A Simple Regulatory Fix For The FATCA problems of dual citizens from birth

Prologue

It is clear that the US extraterritorial tax regime, which imposes taxation on the non-US source income of US citizens living outside the United States, is an outrageous violation of the sovereignty of other nations. It is also an extreme injustice inflicted on US citizens living outside the United States. The US has successfully exported the extraterritorial tax regime to the world through a combination of (1) The US Internal Revenue Code (2) the FATCA IGAs (hunting down US citizens) and (3) the saving clause in US tax treaties (Country X agrees that the US can impose tax on any individual who has been identified as a US citizen and is tax resident of Country X). To understand the interplay between (1), (2) and (3) above see the following article I wrote for the American Expat Finance News Journal.

The three groups most visibly impacted by the US Extraterritorial tax regime (in different ways) and its enforcement outside the United States include:

1. American Expatriates: I define these as US citizens temporarily living outside the United States. Because their financial/retirement planning is likely to be located in the United States, they are less concerned with the extraterritorial tax regime and less impacted by it.

2. American Emigrants: I define these as individuals who have moved permanently from the United States. Significantly, their retirement and financial planning is based on the rules and opportunities in their country of permanent residence (and likely citizenship). Their financial futures are likely to be destroyed by the extraterritorial tax regime. In fact, they are the ones who find that tax compliance with both US tax laws and the laws in their country of residence make financial planning a practical impossibility.

3. Accidental Americans: These are generally understood to be people born in the United States to parents who were temporarily in the United States (temporary job, students, etc.) Many of them have never filed US tax returns and do not consider themselves to be US citizens. Their primary issue is with FATCA and how it impacts their ability to hold financial accounts in their country of residence/citizenship. An excellent example of the problem of Accidental Americans is revealed in the following podcast.

Generally, Accidental Americans are more interested in ending FATCA or ending its effects on them. (They have not been particularly concerned with ending the US extraterritorial tax regime.) It is important to understand that ending FATCA will NOT end the US extraterritorial tax regime. The Paris based Accidental Americans Association has launched various lawsuits against FATCA. It has also launched a lawsuit against the US State Department claiming that the $2350 USD renunciation fee is unconstitutional.

Acquiring dual citizenship at birth

Note that any person “Born In The USA” (whether expat, emigrant or accidental) is a US citizen. That said, any person “Born In The USA” may have been born to parents who are citizens of another country. These people may, pursuant to the laws of those other countries, have become citizens of those other countries, because of their parent’s citizenship.

In other words, some US citizens are dual citizens from birth. The Internal Revenue Code very specifically and deliberately affords them benefits that those who were born ONLY with US citizenship do not have. They may have lived their lives in the United States or outside the United States.

A Simple Regulatory Fix For Dual Citizens From Birth

In 2020 I collaborated with SEAT co-founders Dr. Karen Alpert and Dr Laura Snyder to propose that the problems of the extraterritorial tax regime could be largely solved by Treasury Regulation. The article titled: “A Simple Regulatory Fix For Citizenship Taxation” may be read here. Our proposal would solve the problem for ALL Americans.

Q. What if a US citizen was lucky enough to have born to the right kind of parent(s)?

A. The Internal Revenue Code Section 7701(a)(50)(B) authorizes Treasury to provide “A Simple Fix For Those Who Were Dual Citizens From Birth”. Note that this solution is available ONLY for individuals who were dual citizens from birth. Here is how it would work …

One country, two citizenships: – some background …

1. One Country Two Citizenships: Citizenship for immigration purposes is different from citizenship for tax purposes

Until 2004 US citizenship for tax purposes was determined by whether one was a US citizen for immigration purpose. Effective June 3, 2004 the United States created a second kind of citizenship – citizenship for tax purposes. The purpose of creating citizenship for tax purposes was to ensure that individuals could NOT relinquish their citizenship for nationality purposes without providing notice to the United States (either to the State Department or to Treasury or both). The history of the “tax citizen” is discussed here. The current rules for giving notice of termination of US citizenship took effect on June 16, 2008 and are found in Internal Revenue Code 877A(g)(4).

(4)Relinquishment of citizenship

A citizen shall be treated as relinquishing his United States citizenship on the earliest of—

(A)the date the individual renounces his United States nationality before a diplomatic or consular officer of the United States pursuant to paragraph (5) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(5)),
(B)the date the individual furnishes to the United States Department of State a signed statement of voluntary relinquishment of United States nationality confirming the performance of an act of expatriation specified in paragraph (1), (2), (3), or (4) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(1)–(4)),
(C)the date the United States Department of State issues to the individual a certificate of loss of nationality, or
(D)the date a court of the United States cancels a naturalized citizen’s certificate of naturalization.
Subparagraph (A) or (B) shall not apply to any individual unless the renunciation or voluntary relinquishment is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the United States Department of State.

https://www.law.cornell.edu/uscode/text/26/877A

What 877A(g)(4) means:
Effective June 16, 2008 in order to cease to be a US citizen for tax purposes (sever tax residency with the United States):

– notice (DS-4081, DS-4081, DS-4079) must be given to the State Department; and

– a CLN (“Certificate Of Loss Of Nationality”) must be issued.

A CLN can be obtained only through an appointment at a US Consulate or US Embassy. The severance of US tax residency will (assuming the CLN is issued) be the date of the appointment at the Consulate. To be clear: the date of severance of US tax residency is the date that one appears at the Consulate (regardless of whether one is doing a real time renunciation or asking for a back dated relinquishment).

2. Internal Revenue Code 7701(a)(50) reinforces the “notice” requirement in 877A(g)(4)

(50) Termination of United States citizenship

(A) In general

An individual shall not cease to be treated as a United States citizen before the date on which the individual’s citizenship is treated as relinquished under section 877A(g)(4).

(B) Dual citizens

Under regulations prescribed by the Secretary, subparagraph (A) shall not apply to an individual who became at birth a citizen of the United States and a citizen of another country.

https://www.law.cornell.edu/uscode/text/26/7701

3. Clearly 7701(1)(50)(B) allows Treasury (by regulation) to specify that the “Notice Requirement” in 877A(g)(4) need NOT apply to individuals who were dual citizens from birth!!

(B) Dual citizens

Under regulations prescribed by the Secretary, subparagraph (A) shall not apply to an individual who became at birth a citizen of the United States and a citizen of another country.

(Note that dual citizens from birth are already granted an exemption to the 877A Exit Tax in certain circumstances.)

Conclusion

By the plain terms of the statute, Congress has given Treasury the authority to enact a regulation which would exempt “dual citizens from birth” from needing a CLN or Notice of relinquishment or BOTH from the expatriation regime.

In 2015 the Obama Budget proposed a possible fix to the problems of Accidental Americans. In 2019 the IRS created the Relief Procedures For Former Citizens compliance program. It’s unclear whether either initiative was linked to 7701(a)(50)(B).

There are a number of possible regulations that could solve the FATCA and US extraterritorial tax problems of dual citizens from birth. (Some of the problems result from the FATCA rules imposed on banks. Some of the problems result from renunciation and interaction with the State Department.)

Possible solutions for “dual citizens from birth” could include (but are limited to):

FATCA problems with local banks

1. Upon presentation of a US birth certificate and proof of a second citizenship at birth the bank the individual could certify that he was NOT a US citizen for tax purposes without the need for obtaining a CLN or a Social Security Number.

Relinquishment/renunciation issues with the State Department

2. Treasury could decree that a dual citizen from birth would lose US citizenship for tax purposes on the date that a prior relinquishing act under INA 349(a) had occurred. (In many cases this would be before an appointment at a consulate.)

These possible solutions are offered as examples to start the discussion. My point is that Treasury has specifically been given statutory authority by Congress to solve the FATCA and US tax problems of “dual citizens from birth” who are living outside the United States.

It’s high time that Treasury uses the express grant of regulatory authority that it is has been given!

John Richardson – Follow me on Twitter @Expatriationlaw

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