updated 2:11 PM CET, Oct 31, 2023

ACA: Statement for the record, in connection with Ways & Means Oversight Subcommittee hearing on the 2022 tax filing season

U.S. Internal Revenue Service Commissioner Charles Rettig may have focused on Homeland tax issues during a House Ways and Means Oversight Subcommittee hearing on "the 2022 Filing Season" last month, as reported. But interested stakeholders were invited to submit written comments for inclusion in the hearing record, and among those to do so – and in so doing, introducing the tax-filing issues currently facing millions of U.S. taxpayers who live overseas – was the American Citizens Abroad, the Washington, D.C.-based advocacy organization. 

Among the ACA's key takeaways: Ways & Means Committee hearings on the urgent need for the U.S. to move to a residence-based system of taxation are needed now.

Below is the ACA's comment, prepared and submitted in association with the American Citizens Abroad Global Foundation, a charitable research and educational organization with which it's associated...

Commissioner Rettig, in his testimony at the March 17th hearing investigating the current 2022 filing season and IRS operations, acknowledged the challenges that the IRS has in meeting the customer service needs of all U.S. citizen taxpayers.

U.S. citizens taxpayers living and working overseas present special complications for the IRS: creation of online accounts, call center assistance, on-site clinics, and free filing  – all are not optimized for this community of taxpayers.

The Taxpayer First Act [a law enacted in 2019, aimed at introducing a package of reforms] has identified U.S. citizens living and working overseas as an under-served community, and the IRS is working to create systems and provide support to these taxpayers.

This cannot come fast enough for the estimated 3.9 million U.S. citizens living and working overseas.

Tax filing for U.S. citizens living and working overseas is complex, costly and confusing; results in onerous taxation of foreign investments considered Passive Foreign Investment Companies (PFICs); involves duplicate reporting regimes, like the Foreign Account Tax Compliance Act (FATCA), Form 8938, and the Financial Bank Account Report (FBAR) (FINCen-114); [is] unfair with regard to application of certain tax credits (Child Tax Credit and the Earned Income Credit); exposes filers to double taxation with the Net Investment Income Tax (NIIT); and involves wading through many regulations that overlap with U.S. corporate international tax.

This is just a sampling of problems on the individual side of reporting, not taking into consideration the filing requirements for small business operations run by U.S. citizens overseas that need to deal with the Transition Tax and Global Intangible Low-Taxed Income (GILTI) regimes.

The complex and confusing tax filing requirements for U.S. citizens living and working overseas makes for a good argument for tax reform.

Alleviating the tax filing requirements for U.S. citizens living and working overseas would also free up IRS resources that are desperately needed to address not only the current tax filing season, but the understaffing at the IRS in general, both today and in the future.

The United States is the outlier in global norm for taxation, being the only OECD nation to adhere to a system of taxation based on citizenship rather than residence. Other countries, applying residence-based taxation, don’t tax foreign – non-home country – source income, only domestic – home country – source income.

ACA has throughout its 40-plus year history advocated for the adoption of residence-based taxation (RBT) and has produced key documents and research that support the move to RBT, which can be made revenue-neutral and tight against abuse.

ACA was the first organization to develop a side-by-side analysis which shows where in the current tax code changes could be made to move to a system of taxation based on residence (excludes from U.S. taxation foreign-earned income).

ACA has fielded two research projects on the subject with District Economics Group (DEG), a Washington, DC-based economic consulting firm – one in 2017, and one in 2022.  Both provide valuable information on the income, assets and taxation of U.S. citizens living and working overseas. This one-of-a-kind data supports our position that RBT can be adopted; no one will be any worse off; the U.S. Treasury would not lose revenue, and it would be tight against tax abuse.

It is time for this research work, along with documents and testimony from ACA and other stakeholders, to be put on record with the House Ways & Means Committee with hearings.

There are currently three pieces of legislation before in Congress that address some of the tax compliance problems of US citizens overseas. They are: HR 5800 (The Commission on Americans Living Abroad Act); HR 5799 (The Overseas Americans Financial Access Act) both introduced by Rep. Carolyn Maloney (D - NY), and HR 6057 (Tax Simplification for Americans Abroad Act), introduced by Rep. Donald Beyer (D - VA).

Both legislators have asked Ways & Means Committee Chairman Richard Neal (D-MA) to address the tax and compliance issues of U.S. citizens living and working overseas, and ACA echoes this call to action.

Never in the history of the U.S. Congress have hearings been held to address the specific issues facing U.S. citizens living and working abroad – not only tax issues but other concerns related to Social Security, Medicare, voting and representation.

The Americans Abroad Caucus, with co-chairs Rep. Maloney, Rep. Dina Titus (D - NV) and Maria Elvira Salazar (R - FLA), are hearing from constituents in their districts about the growing concerns of citizens who chose to live and work overseas.

If U.S. citizens are to engage in a global economic marketplace, they need the tools to help them compete for jobs and have full access to financial and banking services.

Some U.S. laws, such as FATCA, are hampering this, and the Ways & Means Committee needs to hear and understand these issues and problems, in order that proposals, such as the adoption of residence-based taxation, can be carefully examined.

The concerns over how the current tax filing season, the under-staffing at the IRS, the technological issues with IRS systems currently affecting U.S. citizens living and working overseas, as well as how the current citizenship-based tax regime affects these citizens, are all reasons why the House Ways & Means Committee needs to hold hearings on the tax and compliance issues of U.S. citizens overseas – and consider legislation, such as residence-based taxation, to alleviate the problems.

ACA would like to thank the House Ways & Means Subcommittee on Oversight for the opportunity to submit this testimony and commentary.

To see this submission on the ACA's website, click here.

The American Citizens Abroad, Inc. is a qualified section 501(c)(4) non-profit membership organization, which advocates on behalf of Americans abroad. Its sister organization, American Citizens Abroad Global Foundation (ACAGF), is a qualified section 501(c)(3) tax-exempt public charity, which identifies subjects that affect Americans abroad, develops information about these subjects and provides such information to Congress, Treasury Department and other relevant persons. Both are based in Washington, DC.