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Appendix: G:

Correspondence With the Administration

The following materials contain copies of all letters sent to the Internal Revenue Service ("IRS"), Treasury Department, State Department, and Immigration and Naturalization Service ("INS”) and responses received in connection with the Joint Committee on Taxation staff research for this study. Tax return information that is subject to the disclosure requirements of Code section 6103 has been redacted from the responses received from the IRS and Treasury Department. In the case of the May 17, 1995, response from the State Department, the information referenced to be contained in TAB 2 has been included in Appendix H in a form that eliminates some of the extraneous information contained in the State Department computer printout.

Correspondence Included in Appendix G

Correspondence from JCT

1. Letter from JCT to IRS, April 4, 1995.

2. Letter from JCT to INS, April 4, 1995.

3. Letter from JCT to State Dept., April 4, 1995.

4. Letter from JCT to IRS and Treasury, April 7, 1995.

5. Letter from JCT to State Dept., April 20, 1995.

6. Letter from JCT Chairman and Vice Chairman to State Dept., April 25, 1995.

7. Letter from JCT to IRS and Treasury, May 5, 1995.

8. Letter from JCT to IRS and Treasury, May 16, 1995.

Correspondence to the JCT

1. Letter from State Dept., April 28, 1995.

2. Letter from IRS (reprint does not include sec. 6103 info), April 26, 1995.

3. Letter from Treasury, May 2, 1995.

4. Letter from State Dept., May 9, 1995.

5. Letter from Treasury, May 12, 1995

6. Letter from IRS (reprint does not include sec. 6103 info), May 12, 1995.

7. Letter from State Dept., May 17, 1995.

8. Letter from IRS, May 23, 1995

9. Letter from Treasury, May 23, 1995.

10. Letter from Treasury, Eric Toder (reprint does not include sec.

6103 info), May 23, 1995.

11. Letter from IRS (reprint does not include sec. 6103 info), May

26, 1995.

12. Letter from INS, May 31, 1995.

CONGRESS OF THE UNITED STATES,
JOINT COMMITTEE ON TAXATION,
Washington, DC, April 4, 1995.

Hand Delivery

The Hon. MARGARET MILNER RICHARDSON,
Commissioner of Internal Revenue,
Washington, DC 20224

DEAR COMMISSIONER RICHARDSON: The Self-Employed Health Insurance Act, passed by Congress as H.R. 831, directs the staff of the Joint Committee on Taxation to undertake a comprehensive study by June 1, 1995, of the issues raised by the President's proposal to impose a tax on U.S. citizens and certain U.S. residents who expatriate. As part of the study, we are required to examine the effectiveness and enforceability of current law with respect to the tax treatment of expatriation and the current level of expatriation of tax avoidance purposes. To fulfill this Congressional mandate, we request certain assistance from the Internal Revenue Service ("IRS"). The following is a preliminary list of issues with respect to which we require an immediate response from the IRS.

1. What are the problems with current law regarding the taxation of expatriates under Code sections 877, 7701(b)(10), 2107 and 2501(a)(3)? In a recent speech to the U.S.A. branch of the International Fiscal Association, you have indicated that the current rules have been ineffective "because departing taxpayers have restructured their activities to avoid these rules.” Please elaborate on the types of structures that taxpayers use to avoid the taxes imposed under present law.

2. In general, what is the IRS doing to enforce current law with respect to the taxation of expatriates? What is the IRS's experience in monitoring compliance in this area? How many people are currently assigned to administer the compliance with these provisions? How many taxpayers have filed tax returns under section 877? Are there any pending taxpayer controversies involving the provisions (e.g., cases under audit or litigation)? What procedure does the IRS follow to identify the potential cases?

3. Has regulation project ever been established under section 877 since the enactment of the law in the Foreign Investors Tax Act in 1966. If so, for what reason was the regulation project closed without the issuance or regulations? If not why was no regulation project ever opened? In light of a lack of regulatory guidance, what standards are currently applied in determining whether a taxpayer has relinquished his citizenship for tax avoidance motives?

4. In a white paper issued jointly with Assistant Secretary Samuels in 1993, you acknowledged that the Administration is facing tax compliances challenges of a global economy.1 The paper suggests that the Administration intends to expand its efforts to improve individual tax compliance in a global economy including, for example, simultaneous examinations of individuals by the United States and other taxing jurisdictions. Please indicate the IRS's experience to date in launching additional efforts in the enforcement of current provisions relating to taxation of expatriates. Please also illustrate to what extent the Administration has coordinated its enforcement efforts with our treaty partners.

5. We received a statement on March 17, 1995, from the Office of Assistance Commissioner (International) with respect to current IRS enforcement of section 877 (copy attached). We have the following questions regarding the statement:

a. The statement indicates that hard data on the number of U.S. citizens who renounce their citizenship for tax avoidance motive is not available. Yet, officials from the Department of Treasury have indicated that approximately two dozen very wealthy taxpayers with substantial unrealized gains would be subject to the pro

1 See Tax Compliance in a Global Economy: Statement of Policy and Action Plan, issued jointly by the Commissioner of Internal Revenue and the Assistant Secretary (Tax Policy) of the U.S. Department of the Treasury on December 17, 1993.

(G-2)

posed rules. Please explain the rationale behind the estimate that 24 individuals would be subject to the proposed expatriation tax each year if there is no hard data on U.S. citizens who renounce their citizenship to avoid U.S. tax. Furthermore, the press package released by the Department of Treasury on February 6, 1995 describing the Administration's proposal states that "the proposal would rarely apply to an individual whose gross assets are less then $5 million." It is our understanding that the Administration believes that taxpayers with less than $5 million of gross assets generally may be exempt from the expatriation tax proposal because of the $600,000 exclusion of gain available under the proposal. Please indicate, based on the IRS's experience, what is the correlation between the level of a taxpayer's gross assets and the amount of unrealized appreciation that is inherent in such assets.

b. The statement mentions that there is no current provision that requires the Department of State to notify the IRS when a U.S. citizen relinquishes citizenship. Please explain the extent to which Department of State information on expatriates (e.g., names, social security numbers, and new nationalities) is available to the IRS. Please indicate what laws or Administration procedures, if any, may need to be modified to enhance IRS access to such information.

c. The statement states that inquires about current section 877 have indicated that "presence of the provision has acted as a deterrent for the wide use of expatriation as a means of tax avoidance." Please provide information with respect to the type of inquires that the IRS has received on section 877 and the area of the IRS that has received such inquires.

d. The statement refers to the fact that there is no indication on Form 1040 whether an individual taxpayer is a U.S. citizen or resident alien. Consequently, a taxpayer who is subject to U.S. income tax on his worldwide income in a year, but is taxable only on U.S. source income (due to a change in his status to a nonresident alien) in another year generally does not raise the IRS's suspicion that the individual may be subject to section 877. Thus, the statement implies that identification of those taxpayers who potentially may be subject to section 877 could be facilitated by including a question on Form 1040 asking whether the taxpayer is a U.S. citizen, and a question on form 1040NR regarding whether a taxpayer had relinquished his U.S. citizenship within the past 10 years. Please indicate the rationale for not including such questions on the appropriate forms under the authority granted by section 6011.

e. The statement suggests that the IRS has historically used other provisions, including the gift tax provisions of the Code (instead of section 877) to enforce the U.S. tax fisc. Please describe how the gift tax provisions have been effective in collecting revenue that is lost due to lack of enforcement under section 877. Please also explain the other Code provisions that have been used for the same purpose.

f. Please explain how the stop-filer program works and whether such a program has been used to identify taxpayers who potentially may be subject to the current law applicable to expatriates.

I recognize the possibility that some of the information that I have requested may be subject to section 6103. Accordingly, pursuant to Code section 6103(f)(2) and (f)(4)(A), I request access to the information I have requested above. Please indicate in any responses you prepare which portions (if any) of the response contain information subject to section 6103 restrictions. I have authorized all members of my staff to receive this information as my designated agents.

I would like to obtain this information as soon as possible. If some of the information is available earlier than other information, I would like to receive whatever information is available as soon as possible.

Due to the time-sensitive nature of the study, I also request a meeting with relevant individuals from the IRS within the next week to discuss the above issues. One of may staff will contact your office early this week to coordinate the meeting. I appreciate your cooperation in this matter.

Sincerely,

Enclosure

KENNETH J. KIES,
Chief of Staff.

cc: The Honorable Leslie B. Samuels, Assistant Secretary (Tax Policy), U.S. Department of the Treasury. Joseph H. Gutentag, Esq., International Tax Counsel, U.S. Department of the Treasury.

2 See Statement of Leslie B. Samuels, Assistant Secretary_(Tax Policy), Department of the Treasury, before the Subcommittee on Taxation and Internal Revenue Oversight, Committee on Finance, United States Senate, dated March 21, 1995.

REVISION OF TAX RULES ON EXPATRIATION

Current IRS Enforcement of Section 877

Under the current provisions of IRC Section 877, a U.S. Citizen who renounces his/her citizenship for the purposes of avoiding payment of U.S. tax on worldwide assets may continue to be assessed U.S. tax for a period of ten years after the his/ her expatriation. Hard data on the number of citizens who have renounced their citizenship for this purpose is not available. There is also no current provision to have the Department of State notify the IRS whenever an expatriation occurs. Since the element of intent is involved, one cannot assume that all expatriations are for the purposes of avoiding U.S. tax.

Anecdotal information implies that this provision of the U.S. tax code has been applied in very few cases. Over the years, inquiries about the provision have indicated that the presence of the provision has acted as a deterrent for the wide use of expatriation as a means of tax avoidance. In addition, since the U.S. taxes on worldwide income for both citizens and resident aliens and citizenship is not an element on the Form 1040, a U.S. citizen who moves abroad, renounces his/her citizenship and then purports to now be a nonresident alien would not necessarily raise the suspicion that a Section 877 violation has occurred. IRS has historically used other provisions of the tax law, e.g., gift tax, in lieu of Section 877 in enforcing the code. Thus when an examination of a return, or a stop filer condition identifies a taxpayer who may be subject to this provision, experience has shown us that, in its present form, it is very difficult to identify, much less to prove, that an expatriation for avoidance of taxes was the intent.

Proposed Enforcement of the New Section 877 Provisions

The following are several of the steps that IRS proposes to use to enforce the new provisions of Section 877:

1. Require each citizen renouncing his/her citizenship to complete a form estimating the value of his/her assets at the time of expatriation.*

2. Require each expatriate who is subject to the tax to name a U.S. agent.

3. Require the Department of State to immediately notify IRS of all expatriates and provide a copy of the form listed in #1 above.

4. Upon receipt of the notification from State, research all available information to determine if the expatriate is subject to the tax.

5. For all those who are subject to the tax, immediately assign the case for the pre-filing review of the potential liability and identification of assets and their location.

6. In the case of any expatriate subject to the tax who fails to file the tentative tax within the required ninety days, a jeopardy assessment will be made and immediate enforcement actions to collect will be initiated.

*Note: Any necessary changes to Department of State/Immigration and Naturalization laws, regulations and/or procedures should be changed concurrently with enactment of this provision to ensure rapid, accurate and consistent enforcement of this provision by all Federal agencies.

CONGRESS OF THE UNITED STATES,
JOINT COMMITTEE ON TAXATION,
Washington, DC, April 4, 1995.

Hand Delivery

The Hon. DORIS M. MEISSNER,

Commissioner, Immigration and Naturalization Service,
Washington, DC 20001

DEAR MS. MEISSNER: The Self-Employed Health Insurance Act, passed by Congress as H.R. 831, directs the staff of the Joint Committee on Taxation to undertake a comprehensive study by June 1, 1995, of the issues raised by the President's proposal to impose a tax on U.S. citizens and certain U.S. residents who expatriate. As part of the study, we are required to examine the effectiveness and enforceability of current law with respect to the tax treatment of expatriation and the current level of expatriation for tax avoidance purposes. To fulfill this Congressional mandate, we request certain information from the Immigration and Naturalization Service ("INS") with respect to the ability of individuals to move into and out of the United States. The following is a preliminary list of issues with respect to which we require an immediate response from the INS:

1. A general description of the various types of visas available to individuals who wish to enter the United States, including eligibility criteria and the length of time that an individual may remain in the United States under each type of visa.

2. With regard to former U.S. citizens, information regarding the types of entry visas they may be eligible for, and the nature of any records that are kept of their movement into and out of the United States and/or the length of their stays.

3. Any circumstances under which an individual may enter the United States without an entry visa, the amount of time such individuals may remain in the United States, and the nature of any records that are kept with respect to such individuals.

4. The nature of any records that are kept with respect to the movement of lawful permanent residents (i.e., "green-card" holders) or other resident aliens into or out of the United States, the circumstances under which such status could be revoked or relinquished, and the procedures required for such revocation or relinquishment. Due to the time-sensitive nature of the study, I also request a meeting with relevant individuals from the INS within the next week to discuss the above issues. One of my staff will contact your office in the next few days to coordinate the meeting.

I appreciate your cooperation in this matter.

Sincerely,

KENNETH J. KIES,
Chief of Staff.

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