A few years ago, a neighbor of mine was having a serious problem with the Social Security Administration. The agency inexplicably denied her the retirement benefits she was entitled to — all because of a name change. Something so basic as reverting to her maiden name (after being widowed for a decade) was enough to hurl her beneficiary status into an abyss of bureaucratic malfunction.
She took the appropriate steps to notify the agency of its blunder. That got her nowhere. Her phone calls weren’t returned; her letters went unanswered. Multiple trips to the local SSA office accomplished nothing.
The situation wasn’t rectified until she did something that (almost) every U.S. citizen is able to do by right: She contacted her congressman.
The office collected the facts, assessed the situation, and sent a strongly worded letter to SSA senior management, calling attention to the problem and demanding a prompt resolution. It worked like magic. Within days, an SSA official had apologized for the mishandling of her case. More importantly, the agency reinstated her monthly benefits. Sanity prevailed . . . eventually.
Who You Gonna Call?
This experience got me thinking about the millions of U.S. citizens who live overseas. Who are they going to call for a lifeline should they find themselves in a comparable position of jeopardy?
In theory, U.S. expats are represented by the member of Congress for their last known domestic address. That’s a tenuous model of constituency if we’re honest about it. It’s doubtful that most members of Congress would spend political capital on the needs of expats who no longer reside in their district. That’s tantamount to no representation at all.
By some estimates, there are nine million U.S. citizens residing abroad. Were they regarded as a single voting bloc they’d rank as the nation’s 12th most populous state. Yet no member of Congress represents them as a distinct pocket of the electorate. This can fairly be characterized as a democratic deficiency.
Now you might be tempted to think, “So what?” Expats signed up for diluted influence when they relocated overseas; it was their choice. Allow me to push back on that presumption for one good reason. The federal income tax applies to individuals on the basis of citizenship, as well as residence.
This policy is called citizenship-based taxation. It’s a manifestation of American exceptionalism that goes against the recognized international norm, which is known as residence-based taxation. The only other nation that applies citizenship-based taxation is Eritrea.
Expats do not escape the obligation to file U.S. tax returns by virtue of living overseas. Their foreign presence assures that they’re burdened by the Foreign Account Tax Compliance Act regime, as well as the foreign bank account report regime. FATCA can make it impossible for foreign banks to want to do business with you. Try saving for retirement without the professional financial services routinely provided by the banking sector.
The FBAR regime is something most Americans know nothing about, yet the failure to timely file those annual reports (which are completely different from your income tax returns) can result in significant penalties. Many FBAR penalties wind up being challenged in court; the U.S. Supreme Court threw out an FBAR penalty earlier this year because of how the IRS calculated it.
Who are expats supposed to call when they’re being (allegedly) raked over the coals by the excesses of our nation’s extraterritorial tax and financial reporting rules?
Bring on the Czar
Over the years, one body of tax professionals has been tuned in to the concerns of beleaguered taxpayers. I’m speaking of the Taxpayer Advocate Service, an independent organization housed within the IRS. The group’s leader is known as the national taxpayer advocate, one of the more important positions in the federal tax system.
The TAS prides itself on being “your voice at the IRS.” The group does solid policy work, evidenced by the so-called purple book it publishes each year to document what it sees as the biggest problems facing U.S. taxpayers, complete with recommendations on how Congress can fix the system.
I’m an enthusiastic fan of the TAS. With that in mind, I’ll take this opportunity to respectfully propose one change to the group’s organization: Let’s establish a special operating unit within its structure to focus exclusively on the concerns of nonresident U.S. taxpayers. It would be headed by a separate taxpayer advocate, tasked with monitoring the issues arising from things like the FATCA and FBAR regimes and tax treaty benefits. There’s a considerable list of subject matter this office holder could address. For instance, issues relating to the earned income exclusion of section 911 would fall under the group’s purview.
We could assign the position a colorful title. “Expat ombudsman” has a nice ring to it. Or perhaps “FATCA czar” would be fitting because there’s a propensity in Washington to use Romanov nomenclature as a form of aggrandizement. While we’re at it, the TAS could publish two purple books each year: one volume applicable to resident taxpayers, the other reflecting the concerns of nonresident taxpayers. We could call it the fuchsia book to avoid confusion.
Agent for Change
By no means am I suggesting the TAS has failed to emphasize the issues that expats care most about. Quite the opposite. Each passing edition of the purple book seems to devote more pages to the burdens associated with FATCA, FBARs, and troublesome side effects of citizenship-based taxation.
Do American expats need their own taxpayer advocate? Strictly speaking, the answer is no. The recent and current national taxpayer advocates have done an admirable job of identifying problems when they see them.
Still, there’s an old saying in Washington that the squeaky wheel gets the grease. Consider my modest proposal as an elevated form of squeaking. The more often influencers in political spheres emphasize the inequities of citizenship-based taxation, the more likely it is that reform becomes a possibility. For that reason, my pitch for a FATCA czar is more than justified.
It’s a wonderful thing to have a prominent voice at the IRS. Now let’s give the expat community one there as well. Change isn’t going to happen by itself, is it?
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