An organization known as American Citizens Abroad (ACA) has provided testimony to the Senate Homeland Security and Governmental Affairs Permanent Investigations Subcommittee following its recent hearing on offshore tax evasion. The ACA has recommended that the US should implement a residence-based tax (RBT) system to avoid penalizing American expatriates.

The ACA has proposed that, as part of a general tax reform package, an option should be provided to citizens who are long-term non-resident citizens to be taxed as non-resident aliens if they meet certain conditions. For example, the option could apply where an individual has completed a minimum period of residence abroad, and an exit tax could be imposed on taxpayers opting for taxation as non-resident aliens where they are deemed to sell all assets at the time of election.

Under the current citizenship-based tax (CBT) system, US citizens living or working abroad remain subject to US taxation as though they were still US residents. Under RBT, only US residents, whether they are Americans or foreigners, would be subject to US income, estate and gift taxation. US citizens resident abroad would be taxed under essentially the same rules that are applicable to non-resident aliens.

Even Americans abroad who are in full compliance with US taxes are being significantly affected by their US tax position. For example, they are closing accounts due to the FATCA legislation, investment in local non-US mutual funds is impossible due to the passive foreign investment reporting requirements, and efficient saving for retirement is not possible due to the US tax treatment of contributions to foreign pensions.

The 3.8 percent Medicare Tax is being imposed with no allowance for foreign tax credits. This effectively gives rise to double taxation and is unfair as US citizens abroad do not have access to Medicare.  The ACA attributes these problems to the CBT system coupled with aggressive techniques to prevent tax evasion, and suggests that the tax system should be reformed to a residence based system that is in line with the rest of the world.