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Thoughts on Exit Taxes in the Modern World by @VictoriaFerauge – Do the S. 877A rules go too far?

The above tweet references a comment that appeared on post written by Victoria Ferauge on her “TheFrancoAmerican-Flophouse.blogspot.com” blog. It is a old post that was written about “Exit Taxes” in general which she refers to as:

An exit tax is a tax that is levied against an individual or a corporation who wishes to transfer residency or citizenship from one country to another.  It is a tax on emigration and/or expatriation.  How does it work and what is its purpose?:

In general, ET [Exit Taxation] aims at levying the potential or latent gains (also called “hidden reserves”) related with the assets that an individual, a company or a PE located in a given country, economically (eg., through allocation to a foreign PE of a trademark or a shareholding), or physically transfer to another tax jurisdiction. A first feature of ET is, thus, related with the fact that it is imposed when no asset disposal takes place, and no revenue is generated.

It is a tax that the United States levies against certain individuals who relinquish U.S. citizenship. I recommend this Victoria’s post as an objective description of what is meant by an Exit Tax. I also found that I had left the following comment on the post:

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U.S. Republican senators write to Iranian leaders in attempt to undermine nuclear talks

“The Obama administration believes it has authority to lift most trade, oil and financial sanctions that would be pertinent to the nuclear deal in exchange for an Iranian promise to limit its nuclear programs. For the rest, it needs Congress’ approval. And lawmakers could approve new Iran sanctions to complicate matters.”

One more example of the use of sanctions in foreign policy. On this note see:

Don’t panic, American citizens in Canada: The IRS is not coming to seize your house

The comments to this article and other comments  express the concern over the content and the purpose of this article.

Two points:

1. U.S. tax law is NOT enforced by the IRS, it’s enforced by the tax compliance community.

2. Therefore, the tax compliance community has a responsibility to NOT “invent” the law that they are enforcing. For example, many tax practitioners in Canada assume that a TFSA is a “Foreign Trust” for U.S. tax reporting purposes. Income from a TFSA is taxable on the U.S. tax return. If it were a “Foreign Trust” it would be subject to additional (expensive) reporting requirements and penalties (think Form 3520). The author of this Financial Post article, Max Reed has been helpful  in taking the position that the TFSA is NOT a Foreign Trust for U.S. tax purposes.