Mission Impossible: Extraterritorial Taxation and the IRS

Today the American Expat Financial News Journal published an article about a paper that recently appeared in Tax Notes Federal. The paper is entitled “Mission Impossible: Extraterritorial Taxation and the IRS.” Its authors are three of SEAT’s co-founders: Laura Snyder, Karen Alpert, and John Richardson.

As the paper explains:

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.

The paper is now available outside of a paywall, via SSRN, at this link.


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