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A New, Two-Pronged Attack on U.S. Expats?

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(Zephyr18/Getty Images) Maehr v. U.S. Department of State threatens to harm those already laboring under the burdens imposed by a U.S. citizenship-based taxation regime.

On July 20, the U.S. Tenth Circuit Court of Appeals unanimously upheld a decision from a Colorado district court that will have profound, negative implications for U.S. expatriates — those seeking to live and work abroad without renouncing their U.S. citizenship. If not limited or overturned by the U.S. Supreme Court, the ruling could lead to a new, two-pronged attack on a U.S. expatriate community already laboring under the burdens imposed by a U.S. citizenship-based taxation regime.

The U.S. system reduces Americans’ competitiveness abroad, disincentivizes investment, and treats nonresident U.S. citizens — including many who have lived abroad their entire lives — as full-time residents for tax purposes. If an American lives overseas and sources most of his or her income outside the U.S., it is destructive and unfair to tax that income as if it were earned in the U.S.

America’s citizenship-based tax regime has already made Americans toxic abroad for banks and potential business partners. If this case stands, it will represent yet another tightening of the ratchet. American expats will find that their ability to cross foreign borders (if they are outside the U.S.) or leave the U.S. has been dramatically curtailed or, in the latter case, ended.

*   *   *

The case, Maehr v. U.S. Department of State, involved a challenge to the Fixing America’s Surface Transportation Act. Among other things, the FAST Act gives the IRS the power to notify the State Department if a taxpayer owes more than $50,000 in federal taxes — a sum against which the IRS has a tax lien. Once the IRS has certified that the taxpayer has such delinquent tax debt, the State Department is prohibited from issuing the taxpayer a new passport and has the authority to revoke a current one (subject to certain emergency or humanitarian exceptions).

The appellant, Jeffrey T. Maehr, owed $250,000 in federal taxes and subsequently had his passport revoked under the State Department’s FAST Act authority. Maehr

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