The National Taxpayer Advocate's latest Annual Report to Congress largely ignores the struggles American expatriates have been facing, an examination of the various documents that comprise it reveals.
Among the issues this year's report by National Taxpayer Advocate (NTA) Nina E. Olson, pictured, doesn't address are some of the problems Americans living overseas have begun to have as they begin to prepare their first tax returns since President Trump's tax reform package, the Tax Cuts and Jobs Act, came into force on Jan. 1, 2018.
As reported, American expatriates and other American citizens who own small businesses located outside of the U.S. have been frustrated by the so-called Transition Tax element of the TCJA in particular, which imposes a one-off tax on previously-untaxed (by the U.S.) foreign earnings dating all the way back to 1987.
The Transition Tax, also sometimes referred to as the Repatriation Tax, is said to hit individual owners of small businesses and partnerships located outside of the U.S. particularly hard, because many of them had been counting on their set-aside corporate profits to either expand their businesses in the short term, or to rely on later in life to fund their retirements.
Tax experts said the National Taxpayer Advocate almost certainly didn't address the TCJA this year because the Annual Reports to Congress focus on the most recent tax-reporting year – in this case, the 2017 tax year, which covers the 12 months ending on Dec.31, 2017. In other words, the problems with the TCJA have yet to formally appear on the radar of the NTA.
In not addressing the tax concerns currently faced by America's estimated 8 million to 9 million citizens who live outside of the U.S., this year's National Taxpayer Advocate report is very different from some recent past editions. In her January 2014 report, for example, Olson, pictured left, strongly criticized the IRS's offshore voluntary disclosure programs then in use, saying these had been too harsh, and had "burdened 'benign actors' who inadvertently violated the rules."
In 2017, Olson acknowledged the difficulties expatriate Americans face as a result of the U.S.'s unique "citizenship-based" tax regime (CBT) and recommended that the U.S. adopt a “Same Country Exemption” to the Foreign Account Tax Compliance Act, which would exempt expatriates from their FATCA information reporting obligations in the foreign countries in which they are currently living, and, it’s thought, make getting and maintaining such things as bank accounts and mortgages easier. Her recommendation wasn't acted upon.
Also in that report, Olson observed that the IRS had "adopted an enforcement-oriented regime with respect to international taxpayers," with its "operative assumption [appearing] to be that all such taxpayers should be suspected of fraudulent activity, unless proven otherwise."
One reason the concerns of America's overseas-resident citizens may not appear to rank highly every year is because this group is significantly smaller in size than the number of taxpayers who file from within the U.S. The IRS currently receives more than 150 million returns annually, according to an IRS spokesperson, who said this number included joint returns.
Nevertheless, this year's National Taxpayer Advocate Annual Report to Congress report comes at a time when a bill entitled the "Tax Fairness for Americans Abroad Act" (HR 7358) has just been introduced into the House of Representatives by North Carolina Republican George Holding, and remains the subject of considerable debate in expatriate social media channels. Here, questions are being raised about whether a fiercely divided Congress could come together to pass such legislation, even though Republicans and Democrats agree that many of the issues it addresses urgently need attention.
"As with too many U.S. governmental organizations, it is unclear whether the Taxpayer Advocate is that concerned with Americans abroad or small businesses," said Monte Silver, the Israel-based American lawyer and tax expert who earlier this month filed a lawsuit against the U.S. Internal Revenue Service and Treasury Department, challenging the Transition Tax element of the Tax Cuts and Jobs Act of 2017. As reported, Silver's lawsuit claims that the Trump tax reforms failed to contain a "regulatory flexibility analysis" that federal agencies are required to conduct when introducing any legislation that is likely to have a negative impact on small businesses.
FATCA reciprocity concerns
Rather than addressing the concerns of Americans with non-U.S. bank accounts and income who are struggling to comply with their U.S. tax obligations from abroad, the National Taxpayer Advocate this year takes up the cause of non-Americans who have accounts in the U.S., whose rights to "privacy", being kept "informed" and to "confidentiality", she says are currently being endangered by the U.S.’s agreement to provide reciprocity under intergovernmental agreements (IGAs) that the U.S. has signed with foreign governments to enforce the Foreign Account Tax Compliance Act.
FATCA was signed into law in 2010 by President Obama as part of efforts to crack down on the use of foreign bank accounts for tax evasion by American citizens, whether resident in the U.S. or elsewhere.
Under these IGAs, these foreign governments agree to collect and provide to the IRS information on non-U.S. financial accounts held by Americans, with the understanding that the U.S. would do the same for these governments.
In one of its 10 “legislative recommendations” for Congress in its latest report, the National Taxpayer Advocate notes that while the information-sharing contemplated by FATCA "and similar programs can be extremely helpful in identifying and preventing tax evasion through the use of offshore accounts…it also presents enormous risks to taxpayer rights.”
“Recognizing the importance of taxpayers’ right to privacy and right to confidentiality, Congress has enacted significant taxpayer protections relating to disclosure and use of taxpayer information," the NTA continues, in a five-page comment on this specific issue.
“[But] the IRS is exchanging U.S. taxpayer information under circumstances where the data transfers to foreign recipients do not conform to NIST [National Institute of Standards and Technology cybersecurity] guidelines, and where the IRS cannot ensure that the data is used properly by IGA partners…
“The data being disclosed and potentially breached, however, relates to taxpayers, not to the IRS…
“[And] currently… taxpayers have no voice in these IGAs and receive no notification that their personal information is being transferred outside of [the] U.S.”
The NTA therefore is recommending that the IRS be required to "notify taxpayers before their data is transferred to a foreign jurisdiction, pursuant to these intergovernmental agreements unless unique and compelling circumstances exist." It also calls for an amendment to the Internal Revenue Code to “allow a period of notice and comment on new intergovernmental agreements.”
Key 2018 recommendations
In an official statement unveiling the National Taxpayer Advocate's report to Congress – which was late by several weeks as a result of the recent, 35-day U.S. government shutdown – the need for Congress to "provide the IRS with additional multi-year funding to replace its core 1960s-era information technology (IT) systems" is cited as one of the top recommendations.
Other key issues cited included a "decline of available tax law resources" for tax-related investigations due to [recent] budget cuts," as well as a need to "[focus] on areas where IRS customer service and taxpayer compliance can improve with existing resources."
“Providing taxpayers with timely and accurate answers to their tax-law questions is a core IRS function," the statement unveiling the key elements of the NTA's report continues.
This year's report to Congress is the second to include a so-called "Purple Book," which makes almost 60 legislative recommendations that are aimed at improving the way the IRS delivers its services to taxpayers.
To read more about the annual report, and download it and various related documents, including the "Purple Book," click here.
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- Monte Silver: TCJA still a major problem, but some progress seen in recent GILTI revisions
- GILTI tax webinar on Thursday to feature tax lawyer Silver
- Proposed IRS tweaks to GILTI regs seen giving break to American taxpayers resident in high-tax countries