A part of our interview that really stands out to me is when Attorney Richardson referred to the current system of global taxation and compliance as immoral. I could not agree more. Why? A few reasons stand out. Our current system:
- Imposes compliance obligations on tax residents of other countries.
- Taxes due are usually nothing because of the foreign income exclusion and foreign tax credits or incredibly high because of that the type of income is one that was disfavored by Congress.
- Perhaps most importantly, tax compliance is a non-delegable duty. That is, a tax payer is always ultimately responsible. Yet we know it is impossible for a lay person to actually know if their tax professional is doing things 100% correct. And also, the fact is, as far as international returns go, the chances that a tax preparer is doing it correctly is remote. Either they don’t know how to do it correctly, or what is also common, is there there is no real “right” answers. There are competing answers all of which could be right, all of which could be wrong. Coming up with the best answer is communicating the real risks to the client so that they can make an informed decision.
The other surprise for me is when Attorney Richardson made the claim that the biggest victim on the complicated international taxation system is the IRS itself. Surprising, but true when you think about it. The IRS has limited resources and limited brainpower. International compliance is so heavy on the top talent that there needs to be a substantial payoff to justify the IRS’s examination function.
Yet even with the draconian $10,000 penalties and FBAR penalty they can assess, the IRS is still coming up short. The international compliance rate still remains incredibly low and while the revenue generated by the offshore disclosure programs seems impressive, in relation to other opportunities, the amount is tiny.
Consider, only 700,000 FBARs were filed ion 2016. And there is estimated that there are 9.0 million expats overseas, we should expect a large portion of them to have bank account and other assets in excess of $10,000. Additionally, there are 2.4 million H1B visa holders, they too still have foreign assets in their home country that needs to be reported. And since 1990, there have been 26 million Green Card holders, again many of them with assets they earned themselves overseas or inherited.
The fact is that over 1 in 10 Americans is an immigrant or an expat who possesses a substantial likelihood of having foreign income and asset reporting requirements. Those 700,000 FBARs really seem a little light. But Congress continues to give tax commands that the IRS can’t enforce — especially with half the revenue officers and agents they had in 2008. This is not the foundation of good governance or does it make the IRS an especially joyful place to work.
Ultimately the way forward for those looking to fix the law is that we need to refocus and acknowledge that everyone is suffering under the current regime. There is no one who is benefiting from the current state of affairs, with the exception of tax professionals who believe there is nothing else the market would pay them for other than to fill in the compliance holes the US government creates.
The way forward is for Republicans, Democrats, Socialists, Libertarians to unite with one consistent message: The bloated US tax system serves no one. The US tax system makes all American second class citizens and limits opportunity around the world. We need to put Americans first; we deserve a world-class taxing system that does not tax us around the world.
You can reach Attorney Richardson at john@citizenshipsolutions.ca.
