Implementation of RBT requires changes in the U.S. income tax code and estate and gift tax laws. Exhibit 2 provides a list of measures required to define who is subject to U.S. income tax, the Departure Procedure, modifications required in FATCA regulations and IGA agreements, changes required to bilateral taxation treaties, cancellation of the requirement for certain Americans abroad to contribute to Social Security and Medicare, alignment of taxation of green card holders with their status under immigration laws and non-applicability of SEC investment restrictions on Americans resident overseas. The list is non-exhaustive. Other parts of the U.S. Internal Revenue Code may also require modification.
Though implementing RBT requires numerous changes in the U.S. tax code, the process is essentially simple since the withholding tax rules are already defined, as they already apply to non-resident aliens, and the withholding tax collection system is already in place and can easily distinguish income flows by residence and nationality.
Simultaneously with the adoption of RBT, Congress must instruct the IRS to significantly simplify the rules, forms and procedures for Americans resident overseas to enter into compliance since compliance with U.S. tax filing is a condition for obtaining a Departure Certificate and transition to RBT.
The September 1, 2012 “Streamlined” OVDI iteration intended to encourage tax compliance of Americans abroad represents a step in the right direction, but unfortunately this program carries far too many restrictions and an exceedingly low eligibility threshold (with a maximum of only $1,500 per year in unpaid taxes). Moreover, the inappropriate term “high risk” and the threat of criminal charges are extraordinarily intimidating. Knowledgeable Americans abroad, aware of the mishaps and unimaginably harsh treatment meted out under prior voluntary disclosure programs, generally view the new IRS program as a trap, rather than a solution.
Therefore, Congress must instruct the IRS to provide a streamlined compliance program for all Americans residing overseas at the time the RBT law becomes effective, with no restrictions on eligibility. Additionally, the program should not be under the administrative purview of the IRS Criminal Division.
An equitable and acceptable compliance program for Americans abroad:
- would require just three years of back tax reporting;
- would eliminate the requirement to file the FBAR which is superfluous since it is not a tax form;
- Form 8938 (submitted as an attachment of Form 1040) provides a much more comprehensive report on overseas assets;
- must eliminate all non-filing penalties for FBAR and Form 8938;
- must eliminate any threat or risk of criminal prosecution;
- must be open to all non-residents, with no ceiling threshold for the amount of taxes due;
- must be limited to payment of only back taxes, interest and late filing penalties related to unpaid taxes associated with the three years of back-filing.
Such a program would allow Americans abroad to come forward with confidence that they will be treated fairly and with the requisite predictability heretofore lacking. A sound, simple IRS compliance program that functions in good faith is absolutely necessary to transition from CBT to RBT. The IRS may even develop a simplified 1040 report for Americans abroad coming into compliance under this transition to RBT. The National Taxpayer Advocate calls for a similar program in the 2012 Annual Report to Congress.
With such a program, Congress and the IRS would recognize the dysfunctional nature of CBT and with it, their share of responsibility for the current level of non-compliance of Americans abroad. The IRS has insufficient means to enforce tax collection abroad and has significantly reduced its customer service overseas. Many long-term overseas residents are unaware of their tax filing obligation. IRS efforts to inform the overseas community of the law have been sparse and ineffectual. Some Americans abroad may be aware of the tax filing requirement, but hesitate to engage an extremely costly tax professional to prepare the complex U.S. tax forms when they know that no U.S. tax is due. Some, born abroad to a U.S. parent, are citizens of the country where born, have never held a U.S. passport and have never lived in the U.S. Others, born to foreign parents in the United States, returned to their parents’ home country when they were infants. Still others are convinced they are no longer U.S. citizens because they had their U.S. citizenship rescinded under prior legislation, later deemed unconstitutional by the Supreme Court, thus retroactively restoring U.S. citizenship to all such persons without their knowledge or consent. Finally, others do not earn income reaching the threshold required for filing the 1040. The consequence is widespread confusion among Americans abroad and a tax system which can only be described as dysfunctional.
If RBT is adopted by Congress, it would be front-line news that would spread rapidly among the overseas community; regardless of whether the RBT program is defined as default or as voluntary, Americans and green card holders overseas not in compliance would in large part adhere to the transition compliance filing in order to obtain a Departure Certificate which would substantially improve their life abroad.