‘I’m not American’: How a complicated Trump tax law created huge bills for foreign citizens

June 18, 2019

For some U.S. citizens, the Trump administration’s 2017 tax cuts provided an economic boost. But for Carrie, a 50-year-old doctor living in Amsterdam, they have added to a slow-moving financial disaster that threatens a six-figure debt.

Carrie says that when she finally explained her circumstances to an accountant earlier this year, she heard panic in the professional’s voice.

“He said: ‘This is bad. This is bad.’ He kept repeating it,” Carrie said.

Carrie is now expecting to be hit not only by an Obama-era tax change that is compelling thousands of U.S. citizens around the world to file taxes for the first time but also by another, more complicated and less-noticed change made during the Trump administration.

And although that change was made with U.S. corporations in mind, foreign individuals like her may feel the hardest impact.

Her accountant currently estimates a U.S. tax bill of at least $107,000 — a sum that Carrie fears would wipe out much of the savings designed to send her children to college.

To her, it feels surreal. “I’m not American,” she added. “Well, by your rules I am. But it doesn’t feel like that.”

Carrie, who asked that her full name not be used as she is still in the process of coming into compliance with U.S. tax law, is one of thousands of U.S. citizens who live abroad who have found themselves entangled in U.S. tax laws in recent years. Her accountant issued a statement that confirmed the current estimates of her tax bill.

Like many, her citizenship is an accident of birth — she was born in the United States when her Dutch parents were living there during a six-month sabbatical from work. Her parents were not U.S. citizens. Neither were her siblings.

Although she did apply for a U.S. passport when she was 18, it is long expired, never used.

Foreign governments are starting to take notice of the situation, but they have little leverage to lobby on behalf of their own citizens. The laws that target people like Carrie are designed to target U.S. citizens — whether those people are also foreign citizens or not.

Some countries have sent high-level delegations to push the United States on the issue. Menno Snel, the Dutch state secretary for finance, was in Washington last month to meet members of Congress and officials from the Treasury Department and Internal Revenue Service.

Snel has built an ambitious agenda at home for trying to change the Dutch reputation as a tax haven. He is now trying to protect Dutch citizens from becoming collateral damage in a U.S. battle against evasion.

“Most countries in the world have a different system,” Snel said of the United States in an interview.

The United States is one of only two countries in the world that bases its taxation policies on citizenship rather than residence, according to the Tax Foundation; the other is Eritrea. The U.S. practice is a relic of the Civil War and the Revenue Act of 1862, which sought to punish men who fled to avoid joining the Union army.

Recent changes to the U.S. tax system have increased its global impact. In 2010, the United States passed the Foreign Account Tax Compliance Act (FATCA), which requires all non-U.S. foreign financial institutions to search their records for U.S. citizens and permanent residents and report them to the Treasury.

FATCA was designed to catch tax evaders; in theory, tax treaties exempt anyone from paying U.S. taxes if they have already paid them in the country in which they live. Many do not have enough assets to be required to report them in the U.S. and the IRS can offer an exclusion for roughly $100,000 of income.

Snel said that bilateral tax treaties designed to prevent double taxation and a $50,000 [SIC as it actually $10,000] threshold on what has to be reported under FATCA meant that 90 percent of those targeted don’t pay additional taxes.

“There’s just a lot of fuss and rules and bureaucracy,” he said.

But when the sums are bigger, or the tax systems don’t align, it can cause costly and sometimes high-profile problems.

Boris Johnson, the former British foreign secretary who was born in the United States, renounced his U.S. citizenship in 2017 after paying a hefty capital gains tax on a home in London on which he had already paid British property tax.

Foreign institutions have until the end of the end of this year to become fully compliant with FATCA. Activists say that banks have already refused bank accounts and loans to potential U.S. citizens for fear of fines from the U.S. Treasury.

“We all keep quiet because we’re scared,” Carrie said.

To come into compliance with U.S. tax laws, dual nationals may have to deal with mundane but complex aspects of U.S. bureaucracy — acquiring a Social Security number as a nonresident, for example.

“Someone who was not brought up in the U.S., often doesn’t even speak English well, has to go to a U.S.-based tax adviser,” said Daan Durlacher, the Dutch American founder of the group Americans Overseas, adding that legal fees add up to thousands of dollars.

Although she was already facing costs due to the Obama-era FATCA, Carrie’s problem has been made far more complicated and expensive by Trump’s tax cuts — signed into law in the Tax Cuts and Jobs Act of 2017.

That law allowed a one-time tax on assets that U.S.-controlled businesses have accumulated overseas, whether or not they repatriate them to the United States.

The aim was to persuade major American firms to bring assets back to the United States, but it was indiscriminate, requiring huge businesses like Google and small entrepreneurs alike to announce and pay tax on money they had accumulated over decades.

“It offered benefits, exemptions and the application of foreign tax credits to corporations,” said Richard Barjon, the U.S. Individual Tax Practice leader at PwC Switzerland. He added that individuals did not qualify for the same deductions and usually did not have the cash on hand to settle quickly, although the law does provide the possibility of paying in installments.

“It's not favorable at all for individuals,” said Eric Toder, co-director of the Tax Policy Center at the Urban Institute. “Had they thought about it, they probably would have thought of some clause to prevent this from happening."

The issue is particularly acute in countries such as the Netherlands, where the health-care system encourages doctors and other health-care workers to register private limited companies to charge for their services to different hospitals.

Carrie, a medical specialist, had set up three separate private companies and kept her profits in them as a form of savings, which made her circumstances particularly complicated. She estimates that she will spent tens of thousands of dollars just in fees to lawyers and accountants aside from her tax bill.

Other health-care workers are running into the problem, too. Last year, a Dutch TV show interviewed a dentist, also born in the United States, who said he expected to potentially have to pay tens of thousands of dollars in U.S. taxes under the transition tax.

U.S. citizenship had become “a nightmare” in recent years, the dentist, Jan Willem Vaartjes, said.

If it were a different country making these complicated requests, foreign governments like the Netherlands might just ignore them. Two members of French Parliament said in May that the country should consider pulling out of its tax treaty with Washington if more is not done to help French citizens.

But the United States is an economic behemoth, and most countries already have binding tax treaties in place. Speaking in Washington, Snel said he was advocating for a less drastic approach.

“Let’s put our minds and heads together to find a solution,” Snel said in May.

A spokeswoman for the Ministry of Finance, speaking on background in accordance with government practice, said that contact with the IRS has intensified since Snel’s visit but that there were “no solutions yet.”

Many are not optimistic. The Treasury Department and the IRS have limited leeway to change tax rules without congressional approval. So far, legislative efforts to change FATCA and other U.S. tax laws have stalled. “In complex legislation, there are mistakes and things that need to be fixed after the fact,” said Toder.

Technically, Carrie is represented in Congress by the last place she had residence in the United States — in her case, a place she left as a baby. Peter Spiro, an expert on dual citizenship at Temple University School of Law, said this is one reason Americans overseas have little clout in the U.S. political system.

“Their representation in Congress is watered down,” Spiro said.

The simplest option for Carrie may be following Johnson and thousands of others who renounce their citizenship — a growing trend that comes with its own financial burdens, including a potential “exit tax” on high earners. But she hopes to find a way to keep her citizenship.

“I love the United States,” she said.

IRS to revoke 260,000 American passports

By: Pedro Goncalves

16 Oct 2018 on www.internationalinvestment.net

The US Internal Revenue Service has started action to revoke the citizenship or residence rights of at least 260,000 US individuals due to significant tax debts, according to law firm Dickinson Wright.

The tax collector and the State Department have begun the enforcement of an existing law that enables them to deny passport applications or revoke existing passports due to outstanding claims. The IRS has stated it plans to use the power against US citizens who owe more than $51,000 in taxes and penalties.

The enforcement, which began in February, has so far included applications for new or renewed passports. The State Department denies passport applications based on the information on outstanding debts it receives from the IRS.

There are still number of safeguards available to those who have a hefty tax bill to pay since the $51,000 tally in tax debt must qualify as legally enforceable federal tax debt, including interest and penalties, according to the IRS.

The first safeguard is that the threat cannot be used unless the taxpayer has already received either a Notice of Federal Tax Lien or a Notice of Intent to Levy. Taxpayers receiving either notice are entitled to appeal to a Collection Due Process hearing, to negotiate a resolution of this debt.

Second, the IRS can apply for a passport revocation or denial only if it first notifies the taxpayer of its intention, and allows 30 days for a response. It can go ahead with the application only if this request is ignored or not satisfactorily answered.

The agency received $11.5m as of the end of June from 220 individuals who have paid their debts in full, according to the IRS. About 1,400 more people have entered into payment agreements.

As many as 362,000 Americans could be affected by these rules by the end of this calendar year, according to the IRS.

For American citizens living overseas, travel to the US will not be affected.

You think filing taxes is hard? Talk to Americans living abroad.

Although their income is generated in a foreign country, expatriates must file tax returns in the United States, the only industrialized nation that taxes its citizens on worldwide earnings.

"Preparing a return for Americans living overseas is more complex, because the forms are long and the instructions not always easy to understand," said Jane Bruno, a Florida-based tax consultant specializing in tax issues for U.S. citizens living abroad.

For instance, Americans living abroad are allowed to deduct part of their foreign salary from their overall income, but the calculation is based on complicated rules, Bruno said. And equally complex regulations determine whether foreign income is subject to self-employment tax in the United States.

In addition to filing their tax returns, expatriates must also file two separate forms reporting their foreign savings, stock holdings, life insurance, retirement plans, annuities and other financial information. Making the task even more daunting, the rules about which assets need to be reported change often, making it difficult to figure out what is required in a given year.

And all the amounts must be converted from local currencies into U.S. dollars, a time-consuming process of looking up exchange rates on specific days during the previous year, or using the IRS currency conversion chart.

The heavy-handed regulations are part of a wider U.S. government effort to combat tax evasion, a major concern since some Swiss banks admitted in the past to helping wealthy Americans hide their assets offshore.

All this creates a headache for tax-compliant expats and people who have only tenuous links to the United States — those who have lived overseas for decades and never plan to return, plus "accidental Americans," who never lived in the U.S. but were born to American parents overseas. The IRS says they also must file U.S. taxes and disclose foreign assets.

The fines for even unintentional errors are hefty. The IRS can impose a penalty of $10,000 a year for undisclosed foreign accounts, even if they don’t generate any taxable income in the United States.

A growing number of Americans abroad are giving up their citizenship in part because of the complexity of filing their taxes, the potential penalties and the financial burden of double taxation by the U.S. and the country where they live. In 2015, more than 4,200 U.S. nationals relinquished their passports, a 20% increase over the previous year.

Tax relief is not on the horizon. The Geneva-based advocacy group American Citizens Abroad has pushed for years for taxation based on residence rather than citizenship. This way, the IRS would tax income generated only in the United States, such as from real estate and dividends on U.S. stocks, but no longer tax income from overseas.

"We're in constant contact with members of Congress and the Treasury to try to convince them that this is a good thing, but our argument gets lost in the shuffle," said Anne Hornung-Soukup, the advocacy group's finance director.

A tax overhaul could be debated by the next Congress after this year’s elections, the group said, but until then, tax season for U.S. expats continues to be a time of unhappy returns.

IRS Power To Revoke Passports Signed Into Law

Forbes.com on 4/Dec'15

The passport provision is now official, as President Obama signed the 5-year infrastructure spending Bill. It adds a new section 7345 to the Internal Revenue Code. It is part of H.R. 22 – Fixing America’s Surface Transportation Act, the “FAST Act.” Why are passport covered in the tax code, you might ask? The title of the new section is “Revocation or Denial of Passport in Case of Certain Tax Delinquencies.” The idea goes back to 2012, when the Government Accountability Office reported on the potential for using the issuance of passports to collect taxes.

It was controversial then, but this time sailed through, slipped into the massive highway funding bill, passed here. The section on passports begins on page 1,113. The joint explanatory statement is here, beginning on page 38. The law says the State Department can revoke, deny or limit passports for anyone the IRS certifies as having a seriously delinquent tax debt in an amount in excess of $50,000. Administrative details are scant. It could mean no new passport and no renewal. It could even mean the State Department will rescind existing passports.

Taxing Passports

The State Department will evidently act when the IRS tells them, and that upsets some people. We think of passports when traveling internationally, but some people may find that passports are required for domestic travel in 2016. That could make the IRS hold even more serious. The list of affected taxpayers will be compiled by the IRS. The IRS will use a threshold of $50,000 of unpaid federal taxes. But this $50,000 figure includes penalties and interest. And as everyone knows, interest and penalties can add up fast.

Notably, if you are contesting a proposed tax bill administratively with the IRS or in court, that should not count. That is not yet a tax debt. There is also an administrative exception, allowing the State Department to issue a passport in an emergency or for humanitarian reasons. But how that will work isn’t clear, nor is the amount of time it will take to get special dispensation. You would still be able to travel if your tax debt is being paid in a timely manner, as under a signed installment agreement. The rules are not limited to criminal tax cases or where the government thinks you are fleeing a tax debt.

In fact, you could have your passport revoked merely because you owe more than $50,000 and the IRS has filed a notice of lien. A $50,000 tax debt including interest and penalties is common, and the IRS files tax liens routinely. It’s the IRS way of putting creditors on notice. The IRS can file a Notice of Federal Tax Lien after the IRS assesses the liability, sends a Notice and Demand for Payment, and you fail to pay in full within 10 days.

The right to travel has been recognized as fundamental, both between states and internationally. And although some restrictions have been upheld, it is not clear that this measure will pass the constitutional test if it is challenged. Speaking of challenge, it is not off-topic to mention FATCA, the Foreign Account Tax Compliance Act.

FATCA penalizes foreign banks that don’t hand over American account holders. There are approximately eight million Americans living overseas, many of whom are still reeling from FATCA compliance problems.

IRS Releases Guidance on FBAR Penalties Containing Procedures for the Determination, Calculation, and Assessment of FBAR Penalties

The IRS recently issued guidance to its examiners for determining, calculating, and assessing Foreign Bank and Financial Accounts (FBAR) penalties, along with a civil FBAR penalty case file checklist.1 The IRS explained that the FBAR penalty procedures were developed to ensure consistency and effectiveness in the administration of FBAR penalties, ensure that FBAR penalty determinations are adequately supported, and penalties are asserted in a fair and consistent manner. The guidance was released one month after a District Court found that the IRS lacked an administrative record that established an adequate basis for the assessment of FBAR penalties.2

The memorandum contains a discussion on determining the penalties for willful and non-willful FBAR violations. For willful violations, the guidance explains that examiners should consider the facts and circumstances of the case in determining the amount of the penalty. However, the guidance does not address how willfulness is determined or what evidence is required to make that finding. As a result, it appears the willfulness guidelines in IRM sections and have not been modified. The guidance emphasizes that for each year for which it is determined that there was a willful FBAR violation, examiners must fully develop and adequately document in the examination work papers their analysis regarding willfulness.

For non-willful violations, the guidance advises the examiners to first determine if the mitigation threshold conditions contained in the IRM apply so as to automatically reduce the amount of the penalty based on the aggregate balance of the accounts. There are no other guidelines for reducing the amount of the $10,000 penalty. However, the guidance notes that when handling non-willful FBAR violations for multiple years, an examiner has the discretion to impose a penalty for a single year or impose a penalty for each year at issue. If there are multiple accounts involved, an examiner has the option of imposing one penalty per year, regardless of the number of accounts involved, or of imposing a separate penalty for each account.

The IRS guidance was released one month after a decision in a District Court case in which a taxpayer, James Moore, filed a suit after being assessed $40,000 in FBAR penalties for the years 2005-2008.3 In that case, Moore objected to both the total amount of the penalty, which he claimed violated the Eighth Amendment’s Excessive Fines Clause, and the IRS’s decision to impose the maximum amount of the penalty for each year, a decision he claimed was arbitrary and capricious and in violation of the Administrative Procedure Act.

The court concluded that Moore committed nonwillful FBAR violations; however, the court determine reasonable cause did not exist for failing to file FBARs because Moore had no objective basis for his belief that he did not have to report his bank account and he continued to ignore notice of his duty to report it.

Next, the court looked at the administrative record the IRS had provided and found that it was insufficient to establish whether the IRS had acted arbitrarily or capriciously4 in determining the amount of the penalties it assessed. The court explained that the record contained no administrative explanation of the IRS’s decision to impose the penalties because the only document before the court did not illuminate what the IRS considered or why it determined that the maximum $10,000 penalty would apply for each year. The court gave the IRS an opportunity to supplement the record to include contemporaneous evidence for the penalty determination or any other evidence from which the court could conclude that the IRS did not act arbitrarily or capriciously. Finally, the court ruled that the assessment of the penalties did not violate the Eighth Amendment because the penalties were about 10% of the value of the bank accounts that had not been reported, and were therefore not grossly disproportional to the gravity of the offense.

It remains to be seen whether the District Court will find that the IRS acted arbitrarily and capriciously once it has reviewed the supplemented administrative record, and whether the new guidance will have an effect on the way in which the IRS handles the determination, calculation, and assessment of FBAR penalties.

1 SBSE-04-0515-0025. The guidance is effective from May 13, 2015 through May 13, 2016, and applies to all open cases where the FBAR penalty is considered.

2 Moore v. United States, 2015 US Dist. LEXIS 43979, No. C13-2063RAJ (W.D. Wash., Apr. 1, 2015).

3 Moore, 2015 US Dist. LEXIS 43979.

4 The court determined that the IRS’s actions were not subject to stricter de novo review because there was no evidence of inadequate fact-finding procedures.

Tax Evasion

The data revolution

It will soon be a lot harder to hide money overseas

May 10th 2014 | NEW YORK | From the print edition of the Economist

THE war on those stashing undisclosed money offshore intensified this week when 47 countries, including the Group of 20 and some prominent tax havens, sealed a pact that will shake up the sharing of tax information. Under the present system, countries have to file requests with each other for data on suspected cheats. Even reasonable enquiries are often rejected as “fishing expeditions”. In future the signatories—and dozens of others that will be pressed into joining later—will automatically exchange information once a year. This will include bank balances, interest income, dividends and the proceeds of sales, which can be used to assess capital-gains tax.

Some countries are likely to set up special arrangements, with reduced penalties, to encourage non-compliant taxpayers to bring money home now rather than wait to be caught once the new system kicks in, probably in 2017. The deal also increases pressure on banks to identify the ultimate owners of shell companies and trusts, behind which tax evaders often hide.

The catalyst for the agreement was America’s Foreign Account Tax Compliance Act (FATCA). The law, passed in 2010, will soon impose stiff penalties on foreign financial firms that fail to declare their American clients. Once America began pushing for automatic declarations, other big countries did the same.

The most eye-catching signatory to the accord is Switzerland, whose banks were at the centre of the scandals that gave rise to FATCA. The world’s most famous offshore wealth-management centre was built on supposedly ironclad bank secrecy, but it has been forced to buckle under international pressure. (The American authorities, for instance, are currently leaning on Credit Suisse to plead guilty to charges of aiding American tax dodgers.) This is momentous: for the Swiss, agreeing to swap client data systematically is the cultural equivalent of Americans giving up guns. Singapore, which has earned a reputation as the Switzerland of the East, is also a party to the deal.

Several challenges must be overcome to make it work. Data-collection systems need to be upgraded and harmonised. Even the most sophisticated tax authorities could struggle to process the deluge of information coming their way. Without assistance, poor countries whose elites dodge taxes using rich-world havens will not reap the benefits.

More havens need to be brought into the fold. Britain’s offshore satellites, such as Jersey and the Cayman Islands, are grudgingly on board. But it will be harder to corral Panama, Dubai and the havens dotted around the Indian and Pacific Oceans (although blacklisting can be a powerful tool). Until they sign up, the likes of Switzerland and Luxembourg may have an excuse to drag their feet in implementing the new rules.

Still, the pace of change has been remarkable. Global information exchange, unthinkable a decade ago, is within reach. Tax evaders can be ingenious, but their options are narrowing fast.