Individuals, Treasury, The State Department And IRC 6039G: Who has to report what when an individual renounces US citizenship?

Renunciation of U.S. Citizenship triggers a “Reporting Frenzy”!

It’s simply unbelievable. The renunciation of U.S. citizenship triggers more reporting obligations on the part of individuals and government agencies than anything else. More than birth. More than death. More than marriage. More than bankruptcy. More than conviction of a crime (probably). It’s unbelievable.

The purpose of this post is to “slice and dice” what those reporting obligations are.

Let’s Go On A Magical Reporting Tour

The rules governing information reporting when one relinquishes U.S. citizenship are found in Internal Revenue Code 6039G. They impose reporting obligations on “some” individual relinquishers (“covered expatriates”), the State Department whenever a Certificate of Loss Of Nationality has been issued and on U.S. Treasury. (I will comment separately on the situation of Green Card holders at the end of this post.) Most of this is summarized in the following two tweets. But, because this is so confused, I am going to take the time to parse the statute.

It’s all in Internal Revenue Code – 6039G Note that Section 6039G is found in Subtitle F which is the – “Procedure and Administration” – part of the Internal Revenue Code. In other words, it deals only with information reporting. It does NOT impose taxation. Interestingly, Section 6039G imposes reporting requirements on individuals, the State Department, U.S. Treasury (and in the case of Green Card holders) the Immigration authorities.

That pretty much sums it up. For those who want to understand the analysis …

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IRS Relief Procedures For Former Citizens Update – Relief For Former Green Card Holders Coming!

Introduction

On December 17, 2019 Gary Carter published a post on Tax Connections, which outlined the “Options Available For U.S. Taxpayers With Undisclosed Foreign Financial Assets“. It contained an excellent overview and analysis which included a discussion of the IRS definition of “non-willfulness” under the Streamlined Program. In commenting on the definiton of “non-willful” he noted that:

The IRS definition of non-willful covers a lot of territory. Negligence, for example, includes “any failure to make a reasonable attempt to comply with the provisions of the Code” (IRC Sec. 6662(c)) or “to exercise ordinary and reasonable care in the preparation of a tax return” (Reg. Sec. 1.6662-3(b)(1)). Further, “negligence is a lack of due care in failing to do what a reasonable and ordinarily prudent person would have done under the particular circumstances.” (Kelly, Paul J., (1970) TC Memo 1970-250). The court also stated that a person may be guilty of negligence even though he is not guilty of bad faith. So the fact that you ignored the FBAR filing requirements for many years, and failed to report your foreign income, might be negligent behavior, but it’s probably not willful. That means you likely qualify for one of the new streamlined procedures. On the other hand, if you loaded piles of cash into a suitcase and lugged it over to Switzerland to conceal it from the IRS, you don’t qualify, because that is willful conduct. If you believe your behavior may have been willful under these guidelines, consult with an attorney before submitting returns through one of the streamlined procedures. We work with attorneys who are experts in this field and we would be happy to provide a referral, free of charge or obligation.

Notably, the definition of “non-willfulness” for the Streamlined Program is the same as the definition for the new “IRS Relief For Former Citizens Program”.

Part A – IRS Relief For Former Citizens Who Relinquished U.S. Citizenship After March 18, 2010 (the date FATCA became law)

The program was announced on September 6, 2019.

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Presumptions, tax residency and presumptions of tax residency: Nonresident alien status in a FATCA world

Introduction – All The World Is A Multiple Choice Test
Q.1 – A tax resident of the United States is taxable on his worldwide income. According to the Internal Revenue Code of the United States, which one of the following is NOT a tax resident of the United States of America?
(A) A Congresswoman “Born In The USA”, head of her household, who does not and has never had a U.S. Passport
(B) An unmarried Green Card Holder who has never filed an FBAR who lives in El Paso Texas
(C) A fifty year old U.S. citizen who is divorced has never set foot in the United States, doesn’t have a U.S. Social Security Number and lives in and pays full taxes in Germany
(D) A citizen of only Canada who lives four months a year in Florida with his U.S. citizen wife, in a house he owns where he parks a car he owns with Florida license plates
(E) A citizen of Grenada who lives full time in the USA with an E1 visa operating a fast food franchise
For help in finding the answer see …
https://www.law.cornell.edu/uscode/text/26/1
https://www.law.cornell.edu/uscode/text/26/2
Q. 2 – A tax resident of Canada is taxable on his worldwide income. According to the Income Tax Act Of Canada, which one of the following is a tax resident of Canada?
(A) A Canadian citizen who lives in the United States but has no business, family, social or residential ties to Canada
(B) An individual with a house and family living in Toronto who works and lives in the banking industry in the Middle East
(C) A Massachusetts resident with a summer home in Ontario, Canada in which he visits 180 days every year
(D) An individual who is a legal permanent resident of Canada but actually lives in Hong Kong
(E) A rich Canadian who buys permanent residency in Portugal and uses a tax treaty tie breaker provision to deem himself to be a tax resident of Portugal
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Article 4 paragraph 2 of the US UK Tax Treaty: A clause preventing the use of the tax treaty tie breaker for some Green Card holders

Introduction – In The 21st Century The Most Important Thing About A Person Is His Tax Residency

Green Card holders are deemed to be U.S. tax residents under the Internal Revenue Code. In most circumstance,s Green Card Holders are also treated as U.S. tax residents under U.S. tax treaties.
U.S. Green Card holders have traditionally been able to use tax treaties to sever “tax residence” with the United States. This decision carries both burdens and benefits and should never be undertaken without competent professional advice. (For Green Card holders who are “long term residents“, the use of a “tax treaty tie breaker” will result in expatriation. Expatriation may trigger the imposition of the Sec. 877A Expatriation Tax.)

The tax treaty tie breaker is available if and only if the individual is, according to the tax treaty, a tax resident of BOTH the United States and the treaty partner country.
Typically the tax treaty tie breaker is a mechanism where one uses the provisions of the tax treaty to assign tax residency to one and only one country according to the tax treaty.

To repeat: a condition precedent to the use of the tax treaty tie breaker is that the individual be a tax resident of both countries according to the tax treaty.

Most tax treaties provide that if an individual is a tax resident of Country A according to domestic law, then the individual is a resident of Country A under the treaty. In other words, tax residency under the terms of the treaty follows from tax residency under domestic law.

Prior to the U.S. UK Tax Treaty of July 24, 2001, tax residency for Green Card holders according to the tax treaty, followed from tax residency under domestic law.

The U.S. UK Tax Treaty of July 24, 2001 changed this basic rule. The July 24, 2001 tax treaty contains a provision that provides that tax residency under the U.S. UK tax treaty, does not necessarily follow from tax residency under U.S. domestic law. Specifically Article 4 Paragraph 2 states that Green Card holders will NOT be treated as U.S. tax residents under the U.S. UK Tax treaty except as follows:

2. An individual who is a United States citizen or an alien admitted to the United States
for permanent residence (a “green card” holder) is a resident of the United States only if the
individual has a substantial presence, permanent home or habitual abode in the United States
and if that individual is not a resident of a State other than the United Kingdom for the purposes of a double taxation convention between that State and the United Kingdom.

Paragraph 2 of Article 4 provides a presumption against U.S. tax residency for Green Card holders resulting in U.S. tax residency under the U.S. U.K. tax treaty.

The purpose of this post is to explore the implications of this unusual provision and how it impacts Green Card holders who are tax residents of the UK.
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Green Card holders who have moved from the United States without properly severing US tax residency

Here is the scenario that this post is addressing:
An individual becomes a permanent resident of the United States (meaning that he has a Green Card). He lives in the United States for any number of years. He then moves away from the United States and returns to live in his home country. He is NOT aware that he must complete any specific steps (from either an immigration or tax perspective) to sever his ties with the United States.
He simply moves from the United States with the intention of no longer living permanently in the United States and:
1. Stops filing U.S. tax returns;
2. Fails to notify the State Department that he is abandoning his U.S. permanent residence.
While a resident of the United States he acquired significant pensions and IRAs.
Years later he reads an article in a newspaper that suggests that the United States still considers him to be subject to the full force of U.S. tax laws. Accessing the pensions will force him to file U.S. tax returns. He (as might be expected) is panic stricken and wonders what to do.
This is a very common scenario – what should he do?
The short answer is: it is completely dependent on the facts. This is one of the most difficult areas to advise in. The problem is that the person is likely to continue to be a tax resident of the United States and subject to all of the requirements of the Internal Revenue Code. The most appropriate response to this will depend on the interaction of a number of factors specific to the individual.
If you are in this situation, I suggest that you seek competent assistance sooner rather than later.
John Richardson – Follow me on Twitter @ExpatriationLaw