Mission Impossible: Extraterritorial Taxation and the IRS
Snyder, Laura; Alpert, Karen; and Richardson, John, "Mission Impossible: Extraterritorial Taxation and the IRS," 170 Tax Notes Federal 1827 (2021)
32 Pages Posted: 19 Apr 2021
Date Written: March 22, 2021
The uniquely American definition of “tax residency,” which includes the imposition of worldwide taxation on the tax residents of other countries, has delegated to the IRS the job of implementing three separate and distinct tax systems: residence, source, and extraterritorial. Through its system of extraterritorial taxation, the United States taxes the worldwide (including non-U.S. source) income of persons who are tax residents of other countries. This requires the IRS to do the impossible: to administer not only a domestic tax system for U.S. residents and a system of source taxation for nonresident aliens, but also an extraterritorial one. All three of these tax systems must be administered while adhering to the Taxpayer Bill of Rights.
Given the considerable challenges, it is little surprise that the IRS denies and/or rejects its responsibility to administer an extraterritorial tax system. This is evidenced, yet again, in its January 2021 Taxpayer First Act Report to Congress. International taxpayers, who are subject to the U.S. extraterritorial tax regime, suffer considerably as a result. Given the impossibility of the IRS’s mandate – both the position in which it is placed and the position in which it, in turn, places international taxpayers – it is imperative that the Department of the Treasury act. In the absence of legislative change, Treasury can and must make the needed regulatory modifications to relieve both the IRS and international taxpayers of the impossible burdens the United States extraterritorial tax system places on them – a system that violates the Taxpayer Bill of Rights, multiple international human rights instruments, and the U.S. Constitution.
Keywords: Extraterritorial Taxation, Citizenship-Based Taxation, Residency-Based Taxation, Department of Treasury, Internal Revenue Service, IRS, Regulatory Authority, Citizenship, Taxpayer First Act, International Taxation, Taxpayer Bill of Rights, Human Rights,
JEL Classification: H20, H22, H24, H25, H30, K33, K34
Suggested Citation: Suggested Citation