US Political Efforts for Residency Based Taxation

Introduction:

US Political Efforts for Residency Based Taxation

At Expat Insurance, we’ve really been getting into organizations like the American Citizens Abroad (ACA) and Democrats Abroad (DA). These are organizations that advocate for American expats living abroad—trying to make our lives better. Organizations such as these help expats with taxes, voting, and other services.

ACA Responds to National Taxpayer Advocate (NTA)

US Political Efforts for Residency Based Taxation

The IRS runs a National Taxpayer Advocate Service (TAS), headed by Erin M. Collins, the National Taxpayer Advocate. According to her biography on the NTA website, she is the “‘Voice of the Taxpayer’ within the IRS and before Congress. TAS serves as a “safety net” for taxpayers by advocating for resolution of individual and business taxpayer issues within the IRS. She identifies and works toward systemic changes for all taxpayers while protecting Taxpayer Rights.” She is an advocate for taxpayers, including low-income taxpayers and is an “independent voice inside the IRS”.

One of the tasks of the advocate is to compile a fiscal report for the coming financial year, the National Taxpayer Advocate Objectives Report to Congress. While submitting the report for 2024, Collins claimed that she was “finally able to deliver some good news. The taxpayer experience vastly improved during the 2023 filing season."

On July 26th, 2023, American Citizens Abroad (and its sister organization, American Citizens Abroad Global Foundation) wrote a wide-sweeping formal response to Ms. Collins.

In this letter, they called for US Congress to:

1. Reducing the Burden on Taxpayers Applying for an Individual Taxpayer Identification Number
2. Eliminating the System Assessments and Offering A First Time Abatement Waiver for International Information Return Penalties.
3. Reducing the Compliance Barriers for Overseas Taxpayers

They also recommended that the IRS institute several programs:

1. To Create an Online System of Communication between Overseas Taxpayers to Resolve Case Resolutions (Democrats Abroad, on the other hand, calls for the reopening of overseas IRS branches that, apparently, used to exist and were closed).
2. To Fund a System Allowing Taxpayers to Resolve Outstanding Tax Debts on A Timely Basis (without forcing expats to return to the US or hire a company inside the US.) IRS Online Accounts
3. That the IRS Funding Be Dedicated to Create Online Accounts that Accept A Foreign Phone and Address.
4. That the IRS Create a Payment Platform that Reduces the Cost to Overseas Taxpayers with Foreign Bank Accounts
5. That the IRS Child Tax Credit Portals Should Fully Accommodate Parent Beneficiaries Who Reside Abroad. IRS Phone and Online Support
6. That the IRS Create A Toll-Free Number for Overseas Filers
7. That the IRS Train Agents in Overseas Taxpayers Filing Requirements (both for individuals and small businesses)
8. IRS Should Reopen the Attaché Offices (or at least hold virtual clinics where taxpayers can ask questions and get filing information) IRS Websites
9. IRS Should Create A Website for Overseas Taxpayers. (Not only information for individual filers, but also information relating to small businesses.)
10. IRS Should Fund an Outreach Initiative for U.S. Citizens Working and Living Abroad (They recommend three programs, before, during, and after tax filing season.)
11. Much of the FreeFile System Needs to Be Overhauled to Accommodate Citizens Abroad
12. The FreeFile System Doesn’t Accept Statements and Schedules Essential for Reporting Foreign Income Taxpayers First-Act Recommendations
13. Adopt the Same Country Exemption when Filing for FATCA
14. Simplify the FBAR FinCen-114 Form and FATCA Form 8939
15. Recategorize Foreign Pension Plans as a U.S. Equivalent
16. Allow Foreign Currency to be Used as Overseas Taxpayer’s Currency Other Recommendations
17. Residence-Based Taxation instead of Citizenship-Based Taxation
18. Hold A Congressional Hearing on Taxation and U.S. Citizens Abroad

*For more information, click here.

Democrats Abroad Write an Open Letter to US Congress and IRS

US Political Efforts for Residency Based Taxation

Another recent attack on the status quo came in the form of a comprehensive open letter from another expat organization. This time, Democrats Abroad wrote to the US Congress urging them to overhaul their tax system for American citizens living in other countries.

The initiative started when a group of volunteers formed the Democrats Abroad Taxation Task Force and started researching U.S. tax codes and policy. They asked American expats what the greatest hassles were when they were doing their taxes, and then they researched ways to fix the problems.

In particular, they believe that residency-based taxation—or taxation based on where you live, not your citizenship status—is a huge solution to a multitude of problems expats face in paying their taxes.

The task force seeks to reduce inequality, boost opportunities for all Americans, and raise enough revenue to meet the public’s needs—mostly from those who have the greatest ability to pay.

In the letter, they advocate:

The Appeal of the Windfall Elimination Provision The Elimination of FATCA reporting A Citizenship Remedy for “Accidental Americans” An exemption for American business owners abroad from the transition taxes in the 2017 tax Cuts and Jobs Act

"We call on the United States to tax based upon residency and source, exempting Americans abroad from FATCA reporting, and fixing the tax code to eliminate tax discrimination for Americans abroad."

Democrats Abroad went on to make several recommendations to the IRS to help level the playing field for Americans living abroad. Their suggestions are as follows:

Switching from citizenship-based to residency-based taxation Passing the Overseas Financial Access Act—which eliminates foreign financial accounts reporting under FATCA (Foreign Account Tax Compliance Act). Passing the Social Security Fairness Act (repeals the Windfall Elimination Provision that prevents Americans living abroad—who also have pensions in their foreign country of residence—from claiming the full amount of Social Security payments owed to them Enacting a remedy for American business owners abroad—who have been existentially harmed by the “transition taxes” built into the 2017 Tax Act. “The provision of an efficient mechanism for “Accidental Americans” to renounce their unwanted U.S. citizenship.

Americans Abroad also made recommendations for the US Congress:

Hold hearings to investigate the different ways the U.S. Tax Code discriminates against Americans who live abroad—and build support for these three critical reforms. Enact H.R. 4363—which builds a commission to study the impact of federal laws and regulations on Americans that reside abroad. It also avoids passing laws that would inadvertently harm Americans abroad in the future. Enact reforms to the Foreign Bank and Financial Accounts Report (FBAR), which would report requirements for US Citizens to their bonafide country of residence, especially to redress the enormous and outrageous penalties for non-wilful non-compliance

The open letter also urged Congress to:

Join the Americans Abroad Caucus Contact us when you travel to our countries of residence so we can meet for any occasion.

Tax Code Provisions

US Political Efforts for Residency Based Taxation

Respondents to the survey put forth by the Democrats Abroad Taxation Task Force identified several tax code provisions that unfairly discriminate against Americans abroad and proposed several remedies:

1. US Capital Gains Tax Exclusion—harmonization of capital gains treatment for properties owned by citizens living abroad with the treatment of properties owned by citizens living in the US.
2. Artificial Capital Gains/Losses due to Currency Fluctuations – getting rid of artificial capital gains and losses when there’s been no currency exchange—by allowing the currency of the country in residence to be the functional currency for tax reporting purposes. 3.Apply foreign credits to Net Investment Income Tax (NIIT–allow Americans abroad to apply foreign income tax credits in calculating Net Investment Income Tax
3. Marital dedication for bequests to foreign surviving spouses – reinstate the marital deduction bequests to surviving foreign spouses in the calculator of estate tax.
4. Declaration of foreign long-term savings plan income – tax the income from foreign long-term saving plans at the time the money is withdrawn from the plan.
5. Taxation of welfare payments – tax imposed on foreign government invalidity, unemployment, and social welfare payments to disabled and disadvantaged Americans abroad only by the country making the payments—i.e. the country of residence
6. Tax-free transfer of foreign retirement plan assets – render tax-free the transfer of assets from foreign retirement plans deemed qualified under international tax treaties to retirement plans in the taxpayer’s new country of residence, be it the US or another country.
7. Revise Punitive PFIC Rules – for citizens residing abroad revise the punitive Passive Foreign Investment Company Rules and reporting requirements that apply to non-US pension plans, foreign mutual funds and other investment savings vehicles that prohibit Amercans abroad from using them to save efficiently for retirement.
8. Taxation of non-US non-qualified pension plans – simplify the reporting structure for non-US, non-qualified pension plans that would alleviate the onerous need for Form 3520 filing for non-employer funded pension schemes.
9. Reforms to the FEIE and FHE – maintain the Foreign Earned Income Exclusion, merge it with the Foreign Housing Exclusion and eliminate the ceiling. This would eliminate double taxation of the earned income of non-resident taxpayers.
10. Repeal WEP – Replace the Windfall Elimination Provision (WEP), which drastically reduces the Social Security payments owed to Americans also receiving foreign pension payments, through passage of the Social Security Fairness Act to restore rightful Social Security payments to Americans abroad.
11. 15.5% Repatriation Tax – Provide an exemption for small-to-medium-sized business owners from the 15.5% Repatriation Tax. Meant as a tax break for American companies retaining profits abroad. It forces small-to-medium-sized business owners to declare profits set aside for future capital investment.
12. GILTI Tax Regime – Harmonize the tax treatment of Global Intangible Low Tax Income and Foreign Intangible Direct Income across all types of foreign corporations owned by U.S. persons or entities by giving corporations owned by Americans living abroad access to the same offset and deductions afforded to C corporations controlled by U.S. multinational corporations.

Improving Tax Filing and Reporting for Americans Abroad

US Political Efforts for Residency Based Taxation

14. Optional Simplified Earnings Declaration – Provide non-resident taxpayers who owe no US federal income tax with the option of a one-sentence, handwritten, or printed declaration of earnings, accompanied by a tax return or assessment from the taxpayer’s country of residence.
15. Expand the criteria for determining the threshold for who has to file – add a provision so that foreign earned income can be excluded under current rules so that that doesn't need to be included when determining your gross income for filing purposes.
16. Make electronic tax return filing possible for non-resident taxpayers declaring foreign tax credits – Allow taxpayers using the free, fillable IRS electronic forms to exclude the attachments eliminating the need for the taxpayer to file the return by post.
17. Translated IRS publications and forms – provide translated versions of the IRS publications and tax forms commonly used by non-resident, non-English speaking US citizens.
18. Harmonize International Tax Treaties – align all international tax treaties with the US Model Income Tax Convention of November 15, 2006, especially—but not exclusively—as they apply to private pensions, social welfare benefits, annuities, alimony, child support, and pension plans.
19. Promote the Streamlined Filing Compliance (Offshore) Procedures (SFCP) – expand awareness of the SFCP, a tax compliance restoration program introduced in 2014 for Americans who non-wilfully are not compliant with their tax filing and reporting obligations.
20. Improve Communication – encourage the IRS to do even more to expand communication with Americans living abroad. This should start with the establishment of non-resident taxpayer support hotlines, the reopening of overseas IRS offices, and the restoration of offshore services lost due to cuts in IRS funding. These facilities should be operated by officials with experience in matters unique to non-resident filers.
21. Protect American Citizens Services – ensure that proposed cuts to State Department funding do not result in further reductions in American Citizens Services provided by U.S. consulates and embassies, which often give advice about tax filing deadlines and local tax return services.
22. Reform the Foreign Account Tax Compliance Act (FATCA) – exempt from FATCA reporting, by both the U.S. citizens abroad and their financial account providers, the financial accounts of law-abiding overseas residents, U.S. citizens in their bonafide country of residence.
23. Reverse the Foreign Bank and Financial Accounts Report (FBAR) reporting requirement for U.S. Citizens in their bonafide country of residence – as follows: Redress the great, out-of-proportion penalties—both civil and criminal—imposed by the IRS for non-willfully neglecting to file forms. Adjust for inflation the $10,000 aggregate threshold amount that triggers a FBAR filing requirement, which has not been adjusted since the Bank Secrecy Act was enacted in 1970. (This amount 53 years ago is equivalent in purchasing power to over $75,000 today.) Address the vulnerability of FBAR data security inherent in electronic filing systems Remove the burden imposed on tax filers who are computer illiterate or have no access to computers by eliminating recently introduced mandatory electronic FBAR reporting

Democrats Abroad also looked into regulations that constrain banking, investments, and retirement savings for Americans abroad. They also highlighted the following discrepancies that further discriminate against American expats:

Punitive taxation of retirement savings plans, which qualify and are taxed under local laws but are not qualified plans for U.S. tax purposes Punitive taxation of foreign government-sponsored retirement savings plans that are not qualified plans for U.S. tax purposes Capital gains tax laws that do not take into account currency fluctuations, thereby creating assessable capital gains upon the sale of assets even if no currency was exchanged The inability to claim a foreign tax credit against taxes owing under the Affordable Care Act, namely the 3.8% Net Investment Income Tax Inflexible regulations involving Social Security and Medicare contributions particularly put (double-tax and other) self-employed Americans abroad at a disadvantage A Windfall Elimination Provision which drastically reduces the Social Security payments owed to Americans also receiving foreign pension payments The Social Security benefit taxation regime for taxpayers who are Married Filing Separately provides no exclusion for spouses. Americans married to foreign nationals normally file as Married Filing Separately and, as such, cannot receive the exclusion afforded Americans married to Americans who file jointly. Social Security contributions required of self-employed Americans are taxed (15.5%) even if they are already making contributions to an aged pension contribution scheme in their country of residence. Welfare payments made by foreign governments to Americans who are disabled, unemployed, or disadvantaged are subject to U.S. taxation though they are normally not taxed abroad

U.S. Banking Also Constrained

Banking securities and national security regulations require U.S. banks to have a “Know Your Customer” policy to prevent fraud, money laundering, and other financial crimes. As a result, banks and financial institutions are no longer willing to hold or open accounts for customers whose only address is outside of the United States. Investor protection “Blue Sky” laws require origination, sales, and management firms to implement a range of provisions to protect investors. Blue Sky laws require those seeking financial products to provide a verifiable U.S. address, in some instances more than just an address, for general correspondence purposes. Together these provisions have constrained the banking, savings, and investment activities of Americans abroad. A sensible reform would be to exempt American citizens living abroad if they have only a non-US address.

*For more information, click here.