Monthly Archives: September 2019

Part 33 – US residents bring suit alleging that the Section 965 US Transition Tax is Unconstitutional

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A lawsuit alleging that the Section 965 transition tax is unconstitutional affords the opportunity to write Part 33 in my series of posts about the U.S. Transition Tax.

Part 22 of this series included a discussion of a paper by Sean P. McElroy which argued that the Section 965 repatriation tax was unconstitutional for the following reasons explained in the abstract:

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Presumptions, tax residency and presumptions of tax residency: Nonresident alien status in a FATCA world

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Introduction – All The World Is A Multiple Choice Test
Q.1 – A tax resident of the United States is taxable on his worldwide income. According to the Internal Revenue Code of the United States, which one of the following is NOT a tax resident of the United States of America?
(A) A Congresswoman “Born In The USA”, head of her household, who does not and has never had a U.S. Passport
(B) An unmarried Green Card Holder who has never filed an FBAR who lives in El Paso Texas
(C) A fifty year old U.S. citizen who is divorced has never set foot in the United States, doesn’t have a U.S. Social Security Number and lives in and pays full taxes in Germany
(D) A citizen of only Canada who lives four months a year in Florida with his U.S. citizen wife, in a house he owns where he parks a car he owns with Florida license plates
(E) A citizen of Grenada who lives full time in the USA with an E1 visa operating a fast food franchise
For help in finding the answer see …
https://www.law.cornell.edu/uscode/text/26/1
https://www.law.cornell.edu/uscode/text/26/2
Q. 2 – A tax resident of Canada is taxable on his worldwide income. According to the Income Tax Act Of Canada, which one of the following is a tax resident of Canada?
(A) A Canadian citizen who lives in the United States but has no business, family, social or residential ties to Canada
(B) An individual with a house and family living in Toronto who works and lives in the banking industry in the Middle East
(C) A Massachusetts resident with a summer home in Ontario, Canada in which he visits 180 days every year
(D) An individual who is a legal permanent resident of Canada but actually lives in Hong Kong
(E) A rich Canadian who buys permanent residency in Portugal and uses a tax treaty tie breaker provision to deem himself to be a tax resident of Portugal
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Part 2: Because banks and people are not the same: @RepMaloney #FATCA amendments require foreign banks but NOT individuals to report custodial accounts

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Introduction:


FATCA imposes obligations on both foreign banks (report on individuals to the IRS – Internal Revenue Code Section 1471) and obligations on individual Americans abroad (report foreign assets to the IRS – Internal Revenue Code 6038D).
Depository vs. Custodial Accounts
In general a “Depository” accounts is a basic day-to-day bank account (checking, savings, etc.)
In general a “Custodial” account is a brokerage or other account that holds assets for management.
The Maloney bill addresses these obligations (with respect to the reporting of “Custodial” accounts) differently.
The Maloney bill and foreign banks – Section 1471 Amendments – custodial accounts are reportable
Representative Maloney’s H.R. 4362 – “Overseas Americans Financial Access Act” – includes relief provisions for both foreign banks AND for individual Americans abroad.
My previous post discussed how the Maloney bill impacts the reporting requirements of foreign banks. Notably the Maloney bill relaxes the reporting requirements for foreign banks ONLY with respect to depository accounts.
The Maloney bill and individuals – Section 6038D Amendments – custodial accounts not reportable
It appears that the Maloney bill would relax the Form 8938 reporting requirements for individuals with respect to BOTH depository and custodial accounts. Although not a model of clarity, it means that (as a general principle) Americans abroad would not be required to report their local (foreign to the USA) accounts (depository or custodial) to the IRS. This is a variant of what has been called FATCA SCE (“Same Country Exemption”).
Bottom Line: Foreign banks and Americans abroad do NOT get the same treatment under the Maloney bill. Is this an oversight? Is it careless drafting? Is it deliberate?
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Technical analysis (of interest to few people) follows:
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December 31, 2019 and US Born individuals living outside the USA without having a Social Security Number

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Introduction – “The Little Red FATCA Book”

More at:

The Two Ugly Faces of FATCA – One for foreign banks and another for US persons

The Obligations of the banks under the IGA

These obligations are described in the FATCA IGA entered into between the United States and the other country. In general the IGA requires non-U.S. banks to “Review, Identify and Report” on U.S. citizens.

The Obligations of the individual taxpayer under IRC 6038D – Form 8938
The mandatory reporting which takes place on Form 8938 is mandated Internal Revenue Code 6038D.

Non-US AKA “Foreign Banks” – The Problem of US Born customers who do NOT have a US Social Security Number are they in danger of their bank accounts being closed?

Those accused of being U.S. citizens who are NOT U.S. citizens have the opportunity to “self-certify” they are NOT U.S. citizens

The Possibility of being “Born In The USA” but NOT being a U.S. citizen

The Possibility of being “Born Outside The USA”, acquiring U.S. citizenship at birth but NOT being a U.S. citizen today

Looks like being “Born In The USA” may not be a great thing!

John Richardson – Follow me on Twitter @ExpatriationLaw

Part 1: #FATCA is: Maloney "Overseas Americans Financial Access Act" is the wrong answer to the right question

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Introduction and purpose …


On March 18, 2010, President Obama signed FATCA (“Foreign Account Tax Compliance Act”) into law. FATCA was:
– a revenue offset provision to the HIRE Act
– a series of conforming amendments to the Internal Revenue Code that:
(a) imposed requirements on Foreign Banks (Internal Revenue Code Sections 1471 – 1474); and
(b) imposed reporting requirements on individuals (Internal Revenue Code 6038D). Those reporting requirements are expressed in Form 8938.
On September 17, 2019 Representative Maloney introduced H.R. 4362 – “Overseas Americans Financial Access Act” – which introduced changes to BOTH the FATCA requirements imposed on Foreign Banks and requirements imposed on Individuals.
This post discusses ONLY the aspect to the Maloney bill that “relaxes” the requirements on Foreign Banks. I have writen a separate post discussing how the Maloney bill would impact individuals.
(Those interested in learning more about FATCA may be interested in my “Little Red FATCA Book)“.
The Maloney Bill is NOT The Same As SCE Previously Drafted!
The Good News:
The Maloney bill appears to apply to ALL Americans abroad – without regard to whether they are compliant with their U.S. tax filing requirements. (A previous version of SCE applied ONLY to Americans abroad who were compliant with their U.S. tax filing requirements.) Interestingly, the Bill (like Internal Revenue Code 911) would NOT apply to “permanent residents (Green Card Holders) in exactly the same way.
The Bad News:
The bill as drafted gives the banks the option to either continue to report on the depository accounts of Americans abroad or not. This is an option available to the bank. I (along with many others) suggest that banks will NOT be willing to engage with individuals with respect to whether they meet the requirements of the Maloney bill. The exact language of the bill includes:

(i) IN GENERAL.—Unless the foreign financial institution elects to not have this subparagraph apply, such term shall not include any depository account maintained by such financial institution if each holder of such account is—

The Maloney bill is too narrow in application
The bill as drafted applies ONLY to “depository accounts”. This means that the bill applies only to day-to-day bank accounts. It specifically does NOT apply to “custodial accounts”. This means that it excludes investment accounts, brokerage accounts, etc.
Verdict: The Maloney bill is clearly far too narrow. There is no reason why the Maloney proposal should not extend to ALL accounts (depository, custodial or any other kind of account) held by an American living outside the United States.
The technical analysis (which will NOT be of interest to the average reader) follows. It consists of Part A to Part D.
Thoughts and Suggestion
The Maloney bill is symbolic. It is not a serious attempt to alleviate the problems of Americans abroad. Representative Maloney should – as a Democrat – support Representative Holding’s “Tax Fairness For Americans Abroad Act of 2018”.
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IRS provides limited tax relief for certain individuals renounced(ing) after March 18, 2010

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Update – My thoughts “The Morning After” – September 7, 2019:
After having digested this for a day (it was announced the afternoon of September 6/19), I offer the following additional thoughts:

Practical value: I think that this IRS announcement/program has value. It may be that those who have renounced would NOT want to come into compliance (although there are certainly some who would – just to bring closure). But, the IRS announcement makes clear that this procedure is available to those who have not yet renounced/relinquished and wish to do so in the future. The point is that these future relinquishers can:

1. Come into tax compliance and have up to $25,000 USD in tax forgiven; and

2. Come into tax compliance without getting a Social Security number. This has the potential to be enormously helpful to a lot of people (but this is a minority view). It’s a way to make the compliance/renunciation process easier and less expensive (tax forgiveness) than it has been to date.

Of course, this will anger the thousands who have previously come into compliance, paid taxes and gone to the trouble of getting a Social Security number.

IRS Motivation: Much of the discussion in social media has revolved around the question of: “Why would the IRS offer this program at all? What’s in it for the IRS (especially if they are forgiving taxes)? I don’t know and nobody outside Treasury/IRS knows. But, my guess is that this is a political response from US Treasury to the problems that FATCA is causing with foreign banks. Viewed prospectively, this provides a clearer path for accidental Americans (living outside the USA) to renounce U.S. citizenship. Although renunciation (which does have tax consequences) does NOT require tax compliance, most people seem to think that it does. Also, this is a clear response from Treasury/IRS to the problems that foreign banks are having with FATCA compliance. In other words: I do NOT think that this has anything to do with helping accidental Americans. I do think that it to assist foreign banks with the problems they are having with accidental Americans. Note that the relinquishment date – March 18, 2010 – is tied to the date that FATCA was enacted. But, what do I know?

Now on to the post as originally written …

Breaking news – just released today – September 6, 2019

Background:

In what appears to be a response to how FATCA issues affect “accidental Americans” living outside the United States, the IRS has introduced a procedure providing limited tax relief, penalty relief and certainty for accidental Americans who need to renounce U.S. citizenship in a FATCA world. The problem is described in this recent article by Helen Burggraf at American Expat Finance. Note that March 18, 2010 was the date that the HIRE Act (of which FATCA was a revenue offset) was enacted – making it clear that this relief is tied to FATCA and NOT to “citizenship-based taxation” per se.

In a nutshell, it appears (I will read this in more detail again) to say that:

Individuals who:

1. Have NEVER filed a 1040 U.S. tax return
2. Have relinquished/renounced U.S. citizenship after March 18, 2010
3. File the five tax years in the year prior to relinquishment
4. File a tax return in the year of relinquishment
5. Have a net worth of less than 2 million USD at the time of relinquishment AND at the time of filing*
6. Have a total of less than $25,000.00 in U.S. tax liabilities over the five year period
7. Have an average U.S. tax liability of less than approximately 165,000 USD for the five preceding years*
8. Certify that their failure to file was non-willful.

can file, avoid paying the U.S. taxes owed and NOT be a covered expatriate.

*These mirror the general requirements to not be a covered expatriate.

This is of value for a limited (but probably numerically large) group of people. The benefits appear to be:

1. Forgiveness of tax up to $25,000.00
2. The opportunity to exit the U.S. tax system cleanly and avoid covered expatriate status.

This is likely to upset those who previously went to the trouble of coming into compliance to expatriate. Note that the procedures are not available to anybody who has EVER filed a 1040.

I will write more on this later. But, for the moment here is the announcement from the IRS News Room:

09 | 6 | 19
IRS announces new procedures to enable certain expatriated individuals a way to come into compliance with their U.S. tax and filing obligations

IR-2019-151

WASHINGTON – The Internal Revenue Service today announced new procedures that will enable certain individuals who relinquished their U.S. citizenship to come into compliance with their U.S. tax and filing obligations and receive relief for back taxes.

The apply only to individuals who have not filed U.S. tax returns as U.S. citizens or residents, owe a limited amount of back taxes to the United States and have net assets of less than $2 million. Only taxpayers whose past compliance failures were non-willful can take advantage of these new procedures. Many in this group may have lived outside the United States most of their lives and may have not been aware that they had U.S. tax obligations.
Eligible individuals wishing to use these relief procedures are required to file outstanding U.S. tax returns, including all required schedules and information returns, for the five years preceding and their year of expatriation. Provided that the taxpayer’s tax liability does not exceed a total of $25,000 for the six years in question, the taxpayer is relieved from paying U.S. taxes. The purpose of these procedures is to provide relief for certain former citizens. Individuals who qualify for these procedures will not be assessed penalties and interest.
The IRS is offering these procedures without a specific termination date. The IRS will announce a closing date prior to ending the procedures. Individuals who relinquished their U.S. citizenship any time after March 18, 2010, are eligible so long as they satisfy the other criteria of the procedures.

These procedures are only available to individuals. Estates, trusts, corporations, partnerships and other entities may not use these procedures.

The IRS will host an on-line webinar in the near future providing additional information and practical tips for making a submission to the Relief Procedures for Certain Former Citizens.

Relinquishing U.S. citizenship and the tax consequences that follow are serious matters that involve irrevocable decisions. Taxpayers who relinquish citizenship without complying with their U.S. tax obligations are subject to the significant tax consequences of the U.S. expatriation tax regime. Taxpayers interested in these procedures should read all the materials carefully, including the FAQs, and consider consulting legal counsel before making any decisions.

See the following link for more information:

https://www.irs.gov/individuals/international-taxpayers/relief-procedures-for-certain-former-citizens
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