me understand. Your best recommendation on improving FATCA is we get rid of one form and we may adjust the — the penalty? Those — those are your two best attempts at trying to fix FATCA?
BEAN: Yes. Because as I said, live my life under that regime, I . . .
MEADOWS: So if you’ve lived your life under that regime, knowing that there is a return, knowing that — that the IRS — the gentlewoman from the District of Columbia talked about — knowing — knowing that there are financial resources, knowing that the Commissioner Koskinen says that he can get a 20 percent return sometimes.
Or even lets take conservative. Under sworn testimony he said an 8:1 return. Wouldn’t we be better off taking the $71 million that we spent last year and using it for some other type of enforcement that provided a better return?
Because aren’t we only getting one percent of what — your sworn testimony said there’s a hundred billion out there. We’re only — we’re only collecting one percent of those — those taxes.
And actually, it’s not even that. It’s taxes and fees and penalties and interest. So we’re spending all this money to address one percent of the problem.
BEAN: Well, $150 billion includes all of the corporate tax avoidance. So that’s — that’s a whole different issue.
But when you’re looking at individuals, the numbers that are usually used are $35 to $70 billion dollars a year just for individuals.
I’ve been asked earlier about offshore tax avoidance and evasion altogether. But for individuals it’s $35 to $70 billion dollars.
MEADOWS: Alright. I’m way beyond my time. So here’s what I would ask you to do – each one of you to do – is come up with three recommendations. Your two that you gave me under sworn testimony don’t count.
I need three recommendations on what you would do with FATCA. I need you to look at — in the spirit of trying to find, if we do not fully repeal — what are the three most erroneous (ph) situations that affect gentlemen like Mr. Crawford and gentlemen like Mr. Kuettel? What are those — those areas?
Are all of you willing to either give me your recommendations back to the committee to do that?
MEADOWS: OK? Thank you. I recognize the gentlewoman from New York, Ms. Maloney.
MALONEY: I — I thank the gentleman for his concern and trying to get an answer.
But — but to me it’s not a monetary thing. It — it really is human life because terrorism financing has become a way of life in this world.
MEADOWS: Well, would the gentlewoman yield for one point of . . .
MALONEY: No, because I have — I have a phone call with Justice Ginsburg in about five minutes so I can’t yield right now. Excuse me, Mr. — I just have to ask one question and that’s it.
Listen, so — I disrupt my train of thought. Let me think. So — so just to — just recently, this month, Chairman Hensarling of the Financial Services Committee created a whole new committee on terrorism financing because it’s such a huge issue.
Bombs went off in my district several months ago. The police caught the guy but the question is where did he get his money from?
So cracking down on terrorism financing is a real concern. And I would say why are people hiding money?
A lot of times it’s not just to save on taxes. It’s because they’re selling guns, they’re selling human bodies, or they’re involved in drugs or all kinds of things that basically hurt people.
So I’m trying to — and I join you with your question: find a solution — and I look forward to working with you on it — that allows us and law enforcement to go after the bad guys but protects people like Mr. Kuettel.
So my question is to Mr. Kuettel: would the exemption, that was really put forward by the Taxpayer Advocate Service that basically recommended that the IRS exclude from FATCA reporting financial accounts maintained by a financial institution and the country in which the U.S. citizen is a bona fide resident — that would have taken care of Mrs. Nelson’s situation which she explains so clearly — but as a bona fide citizen of — of — of Switzerland, this particular change would have excluded you from this burden. Is that correct?
MALONEY: Pardon me?
KUETTEL: I fear not.
MALONEY: Why not? Because you’re a bona fide citizen in a company — in a country, you would no longer have to do the FATCA. That’s what this recommendation says.
KUETTEL: From my experience, the damage of FATCA has already been done. The banks are already terrified of America. If you just exclude local residents from FATCA, they still have the reporting requirements for the taxation.
When I take my daughter here to a bank, practically any bank, the first question is, “Are you taxed by America?” They don’t ask, “Are you reportable by America?” They ask, “Are you taxed?” Meaning she’s a tax threat.
MALONEY: And that’s the current law now. But if the law changed so that if you’re a bona fide citizen, you could just say back to them, “I am a bona fide resident of this country, therefore” — or you could get a form from our government that says therefore if you’re going to a financial institution in your country . . .
I — I — I would like to get legal counsel to look at it because I believe you would be exempt under these types of recommendations.
In any event, something needs to be done on it. And I thank the chairman for his attention to it and his personal involvement in it.
And absolutely all of — all of the panelists. But I do believe cracking down on — on terrorism financing, which is one of the major reasons of this, is a critically important concern, unfortunately, in the world now.
So thank you and I yield back and I thank you and I’m sorry I couldn’t yield but I’m in trouble right now.
MEADOWS: That’s alright. I’ve got a very long memory. So that’s . . .
We’ll go from there. I thank — I thank the gentlewoman for . . .
MEADOWS: No. I understand justice — a Supreme Court Justice or a member from Congress or North Carolina – I would have made the same choice you did.
So — no, I thank the gentlewoman for her interest. So let me — let me — the — in the interest of clarity, let’s talk about what this is and what it is not.
This is really not about the terrorist organizations that — that go and deal with that.
I — I have a little bit of expertise there. The Hezbollah sanctioning bill was a bill that I actually started in the first Congress. I understand the aspects. It is now law. It is affecting behavior because we’re going after money for terrorists.
But we use totally different vehicles than this particular vehicle. And so to suggest that they’re one in the same would not be accurate. I mean — and when you look at Central Bank activity and the moving of funds and all of that, it is a very different issue.
It is very complex, but it’s very different. I have real problems with us treating citizens of the United States who happen to live abroad differently than citizens of the United States that happen to live in the contiguous 48 or whether it’s Puerto Rico or anywhere else.
When we start to look at this, it is critically important that we understand the constitutional foundations of who we are as a nation.
And in the interest of everything that we know, we can go after all kinds of things where we start violating the civil liberties of individuals in the interest of compliance.
And that’s why we have — our founding fathers set it up — that’s why we have a Fourth Amendment. And we’ve got other areas where the Fourth Amendment is being challenged.
And so Ms. Bean, I would ask you to have an open mind and try to figure out those areas where the side effects and the testimonies that we’ve heard from these individuals and others, thousands of others, are being affected.
So I’d ask you to keep an open mind and look at that. Mr. Bopp, I’d ask you to look at it from a different perspective.
In assuming that we can’t get enough bipartisan support, which I believe we can, but if we can’t get enough bipartisan support to repeal this and actually replace it with something else — and I hate to use the word repeal and replace in the context of — of anything these days.
But as I look at this, if we can look at repealing and replacing it with something, I would ask you to — to take the thoughtful suggestions here.
Here is my closing remark. Senator Rand Paul recognized an issue that was brought to him not only from his concern for freedom loving individuals and the Constitution, but it was something that was highlighted over and over again. And if you travel abroad, we have U.S. citizens who love the United States.
Who truly — some of them are more patriotic than some who live in my state of North Carolina.
And yet they’re being forced with a decision of do they renounce the country they love so that they can continue to transact even a normal bank account? And — and that’s a choice that we shouldn’t be forcing people to make.
I think there are ways that we can figure this out and tailor this so that we truly go after those who have a problem with tax — not only avoidance but criminal activity. We — we know that indeed that it is our obligation to pay taxes, and to avoid that in an improper manner is certainly not anything that a Republican or a Democrat would condone.
And so it is in that spirit that I would ask you to report back here the three recommendations.
Get as many — we won’t limit it to three but if — if you don’t give me three you’ll hear from us. How about that? Is that — is that a deal?
I want to thank all of you for the discussion and — and truly for your testimony. It’s been very illuminating. If there is no further business before the committee, this committee stands adjourned.
ON Lawyer remains in Poland as Law Society files notice of motion 4 interlocutory suspension or restriction https://t.co/dDaFdcxegz
— Homelander NOT (@Homelander_NOT) May 15, 2017
While this particular post is not about a tax-compliance professional per sé, it IS about a person with whom many of us have had interactions and from whom we have been assured we WILL BE CAUGHT in one way or another. Given that, I find it extremely ironic to come across what follows in this post. How many of you who have paid a retainer or left any other type of funds when using a lawyer, ever worry about that person absconding with it?
David S Lesperance used to post comments on Brock. Here is an example of the first of many on the post “Americansabroad in Canada may soon be unable to receive payments from Government by USCitizenAbroad, September 16, 2013.
First comment Continuing to ignore the issue; yell at your foreign banker for closing your account; hoping and praying that FATCA and the Qualified Intermediary Regime will be revoked; etc. are all a waste of time. It is time to either comply with the law or expatriate. Complaining is just a waste of time.
I believe my first real exchange with him occurred sometime back on a WSJ article “The Law That Makes U.S. Expats Toxic” October 10 2015 (paywalled-I can’t get around it with the Google News action). Unfortunately, while I have my own comments via my profile, I cannot access the article nor his comments. This limits what I would like to address for the most part. The first set of comments was his reaction to my referring to him as a tax-compliance professional. He did not agree with that label. It was an exchange where I felt constantly challenged at being tripped up especially because I could not (yet) refute the idea that the Qualified Intermediary program (QI) would “out” us hands-down. And I let him have the upper-hand to a certain degree, because he was a professional and I assumed he would know more than I. We seemed to develop a respectful, civil relationship. On several occasions since, I posted comments for him as he could not log on for some reason. I was aware he was in Poland visiting family as he explained it.
Later comments on Brock:
Comment on US Intention to Pursue Enforcement in Spite of Foreign Law
Comment on Do Canadian or Australian etc Tax Attorneys Advising on United States IRS Compliance Typically Comply with the Professional Code of Conduct of their Law societies?
I was very surprised to see some of the Tweets on Twitter when Keith Redmond tried to warn Accidentals not to put themselves into the US tax system. It is interesting that without any proof as to the ability of IRS able to collect via QI, he presumes it and treats Keith in a manner I found inappropriate and unprofessional. I believe the point of contention was to prove that actual Accidental Americans had been “outed” due to QI. This was not provided, nor has it been since that time. There were others that ganged up in more “attacks” that I will not put up here. Brock/Wed Rally Tweeps will remember this extremely unpleasant incident. After that, I declined to post anything further on his behalf. What is ironic, is a number of exchanges that took place privately, up to as late as March 16, with no indication of any actions such as this:
Law Society of Upper Canada Files a Notice for Interlocuatory Suspension or Restriction Against David Sylvio Lesperance Filed March 10, 2017
Wareh vs Lesperance
Continue reading “Irony-“Because it’s the Law” – For once, NOT applied to non-willful expats but a “citizenship” Lawyer”
Someone strongly disagreed with my conclusion (Reed cannot be applied) due to worry of dealing with border guards. However, if a border guard were to claim he/she was denying one entry based upon a perception of Reed, such an action would not constitute an application of the Reed Amendment but an inaccurate assessment by an overzealous/ignorant border guard. This reminds me of something I have heard John Richardson say many times; that there will be a solution to one’s compliance predicament but that it won’t likely be a “good” one or one to like. IOW there are no perfect (or necessarily likeable) solutions. If any US govt employee (or compliance or media person for that matter) misapplied the Reed Amendment, that does not constitute wrong conclusions or information in this post. And it certainly does not suggest I am “misleading.” The DHS has indicated Reed cannot be applied. The State Dept has said it can’t apply it. An IRS counsel could not draft regulations and says it cannot be applied. If one thinks a compliance person or a misguided govt official or a media person should be believed over all these, then what more can be said?
If one needs a “stock answer” to a border guard, the simple answer to “Did you renounce for tax purposes” is “No.” If one feels the need to say more something like “I’ve lived in/been a dual citizen for x-number of years and simply feel more CDN/French whatever.” Something as neutral as possible. A zealot would still see such a statement as treason. There are no perfect solutions. I really dislike adding this because the whole point of this post is to give expats the information to STOP that reaction of “but what if”..IOW, the fear factor. I am NOT writing this to diss any firm, govt agency etc (even though I will not hide my anger or disgust at how this is abused). However, I am responding to the criticism mentioned above. FWIW, I hope this helps.
Stop! Enough Already!! The Reed Amendment is a Myth!!!
Homeland Security Enforced Reed Amendment Twice in 14 Years Banished Two Ex-Citizens Who Mentioned Tax Motivations
Who Voted For the Reed Amendment in 1996
BiPartisan Attempts to Exile Former U.S. Citizens
No civilized country would ban Eduardo Saverin
No would-be US renunciant/relinquisher should ever believe claims about Reed Amendment preventing ability to enter the U.S. 1/11
— Patricia Moon (@nobledreamer16) June 2, 2016
NO ONE has been stopped at the border and refused entry because a CBP agent suspected they renounced “for tax purposes.” There is NO CONNECTION between an expatriate’s tax liability and a renunciant’s intent. NONE! Once again, I see a major firm bringing up the idea of the Reed Amendment as a possible consequence of expatriation.
Individuals who choose to renounce their US citizenship need to be aware of the potential negative consequences of doing so and take steps to avoid them. The negative consequences can include the imposition of the US exit tax, permanent inadmissibility from the United States, and the imposition of the inheritance tax.
Notice the lack of footnote for the phrase concerning permanent inadmissibility. A post on the blog of their website acknowledges that this is a remote possibility-only if you stated that was your reason for renouncing.
However, in the practical application of the original Reed Amendment, the renouncing individual is rarely denied re-entry to the US unless he confesses during his exit interview to be renouncing for tax avoidance purposes. Needless to say, very few expatriates renouncing their US citizenship confess to having tax avoidance purposes. Consequently, identifying those expatriates who renounce for tax avoidance purposes is nearly impossible. Congress knows this and is attempting to tighten the screws on the renunciation program through the proposed Reed-Schumer Amendment.
Just look at the language used; “confesses at his exit interview.” In spite of this, we continue to see this unreasonable emphasis which does nothing but frighten people. I have no argument that it is very likely Congress will try again/make this worse. But is this the right way to present this to people just finding out about this? This has become my number one irritation and I will try to address it again. The point of this post is to debunk the long-standing, commonly mis-communicated information regarding the Reed Amendment.
The Congress has created laws that are in conflict with each other, the end result being, that the Reed Amendment is completely useless unless one chooses to state expatriation is due to tax purposes. Our expatriate movement is now almost five years old. Since that time, we have managed to challenge a lot of misinformation put out there by the media, the compliance industry, etc. This is another one to throw on the pile.
The Reed Amendment
The United States, ironically enough, has a long history of using citizenship as a way to punish those it deems “ungrateful,” “unpatriotic” etc. Putting aside some of the older versions of this idea, the modern beginnings of punishing those who expatriate began with President Kennedy and the Foreign Investors Tax Act of 1966. This Act created I.R.C. § 877 and allowed some U.S.-source income of former citizens to be taxed for up to 10 years following the date of their loss of citizenship. There were no amendments to 877 until President Clinton’s time in office; at this point, things began to change rapidly and drastically for expatriates.
The Reed Amendment formed part of the Illegal Immigration Reform and Immigrant Responsibility Act of 1996.Enacted on September 30, 1996, it was written by Senator Jack Reed (D-RI)The bill was a response to wealthy U.S. citizens expatriating who then wished to return to live in the United States. Once out of the country, any non-citizen could avoid taxes on capital gains and estates. A well-known example is that of this was Kenneth Dart owner of Dart Container, who had become a citizen of Belize who then attempted to obtain a diplomatic visa to serve as Belize’s new consul in Florida. He offered his own residence to serve as the consulate (while the rest of his family was still living there). Had he succeeded, as a foreign diplomat, he would have been exempt from any obligations to the IRS.
U.S.C. § 1182(a)(10)(E) / INA 212(a)(10)(E)
8 U.S. Code § 1182 – Inadmissible aliens
(a)Classes of aliens ineligible for visas or admission Except as otherwise provided in this chapter, aliens who are inadmissible under the following paragraphs are ineligible to receive visas and ineligible to be admitted to the United States:
(E)Former citizens who renounced citizenship to avoid taxation
Any alien who is a former citizen of the United States who officially renounces United States citizenship and who is determined by the Attorney General to have renounced United States citizenship for the purpose of avoiding taxation by the United States is inadmissible.
According to Michael Pfeifer, a tax lawyer with Caplin & Drysdale a difficulty ensued
in determining whether the Reed Amendment would apply to all those renouncing U.S. citizenship under INA 349 a 1; intending to lose U.S. citizenship by performing an expatriating act.
HIPAA In addition to other legislation being considered to apply to expatriates, President Clinton proposed an expatriation tax in his 1996 budget in order to close the loophole.The Health Insurance Portability and Accountability Act enacted August 21, 1996; Title V amends provisions of law relating to people who give up United States citizenship or permanent residence by:
U.S. Code § 877 – Expatriation to avoid tax a)Treatment of expatriates (1)In general
Every nonresident alien individual to whom this section applies and who, within the 10-year period immediately preceding the close of the taxable year, lost United States citizenship shall be taxable for such taxable year in the manner provided in subsection (b) if the tax imposed pursuant to such subsection (after any reduction in such tax under the last sentence of such subsection) exceeds the tax which, without regard to this section, is imposed pursuant to section 871.
(2)Individuals subject to this section This section shall apply to any individual if—
(A)the average annual net income tax (as defined in section 38(c)(1)) of such individual for the period of 5 taxable years ending before the date of the loss of United States citizenship is greater than $124,000,
(B)the net worth of the individual as of such date is $2,000,000 or more, or
(C)such individual fails to certify under penalty of perjury that he has met the requirements of this title for the 5 preceding taxable years or fails to submit such evidence of such compliance as the Secretary may require
U.S. C. § 6039G Information on individuals losing United States citizenship
(d)Information to be provided to Secretary Notwithstanding any other provision of law—
(3)the Federal agency primarily responsible for administering the immigration laws shall provide to the Secretary the name of each lawful permanent resident of the United States (within the meaning of https://www.law.cornell.edu/uscode/text/26/7701 section 7701(b)(6)) whose status as such has been revoked or has been administratively or judicially determined to have been abandoned.
Notwithstanding any other provision of law, not later than 30 days after the close of each calendar quarter, the Secretary shall publish in the Federal Register the name of each individual losing United States citizenship (within the meaning of section 877(a) or 877A) with respect to whom the Secretary receives information under the preceding sentence during such quarter.
The Reed Amendment is unenforceable
After 9/11, responsibility was transferred from Customs/Border (now CBP) to DHS.
Regulations were never written originally, nor when responsibility was transferred to DHS in 2002
S 6103 prohibits disclosure of “return info” by IRS, subject 2 criminal prosecution (Title 18 of US Code) https://t.co/LHKvlBdeHY 3/11
— Patricia Moon (@nobledreamer16) June 2, 2016
§ 6103 prohibits the disclosure of “return information,” by the IRS, subject to criminal prosecution under18Title 18 of the U.S. Code. (a)General rule Returns and return information shall be confidential, and except as authorized by this title—
The Attorney General was never authorized to receive the information necessary from the IRS.
Willard Yates -why Reed Amendment is unworkable. It’s called section 6103 of the IRC.” https://t.co/LHKvlBdeHY 2/11
— Patricia Moon (@nobledreamer16) June 2, 2016
IRS Counsel Willard Yates was tasked with finding a work-around to § 6013. He explains the difficulty:
Important recap: I.R.C. 6103 sets up a situation where there is no way for IRS to give info to CBP or later, DHS; nor is there any way for the Attorney General to receive the information in order to make a determination.
Other Difficulties in Enforcing the Reed Amendment
Implementation of section 212(a)(10)(E) hindered by many policy, operational, & legal complexities & challenges https://t.co/i8FRvtNGX8 8/11
— Patricia Moon (@nobledreamer16) June 2, 2016
The Department of Homeland Security In 2014, Senator Reed directed DHS to report
on the steps it was undertaking to enforce the Reed Amendment, including a schedule for issuing guidance or regulations
Some comments from the report:
“Interagency coordination between DHS and DOS operations in this area is improving continuously, but there currently are no advisable options for altering enforcement of the inadmissibility ground against persons who do not affirmatively admit to renouncing their U.S. citizenship for the purpose of avoiding U.S. taxation.”
“even if a renunciant were to waive Treasury confidentiality provisions, such that DHS and DOS might review specifics of an individual’s Internal Revenue Service filings, DHS lacks the expertise and resources to review tax filings meaningfully or engage in complicated tax liability analysis, involving both domestic and foreign tax law to determine whether a section 212(a)(10)(E) inadmissibility presumption could be rebutted.”
Interestingly, DHS makes the observation that it would be difficult to rely on the imposition of such a tax as the basis for determining that a person who is subject to such a tax subjectively renounced citizenship for tax avoidance purposes, as section 212(a)(10)(E) requires, particularly if an individual in fact complied in paying any liability resulting from the expatriate tax provisions
According to the DHS report, only two individuals were denied admission to the United States on the grounds of the Reed Amendment between 2002 and 2015 because they stated they had renounced for tax purposes. Another five individuals were thought to possibly be inadmissible; one who renounced pre-1996 who was denied submitted a legal brief to CBP & the decision was reversed
The Department of State also has no regulations to proceed from and is unable to determine whether a renunciation is based upon avoidance of tax.
INELIGIBILITY BASED ON OTHER ACTIVITIES
9 FAM 302.10-6 FORMER CITIZENS WHO RENOUNCED CITIZENSHIP TO AVOID TAXATION – INA 212(A)(10)(E)FAM 302.10-6(B)(2) Consular Officer’s Role
The role of the Department and the consular officer is very limited in implementing this ground of inadmissibility. Unless the applicant appears as a hit in the lookout system revealing a finding of inadmissibility under INA 212(a)(10)(E), you must assume the applicant is eligible.
9 FAM 302.10-6(D)(2)
(U) Waivers for Nonimmigrants
For those individuals seeking to visit the United States temporarily, however, this ground of inadmissibility can be waived. You should recommend non-immigrants for an INA 212(d)(3)(A) waiver. The waiver is discretionary and applications are evaluated on a case-by-case basis. (See FAM 305.4-2).
Eugene Chow of Chow & King Associates states that in spite of the Reed Amendment, consular officers “routinely issue visas” to ex-U.S. citizens, and the State Department’s Office of the Legal Adviser has reversed denials based on the Reed Amendment after being made aware of them.
ATTEMPTS TO STRENGTHEN THE REED AMENDMENT
THE BAUCUS-BINGAMAN-BURNS AMENDMENT – JUNE 2002
Rewrote the 9 U.S.C. 1182 (a) (10)(E) replacing “expatriating for tax purposes” to ”not in compliance with expatriation revenue provisions” (new versions of sections 877 and 2801)(relating to expatriation). It included changes that would allow IRS to release taxpayer information to the Attorney General. It did not pass into law.
THE SAFER ACT JULY 2002
Broadened the entry ban in 8 U.S.C. § 1182(a)(10)(E) to cover all renunciants regardless of whether or not they had tax avoidance motivations. Did not pass into law.
THE AMERICAN JOBS CREATION ACT (AJCA) 2004
In 2004, the American Jobs Creation Act removed the issue of intent; established new notification requirements as well as new thresholds resulting in a second type of citizenship (the “Tax Citizen”). Thus, the IRS no longer makes rulings on whether or not an expatriate’s intention to renounce is tax-motivated.
Whole idea of the mark-to-market tax section 877A was 2 eliminate “motive” element of prior version of S 877 https://t.co/LHKvlBdeHY\ 5/11
— Patricia Moon (@nobledreamer16) June 2, 2016
THE HEROES EARNINGS ASSISTANCE AND RELIEF TAX (HEART ACT) 2008
Included a new expatriation tax. As Mr. Yates pointed out, “The whole idea of the mark-to-market tax under section 877A was to eliminate the “motive” element of a prior version of section 877. It did not include the inadmissibility or tax information privacy waiver provisions. See: Notice 2009-85, Guidance for Expatriates Under Section 877A
Since 2000, the first year for which the State Department’s Report of the Visa Office included the relevant statistics, no consular officer has found any visa applicant ineligible for entry into the United States on the grounds of the Reed Amendment.
However, in 2015, a consular officer in Barbados refused to issue a visa to Roger Ver (“Bitcoin Jesus”) on the grounds he did not demonstrate non-immigrant intent (i.e., the officer suspected Mr. Ver was attempting to return to the United States to live). Some speculation occurred whether it was really due to the Reed Amendment but legal sources stated the known problems of enforcement. Mr. Ver received a visa later from the Embassy in Tokyo.
In May 2012, Facebook co-founder Eduardo Saverin renounced his U.S. citizenship which outraged Senator Reed . He wrote to DHS director Janet Napalitano urging her to prevent him from re-entering the U.S. It should be noted that Mr. Saverin completed the entire process properly including paying a very large amount of Exit Tax. He would be a perfect example of DHS report’s observation that it would be difficult to ascertain one had renounced for tax purposes when “an individual in fact complied in paying any liability resulting from the expatriate tax provision.”
Senator Chuck Schumer (D-NY) knew the Reed Amendment could not accomplish this so along with Senator Bob Casey (D-PA) he created an act that would make former U.S. citizens inadmissible to the United States and charge them 30% capital gains tax on their U.S. investments. It died in committee.
In 2013, Reed along with Schumer & Casey tried to attach the Border Security, Economic Opportunity, and Immigration Modernization Act of 2013 as an amendment to a new bill but failed both in the Senate and later in the year, the House.
Expats continue to be threatened with exile as a way to prevent them from leaving “due to tax motivation.” It is important that all members of the tax compliance community understand the interplay of all these factors and stop contributing to the confusion that exists regarding The Reed Amendment.
There is endless fear that even without the Reed Amendment, the U.S. agencies will become digitally proficient and connected, thus a risk at crossing the border. Similarly, there is terror that the State Department will apply all sorts of tax-oriented questions, require returns and so on. Here is where things stand:
INTERAGENCY COORDINATION AND REPORTING REQUIREMENTS
(CT:CON-611; 11-12-2015)(Office of Origin: CA/OCS/L)
7 FAM 1241 INTRODUCTION TO INTERAGENCY COORDINATION AND REPORTING REQUIREMENTS
a. The Bureau of Consular Affairs (CA) coordinates closely with various offices in the Department of State and other Federal agencies, and with U.S. States, on issues related to expatriation. Much of this interagency coordination is mandated by Federal law and policy guidelines. CA/OCS/L provides copies of approved Certificates of Loss of Nationality (CLNs) to the following Federal agencies pursuant to statutory requirements:
(1) U.S. Citizenship and Immigration Services (USCIS);
(2) Federal Bureau of Investigation (FBI);
The FBI is required to add names of expatriated citizens to the
National Instant Criminal Background Check System (NICS); this list is considered to be much more accurate than the “Name & Shame List.”
(3) Internal Revenue Service (IRS)
(4) In addition, loss-of-nationality cases involving threats against the United States or U.S. officials may also be brought to the attention of the U.S. Secret Service
Of special note: regarding the information requested/discussed at a renunciation interview:
Consular officers no longer obtain tax information from renunciants as previously required by the Health Insurance Portability and Accountability Act of 1996. The American Jobs Creation Act of 2004 (AJCA) made substantial changes to both the tax Section 877 (26 U.S.C. 877) of the Internal Revenue Codes and information reporting rules 26 U.S.C. 6039G that apply to individuals who expatriated or terminated their residency after June 3, 2004.
Questions about expatriation and taxation should be directed to the Internal Revenue Service (IRS) or the IRS Web site. Consular officers are not in a position to provide any advice or answer questions concerning these changes.
And last but not least, DO NOT let any compliance professional tell you it is a good idea to accompany you to the renunciation interview. It will cost you money and though it has not always been adhered to in the past, since July 2015 the State Department indicates it can compromise the issue of voluntary intent.
7 FAM 1262.3: renouncing US citizenship: an attorney, legal representative, should not participate in any interview https://t.co/JHmS1tB5jA
— Patricia Moon (@nobledreamer16) June 2, 2016
Other posts about the Reed Amendment:
Stop! Enough Already!! The Reed Amendment is a Myth!!!
Homeland Security Enforced Reed Amendment Twice in 14 Years Banished Two Ex-Citizens Who Mentioned Tax Motivations
Who Voted For the Reed Amendment in 1996
This is a comment that stands alone as a post in itself. It was made in response to a post on the IsaacBrock Society
Petros, who authored the post this comment is a response to, is the pen-name of the founding administrator of the Isaac Brock Society. He has started this series of Petros Principles as a means of communicating guidelines which he believes have helped him and others deal with the United States’ world-wide tax invasion. He says:
Inordinate fear of the IRS is dangerous because it has caused some people to lay down all of their normal defense mechanisms and like an innocent lamb to stand paralyzed before the toothless lion.
One of the major roles of the cross-border compliance industry has been to frighten their clients and the public about the IRS’s power, and the media has too often created panic by consulting the compliance industry as their principle experts for information on US expat tax issues
The following response, by USCitizenAbroad will be of great help to anyone who is (understandably), in a confused and frightened state and in danger of being so overwhelmed, that reason and a considered assessment of what can/cannot be done by the IRS, that they simply over-comply, over-pay and lose way too many LCU’s.
July 18, 2016 at 10:26 am
With due respect and appreciation for ALL the comments on this thread, this comment is to remind people of what Petro’s original point is (I think):
Petros is saying that fear can be such a dominant factor that it overwhelms all else and makes it much harder to make a “decision”. When “fear” is the dominant factor, people will “react to the fear” and NOT “decide on the facts”. There is NO way to know for certain what would be the result of any one decision.
Petros is not (I don’t think) saying that people should be “fearless”. He is simply saying that one cannot allow decisions to be made primarily based on fear. On this point, I do agree (for what it’s worth) with him.
My perception of the Fear, The IRS, The Condors and Americans (so called) abroad:
About the fear:
I seriously doubt that long term Americans abroad are on the radar of the IRS. But, I don’t know and nobody really knows. Nevertheless, there is no indication to think that they are.
When people experience fear and the trauma associated with the fear they seek safety which includes certainty. They incorrectly believe they have a “tax problem”. They don’t a tax problem they have a “compliance” (maybe) problem. Suggest you read an old post on this issue:
The Taxpayer, the IRS and the Professionals; Where to Go From Here
About the tax compliance community
If you go to a “tax lawyer/accountant” you will achieve CERTAINTY. But, the CERTAINTY will be at the cost of (possibly) turning over a lot of money to the process (U.S. taxes, compliance fees, etc.). Understand that if you go to a “cross border professional” they will approach the problem in terms of compliance with the Internal Revenue Code. Actually, in most cases they will suggest “heightened compliance” (“we are not really sure if this form is required, so you should file it anyway” – WRONG, WRONG, WRONG and WRONG). Understand that U.S. tax law is NOT enforced by the IRS. It is enforced by the tax compliance community.
About the Internal Revenue Code
Because the Internal Revenue Code is a U.S. law which applies outside the USA, there is no way to know with certainty whether you are ever in compliance anyway. I don’t think (just my opinion) that you respond to this uncertainty with “over compliance”. I think (just my opinion) that you solve it by “defensible compliance”. “Over compliance” means that you have absolutely and completely entered the “prison of citizenship taxation”. Your life is absolutely over unless you renounce. “Defensible compliance” means that you are doing the best can, but when things are ambiguous (“Not even your IRS knows for sure”), you don’t resolve ambiguities in favor of the IRS. One example of this would be the ongoing discussion of whether TFSAs and RESPs are “foreign trusts”. Although this example is “overdone”, it is an example where tax compliance people are likely to say: “Well, we don’t know for sure, so why not fill out these forms!” Well: you are not the one who must live with the consequences of filling out the forms!
About Americans abroad
If the “compliance process” costs you a significant percent of your net worth (and it could depending on your situation), you will no longer have “fear” but you will have extreme (dangerously so) “anger”.
In other words, you will have converted the disabling emotion of “fear” into the disabling emotion of “anger”. As a great and late trial lawyer used to say in his closing remarks to the jury:
“It’s not what you take from them, it’s what you leave them with”
See this older post:
Collective psychotherapy – U.S. citizens outside U.S. – Not what they take from you, it’s what they leave you with
My point is largely this:
Whether you are in U.S. tax compliance or not you have a problem. The problem is that you have a U.S. connection. After destroying Americans abroad, the USA will begin destroying the Homelanders (who will think it is just great).
So, you have three options:
1. Take steps to get a CLN (usually renunciation) so that you CANNOT be accused of being American. In most cases this means the 5 years of compliance and renunciation. If you can achieve this for the cost of a used car you are doing well. The difference is that:
– used car is just a depreciating “asset”
– a CLN is simply the best investment that any human being can have in the world. It will grow in value every second of every minute, of every hour, of every day, of every month, of every year for the rest of your life!
2. Take steps to understand why you are NOT American so that you can defend the accusation of being American. (The FATCA IGA specifically allows for this possibility).
3. Live your life and ignore the whole thing.
I am neither discouraging this nor encouraging this. It depends entirely on you. In some cases, the cost of “buying your freedom” is so low that it might be worth doing. In fact there are many Canadian citizens (who with the help of the tax community”) have actually “pretended they are Americans” (even though they know they are NOT) so that they can renounce and get a CLN.
The people who have paid the highest price in emotional and financial terms are the ones who have turned this over to the lawyers and accountants to “do the right thing”. And I am NOT saying that ALL lawyers and accountants are a problem. But, enough are they you should be VERY careful in your choice of adviser. For a recent example, have a look at the following post from Jack Townsend’s blog where he references the story of two women in their 90s and one in her 80′s who tried to do the “right thing”. It was NOT the decision of the three elderly women to enter OVDP. It was the decision of their lawyer. Now, we can’t tall all the factors leading to the lawyer’s decision to enter OVDP, but we can certainly see the consequences of the decision. Returning to the original point, this is what happens when people have so much fear that they cannot think clearly (or at all).
New Case Filing Challenging Streamlined Transition Disparity with Streamlined
Petros is not saying ignore fear. Petros is not saying don’t have fear. What Petros is saying is:
Do NOT allow the fear to overcome everything else – a point that I do agree with!
What would FDR likely say about this crisis and trauma?
It is NOT true that the ONLY thing we have to fear is fear itself!
It IS true that the most dangerous thing we have to fear is fear itself!