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.
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) December 24, 2019
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 …
Introduction: For whom the “Form” tolls …
I would not want the job that the IRS has. There are many “information reporting requirements” in the Internal Revenue Code. The IRS has the job (sometimes mandatory “shall” and sometimes permissive “may”) of having to create forms that reflect the intent of the Internal Revenue Code. The forms will necessarily reflect how the IRS interprets the text and intent of the Code. Once created, the “forms” become a practical substitute for the Code. If you look through your tax return you will “form” after “form” after “form”. The forms reflect how the various provisions of the Internal Revenue Code are “given meaning” (if the meaning can be determined). The Form (in theory) follows the requirements of the Internal Revenue Code …
Every “form” is the result of one or more sections of the Internal Revenue Code. For example, Form 8833 is described as: Continue reading →
(g) Definitions and special rules relating to expatriation For purposes of this section—
(1) Covered expatriate
(A) In general
The term “covered expatriate” means an expatriate who meets the requirements of subparagraph (A), (B), or (C) of section 877(a)(2).
(B) Exceptions An individual shall not be treated as meeting the requirements of subparagraph (A) or (B) of section 877(a)(2) if—
(i) the individual—
(I) became at birth a citizen of the United States and a citizen of another country and, as of the expatriation date, continues to be a citizen of, and is taxed as a resident of, such other country, and
(II) has been a resident of the United States (as defined in section 7701(b)(1)(A)(ii)) for not more than 10 taxable years during the 15-taxable year period ending with the taxable year during which the expatriation date occurs,
Notice that the “dual citizen exemption” operates so that the individual does NOT become a “covered expatriate” if he meets the tests of “subparagraph (A) or (B) of section 877(a)(2)” (the income test or the asset test). The “dual citizen exemption” does NOT absolve the individual from meeting the “tax compliance test” found in section 877(a)(2)(C) of the Internal Revenue Code, which reads as follows: Continue reading →
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) June 21, 2015
How could somebody possibly not know about FBAR?
In our case my wife hailed from the Republic of Ireland. We were married in the early 1990’s. As any immigrant knows it is a hard road. Homesickness, difficulties with the Immigration Service, it’s an enormous adjustment. In our immigration packet of hundreds of documents I recall one that was quite frightening. It was from the US treasury and said that if you have more than $10K in assets you need to file an FBAR or you could lose half of what you owe. Thankfully we didn’t owe anything. At that time there was not 1040 tax requirement to list all overseas assets. That came in a few years later, about 1998. By 1997 my wife received a small lump sum pension. It put her over the limit, but by then we had plenty of other issues consuming us that drove the FBAR issue out of our line of sight. She was suffering from a mysterious illness that was weakening her by the month, she was homesick and I was struggling on a new job. I work somewhere else now. It was a very difficult time and difficult times can leave you open to mistakes.
Eventually somehow around 2000 I was reminded of the FBARs but realized that we were already in deep trouble. Had the first offense been in any way reasonable I would have paid up and gotten into compliance. The penalties however were far too harrowing. Today, you look on the internet and there are articles by the hundreds about filing an FBAR. Back then, because the government wisely didn’t enforce the FBAR rules and their draconian penalties, except for the most egregious offenders there simply were no reminders out there.
Fast forward to about 2010 and FBARs suddenly were pressing news, but for many it was simply too late.
There are several problems with the current scheme. Number one the penalties are insanely draconian for people who often owe less than $1K in taxes over the past 8 years. In our case that translates to $10K to a lawyer (the IRS highly suggest you get one) and $29K in IRS penalties. Any way you cut it that is a $40K penalty for less than $1K in back taxes. In fact it is possible that my attorney didn’t include foreign tax credits which could have brought our back taxes down to $0K. Because he is afraid of the Big Bad IRS, he doesn’t want to irk them and get penalized worse or rejected from the OVDP program. Another crazy thing is that if the IRS owes YOU in back taxes for previous years that doesn’t count by their reckoning. The only thing that matters is what you owe them. Therefore if they owe you $5K over the past 8 years but you owe them $3K over the past 8 years – are you ready for this accounting trick ? Therefore you owe them $3K over the past 8 years. They forgive themselves for the $5K that they owe you over the past 8 years. Therefore if in the Real World if you were owed $2K by the IRS thus strengthening your hand in opting out of the OVDP, think again. They only count what you owe them and you cannot carry forward what they owe you to cancel out what you them. How freaking convenient is that ?
This is a very dangerous trend. When truth and common sense are not the basis for our laws and regulations then we cease to live in a free and democratic society.
As I mentioned previously, every day, you and I are either heading to the light or to the darkness. We choose. We make the same choices with our country. It is “We The People” that is the conscience of our government. If we are too indulgent of our government, it is our fault if our government grows perverted, out of control and rapacious. We The People are our countries disciplinarian. We The People make our own collective breaks in what type of government we must live with. Silence is not Golden. It’s Golden only to tyrants.
This post was prompted because …
Today I had a brief conversation with somebody who was moving to America. I thought I would share some thoughts from the conversation. After all, tens of thousands of people move to the United States each year. Some move there as U.S. citizens. Some move there on Green Cards. Some move there on another type of U.S. visa.
The purpose of this is to reinforce some very simple points. I find that people always have more trouble remembering what’s simple. Here goes: Moving to America 1. Taxation of income from your remaining “non-U.S. assets”
You will be shocked to find that many of your “foreign assets” will be subject to particularly punitive U.S. taxation. 2. Reporting of your “non-U.S. assets”
If you are moving to America, you are moving from another country. You will very likely retain financial assets and bank accounts in that country. From a U.S. perspective, these assets are “foreign” and therefore a “fertile ground” for taxation and penalties. Please remember that if you are:
– a U.S. citizen – Internal Revenue Code – S. 7701(a)(1)(50)
– a Green Card holder – Internal Revenue Code – S. 7701(b)(1)(A)
– a person who meets the substantial presence test – Internal Revenue Code – S. 7701(b)(3)
that you are required to file FBARs, FATCA Form 8938s and possibly more forms (the same forms required of Americans abroad) and reporting requirements. Those who are leaving behind a limited company may meet the requirements to file Form 5471.
The failure to meet these reporting obligations has caused untold misery for may immigrants to the USA. Remember how many immigrants to the U.S. were damaged by the OVDI program in 2011. (The hyperlink in the previous sentence leads to a post with 382 comments!) 2. Make sure that you know the fair market value of any assets that you own at the time of your move to the USA. This (depending on your status at the time you entered the U.S.) may have implications for future taxes (including the S. 877A Exit Tax). 3. If possible do NOT enter the U.S. on a Green Card and do NOT acquire a Green Card.
If you acquire the Green Card you are one step away from being subjected to the S. 877A Exit Tax if you decide to leave America! If you only want to live in the United States for business reasons, you should consider a visa that does not allow for “permanent residence” AKA the Green Card. Examples include the E-1 and E-2 visa. Green Card Holders Moving From America
".. also include the green card holders who left, were never citizens anyway, and have no intention of returning." http://t.co/2s5Ifq5sY6
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) June 22, 2015
Potential problems exist for those with a Green Card who move from the USA. A partial list includes:
1. Read S. 877A of the Internal Revenue Code. You will see that if you held a Green Card for 8 of the last 15 years, you will be a “long term resident” and subject to the S. 877A Exit Tax rules.
2. You are deemed to be a tax resident until you File I-407 (or other reasons described in Internal Revenue Code Sec. 7701(b). In order to cease to be a “U.S. tax resident” you would file your I-407. But, be careful! The filing of your I-407 may (depending on whether you are a “long term resident”) trigger the Exit Tax rules! To put it simply: If you file the I-407, and you are a “long term” resident, you will be subject to the S. 877A Exit Tax rules. Extreme caution is warranted! Moral of the story! Be careful. You will avoid many problems by avoiding the Green Card. Conclusion:
To be forewarned is to be forearmed!
1995 – The origins of the S. 877A Exit Tax – Video of House Oversight Committee
This testimony in this video covers a number of perspectives. It includes a consideration of whether the S. 877A rules are a “human rights violation”. This video should be watched in its entirety. It illustrates the viciousness of the Exit Tax and the attitude of the Clinton administration. There is a suggestion that the purpose of the S. 877A rules was to “keep people from leaving”. If you find any testimony or questions that address the problems of “Americans Abroad”, please leave a comment describing the speaker, time and the substance. It appears that there was little or no consideration of how this would affect “American Citizens Abroad”. Continue reading →
At least the departure tax has a sliver of logic to it, and an appropriate name. To have to pay a US “exit tax” when I left empty handed over thirty years ago, beggars belief. Perhaps if they called it an escape tax or freedom tax that would make more sense.
Composing this series of posts about the U.S. S. 877A “Exit Tax” made me realize that “Exit Taxes” are a prism through which to view a country’s tax system. Any kind of tax imposed on leaving the “tax jurisdiction” of a country will reveal much about the fairness of a tax system. Yet there has been little discussion of “Exit Taxes”. In theory an “Exit Tax” is imposed when one emigrates from one country and immigrates to another country. This is how “Canada’s Departure Tax” works. It is NOT how the U.S. “Exit Tax” works.
I recently came across an interesting book written by Nancy Green and Francois Weil titled: Citizenship and Those Who Leave: The Politics of Emigration and Expatriation The description includes:
Exit, like entry, has helped define citizenship over the past two centuries, yet little attention has been given to the politics of emigration. How have countries impeded or facilitated people leaving? How have they perceived and regulated those who leave? What relations do they seek to maintain with their citizens abroad and why? Citizenship and Those Who Leave reverses the immigration perspective to examine how nations define themselves not just through entry but through exit as well.
This is Part 6 of a 9 part series on the Exit Tax. The 9 parts are: Part 1 – April 1, 2015 – “Facts are stubborn things” – The results of the “Exit Tax” Part 2 – April 2, 2015 – “How could this possibly happen? Understanding “Exit Taxes” in a system of residence based taxation vs. Exit Taxes in a system of “citizenship (place of birth) taxation” Part 3 – April 3, 2015 – “The “Exit Tax” affects “covered expatriates” – what is a “covered expatriate”?” Part 4 – April 4, 2015 – “You are a “covered expatriate” – How the “Exit Tax” is actually calculated” Part 5 – April 5, 2015 – “The “Exit Tax” in action – Five actual scenarios with 5 actual completed U.S. tax returns.” Part 6 – April 6, 2015 – “Surely, expatriation is NOT worse than death! The two million asset test should be raised to the Estate Tax limitation – approximately five million dollars – It’s Time” Part 7 – April 7, 2015 – “The two kinds of U.S. citizenship: Citizenship for immigration and citizenship for tax” Part 8 – April 8, 2015 – “I relinquished U.S. citizenship many years ago. Could I still have U.S. tax citizenship?” Part 9 – April 9, 2015 – “Leaving the U.S. tax system – renounce or relinquish U.S. citizenship, What’s the difference?”
Many Americans abroad have had their lives turned upside down by the combination of FATCA and the enforcement of U.S. “place of birth” taxation. Those who are “long term” residents abroad find themselves caught between a “rock and a hard place”.
On the one hand they can’t afford the costs and complexity of filing U.S. tax returns.
On the other hand, many “middle class” Americans abroad cannot relinquish their U.S. citizenship (freeing themselves from the complexity of U.S. tax laws and the IRS) without paying the U.S. an “Exit Tax”.
Many Americans abroad can neither afford to comply with U.S. tax laws nor afford to relinquish U.S. citizenship. The “Exit Tax”
Yes, many “long term” U.S. citizens abroad are in a position where they are forced to “buy their freedom from the U.S. Government”. I am reminded of one of Ronald Reagan’s great speeches where he noted, that when it comes to Americans:
“The price of our freedom has sometimes been high. But, we have never been willing to pay that price”.
I often wonder what President Reagan would have thought of the America today. Yes, the United States of America has joined some of the nastiest regimes in history with it’s “Exit Tax”. (Well, we all know, there must be a good policy reason for it. Just ask your Congressman.)
Not all Americans abroad are subject to the “Exit Tax”. Only “covered expatriates” are subject to the “Exit Tax”.
The obvious question is: “How does somebody become a “covered expatriate?” Continue reading →