US Lawyers Look At International Tax Reforms For Individuals

By Editorial 06 December, 2013

The Taxation Section of the American Bar Association has written a letter to the United States Congress containing a description of options for the reform of international tax provisions for individual taxpayers.

The proposals in the letter, addressed to the bipartisan leaders of the House of Representatives Ways and Means Committee and the Senate Finance Committee, were submitted as part of a series of tax reform options prepared by the ABA's Section of Taxation, the objectives of which are to improve the tax laws and to make them simpler to understand and administer.

The Section's Committee on the US Taxation of the Activities of Foreigners and Tax Treaties, has pointed out that, over the years, various provisions have been added to the tax code to promote compliance, including by the means of information reporting and withholding taxes.

"Unfortunately," it adds, "some of these provisions have proven to be 'traps for the unwary' and in some cases create compliance burdens that cannot reasonably be met. In addition, concern with US taxpayers expatriating for tax purposes has resulted in laws that we anticipate will be difficult to enforce and that can result in significant double taxation."

The Section's proposals include a simplification of foreign bank account information reporting, in particular by providing a single form that is attached to the income tax return for both the Report of Foreign Bank and Financial Accounts (FBAR) and the newer Form 8938 Statement of Specified Foreign Financial Assets filing requirements, while also increasing the former's threshold from USD10,000 (which has never been increased since FBAR reporting was first required in the 1970s), to coincide with Form 8938's USD50,000 threshold.

In addition, it is said, many taxpayers may believe that because they have filed Form 8938 with their tax returns and reported financial accounts thereon, they have satisfied the FBAR filing requirements. This "trap" can lead to harsh penalties, even when the Internal Revenue Service has received (on Form 8938) all the information that is required to be reported on the FBAR.

The Section also includes changes to the expatriation tax provisions under sections 877 and 877A of Internal Revenue Code, applying to US citizens who have renounced their citizenship and long-term residents who have ended their US resident status for federal tax purposes.

For example, it proposes that Congress considers amending the definition of long-term resident to require a longer period of residence, such as 17 of 20 years, consistent with the United Kingdom residence standard for inheritance tax purposes; to count a year toward residence only if the individual was resident during 183 days of that year; and to take into account any year of residence for US income tax purposes (not just years of lawful permanent residence).

It is further suggested that, to account for inflation, Congress considers making annual adjustments to the USD2m net worth threshold required for application of section 877A, and that an expatriate should be allowed to exclude the mark-to-market gain on the deemed sale of a residence (which generally means that all property of a covered expatriate is deemed sold for its fair market value on the day before the expatriation date) to the same extent as an actual sale of that residence.

Tags: Individuals | Expatriates | Compliance | Finance | Tax | Tax Compliance | Law | Tax Thresholds | Legislation | Withholding Tax | United States | Tax Reform | Penalties | Expats | Tax |


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