“I relinquished U.S. citizenship many years ago. Could I still have U.S. tax citizenship?”
Attn: Former U.S. Citizens: Are you STILL or have you EVER BEEN a U.S. “Tax Citizen”?
This is a long post. In fact, it is too long for the average reader. Therefore, I wish to summarize the purpose and possible (but not certain conclusion) of the post in a few simple sentences.
If you were born in the United States (and became a U.S. citizen at birth) who moved to Canada and naturalized as a Canadian Citizen prior to June 3, 2004:
1. Without informing the U.S. State Department or applying for a Certificate of Loss of Nationality; and
2. You are hearing from the media and some members of the tax compliance community that you are either still a U.S. citizen and/or are somehow liable for U.S. taxes; then
You should NOT believe that you are still a U.S. citizen and/or are that you are subject to U.S. taxation without getting proper counselling.
In other words you should NOT:
– apply for a Certificate of Loss of Nationality
– file U.S. tax returns
– renounce U.S. citizenship
without a thorough investigation of your situation. You may or may not be a U.S. citizen who is subject to U.S. taxation.
Extreme caution is warranted. Every case is fact specific.
Please note that this post is NOT legal advice of any kind whatsoever. You meed to discuss your specific circumstances with a competent adviser of your choice.
To understand why, read on …
Introduction – This post is written primarily for former U.S. citizens who:
-relinquished U.S. citizenship, pursuant to applicable U.S. law, prior to June 3, 2004;
– did NOT seek a “Certificate of Loss of Nationality (“CLN”) at the time of relinquishment;
– are concerned over their possible status as a “U.S. citizen” for “tax purposes” and the issue of U.S. taxes
Note that a “renunciation” of U.S. citizenship is one way of “relinquishing” U.S. citizenship. Conduct which results in the “relinquishment” of U.S. citizenship is defined in the “Immigration and Nationality” Act. As I have previously written:
Note that since 2004, it is possible to be a U.S. citizen for tax purposes (you have to pay taxes) but NOT be a U.S. citizen for nationality purposes (no benefits of U.S. citizenship). See here.
Caution is warranted. Without providing definitive advice, this post explores some things that you need to consider …
(If you were issued a “Green Card” and either no longer reside in the United States or are considering moving from the United States – read this helpful post by Virginia La Torre Jeker.)
If you’re “Born In The USA“, it’s hard to live outside the USA
— Citizenship Lawyer (@ExpatriationLaw) November 21, 2014
Introduction – Framing the question:
Concern: people who relinquished citizenship decades ago are being told they must formally renounce + file US taxes. http://t.co/5l8Pyge0MW
— Citizenship Lawyer (@ExpatriationLaw) December 17, 2014
The above tweet references the following comment from “Homelander_Not“ that appeared at Robert Wood’s Description of “20 really stupid things in the U.S. tax code“. Interestingly Mr. Wood identifies the tax treatment of both American DNA people abroad and American corporations abroad as two of the twenty really stupid things. (I have added my own links to parts of the comment.)
This is a great article! I am very glad to see someone “tell it like it is” with regard to expatriates. Must be especially difficult when working in your profession. Hats off to you!
So far, my experience with accountants and lawyers in this area, suggests that many simply do not have a full grasp of the situation. I do not mean they are dishonest but rather, the situation created by the US’ policy of ‘cracking down’ on “tax cheats” with foreign accounts and the rise in the numbers who are leaving the country, has created something no one has any experience with. These actions of the US seem truly to be, a major shifting point in history. I fear the outcome is unlikely to be good for the country.
A major concern is that people who relinquished their citizenship decades ago are being told they must formally renounce at a consulate, they must file taxes and so on. The same thing is happening with “border babies” and other types of “Accidental Americans.” The fact is, citizenship law is complex. What is true for someone renouncing today is not necessarily the same for people who have a different situation outside of simple dual-citizenship. And yet, if you read what the compliance industry is saying, this is “it” – you must become compliant, file 8854 and pay that outrageous $2350. I have even seen a prominent law group go so far as to say that even if one really isn’t a USC via long-term relinquishment, not having CLN primarily makes you one. This is at least immoral if not in a sense, criminal. The banks insisting on CLN’s is creating even more of a problem. The IGAs do not say only a CLN but offer “or a reasonable explanation” of why one doesn’t have it.
We already have some of the compliance industry more-or-less determining policy & law (erroneously), now the banks? At what point does this get corrected? And more importantly, how to do it?
The link mentioned in the other post about ‘Form People is simply hilarious! Thanks to the poster for the laugh.
The “anxiety” caused by a U.S. place of birth – “I didn’t choose where I was born”
“Homelander_Not” has provided an insightful comment that is rooted in confusion, apprehension, anxiety and fear. The comment confirms that those with a “U.S. place of birth” feel under attack from:
– The U.S. government – with its attempts to force “non-U.S. residents” to pay U.S. taxes
– The Government of Canada – (or any other non-U.S. country of residence) – which has implemented a FATCA IGA to assist the U.S. government in identifying those with a “U.S. birthplace”
– Some lawyers and accountants – who seem willing to frighten people into compliance with U.S. laws without consideration of whether the laws apply to them because they may not be “U.S. citizens” (or other U.S. persons)
– The banks and investment companies – who are forcing those with a “U.S. birthplace” to prove that they are NOT U.S. citizens
Those with a “U.S. place of birth” and “non-U.S. residence” are under attack and are living in a state of fear, confusion, anxiety and distrust. Clearly they have few places to turn.
Leaving aside the question of the “morality” or (“perhaps” lack thereof) of attempting to tax those who are ARE “U.S. citizens abroad”, the bigger problem is the attempt to capture “former U.S. citizens” in the U.S. “Offshore Jihad”.
“Homelander_Not” summarizes the anxiety experienced by many people who were born in the United States and either:
A. Relinquished U.S. citizenship (according to U.S. law) years ago (certainly prior to June 3, 2004); and/or
B. Simply do NOT believe that they are U.S. citizens and don’t have any connection to the United States that they believe could justify having a duty to pay U.S. taxes. (This is one of the issues explored in the 2014 ACA Conference on citizenship-based taxation that was held in Toronto, Canada.)
There are TWO major circumstances that have triggered acute “U.S. Birthplace Anxiety”
First Circumstance – “FATCA Hunt” has begun and the “FATCA Letters” are coming
This problem can be understood by considering both tax law and immigration law. Interestingly, the definition of U.S. citizen has a meaning in “immigration and nationality” law that is different from the meaning in “tax law”. Yes, it’s true. The United States of America has two kinds of citizens.
At the risk of oversimplification I will use the following terms:
“Citizen(s)” = A U.S. citizen as defined for purpose of “Immigration and Nationality” law (“Immigration and Nationality Act”). “Citizens” have existed for hundreds of years.
“Tax Citizen(s)” = A U.S. citizen for the purposes of U.S. tax law (“Internal Revenue Code”). This is a “new and improved” kind of citizen. We will call this the “Tax Citizen”. A “Tax Citizen” has none of the benefits of being a “Citizen” including the right to vote. A “Tax Citizen” was created for only one purpose. The sole purpose of the “Tax Citizen” is to pay U.S. taxes. Fortunately, the “Tax Citizen” did NOT exist prior to June 3, 2004.
There are rumored to be millions of people who emigrated from the United States to Canada and other countries. They were likely U.S. “Citizens” at the moment of emigration. There is evidence that only a small percentage of them either knew or know of their U.S. tax obligations and reporting requirements. Given that the U.S. is the only industrialized country in the world that practices “extra-territorial taxation”, ignorance of U.S. tax law is excusable. (Nevertheless, In 2011 the Obama administration began an unprecedented retroactive enforcement campaign which continues today.)
Many of those “emigrants” subsequently performed a “Relinquishment” and ceased to be U.S. Citizens”. They have lived for years under the assumption that they were NOT U.S. citizens. Some of them are receiving “FATCA letters”. Others are hearing, through the media, that they “may” be U.S. “Tax Citizens”. The vast majority of them are experiencing fear, confusion and uncertainty over BOTH their status as U.S. “Citizens” (fearing they may somehow have been reclaimed) and their status as U.S. “Tax Citizens”. They are turning to their “trusted” advisers (in most cases accountants) for guidance with their OMG – “Oh My God Moment“.
If you have recently had your OMG moment you may want to read “What you should consider before consulting a lawyer” (or any other adviser).
It’s vital that you consider the question of …
Does U.S. tax law apply to you at all? Are you a “Tax Citizen”? People must determine their status as “Citizens” and “Tax Citizens” before they consider any tax issues. “Citizenship” for nationality purposes is a different issue from citizenship for “tax purposes”. Most tax advisers, banks and financial advisers are NOT qualified to advise on “citizenship issues”!
The FATCA Letter
(If you are a U.S. “Citizen” who has received a FATCA letter you might find this “FATCA Letter” post to be a good starting point.)
Since July 1, 2014, FATCA compliant countries, have been identifying people who are known to have been (as Bruce Springsteen sings) “Born In The USA”. Those people began life as U.S. “Citizens”. If they are still “Citizens” they are subject to U.S. tax, form and penalty obligations. If they are NOT U.S. “Citizens” then they may or may not (depending on their “Relinquishment Date”) be “Tax Citizens”. Those “Born In The USA” must clarify their status as “Citizens”. They either are or are not “Citizens” according to the “Immigration and Nationality” laws of the United States. If they are NOT “Citizens”, then the question becomes:
What was their “Relinquishment Date”?
Those with a “Relinquishment Date” after June 3, 2004 are “Tax Citizens” until they satisfy the S. 877 or S. 877A notice requirements. What about those former “Citizens” with a “Relinquishment Date” prior to 2004, who neither notified the U.S. Government nor obtained a “Certificate of Loss of Nationality (“CLN”)?
The tax compliance community, media and banks are encouraging you to consider:
Are you or have you ever been a U.S. citizen? It’s time to check and clarify whether you may be a U.S. citizen!
The three ways of “clarifying U.S. citizenship”
1. Some are currently renouncing their U.S. citizenship. They will be “Tax Citizens” until they comply with the S. 877A rules. (Be very careful what you do!)
2. Some are seeking Certificates of Loss of Nationality based on pre-2004 “Expatriating Acts”. (Be very careful what you do!)
3. Some who committed “expatriating acts prior to 2004 are NOT seeking Certificates of Loss of Nationality. (They take the position that they relinquished U.S. citizenship under the Immigration and Nationality Act prior to June 3, 2004. Prior to June 3, 2004 there was no such thing as a “Tax Citizen”. Nothing more was required. Furthermore, loss of citizenship under the Immigration and Nationality Act is NOT and was NOT dependent on being issued a Certificate of Loss of Nationality).
The important question is …
Did those in categories “2” and “3”, on June 16, 2008, become “Tax Citizens” under S. 877A of the Internal Revenue Code even though they relinquished U.S. citizenship years ago – before the concept of “tax citizen” was invented? This brings me to the second issue.
Second Circumstance – The issue of “Tax responsibilities of expatriation” is of great concern because:
If you are a “Tax Citizen” then you have the “Tax responsibilities of expatriation”.
(Note: What the specific “Tax responsibilities of expatriation” are, is a different question from:
“Who is a “Tax Citizen” and is therefore subject to the “Tax responsibilities of expatriation”?
The specific responsibilities of expatriation began in 1966 and were changed in 1996, 2004 and 2008 with the Exit Tax.)
Since 2004, those who relinquished U.S. citizenship (after June 3, 2004) and ceased to be “Citizens” are still considered “Tax Citizens” until they meet the “Tax Responsibilities of expatriation”. This principle was established in two successive laws.
First, the “American Jobs Creation Act” – taking effect on June 3, 2004, those relinquishing U.S. citizenship and ceasing to be “Citizens” were considered to be “Tax Citizens” until they complied with the 2004 “Tax responsibilities of expatriation”; and
Second, the “HEART Act” – taking effect on June 16, 2008 (which replaced the 2004 “American Jobs Creation Act”). Under the HEART Act, those relinquishing U.S. citizenship and ceasing to be “Citizens”, are considered “Tax Citizens” until they comply with the 2008 “Tax responsibilities of expatriation”. The 2008 “Tax responsibilities of expatriation” are different from the 2004 “Tax responsibilities of expatriation”. The 2008 HEART act includes the possible payment of a draconian “Exit Tax” – a tax without precedent in world history. (The direct imposition of the “Exit Tax” coupled with significant compliance costs and the possibility of the payment of past taxes and interest will likely result in the confiscation of a significant portion of your retirement assets!)
(Note that “expatriation” issues were incidental to the principal purposes of both the “American Jobs Creation Act” and the HEART Act.)
These rules are currently found in S. 877A of the Internal Revenue Code under the heading of:
“Tax Responsibilities of expatriation”
The concern reflected in the comment from “Homelander_Not” is whether these “Tax Responsibilities of expatriation” apply to people who relinquished U.S. citizenship prior to June 16, 2008. The legislative history on S. 877A is sparse. The IRS has never specifically stated that the S. 877A rules apply to those who “relinquished” prior to June 16, 2008. Yet, some members of the legal and accounting community are advising that the S. 877A rules apply to ALL former “Citizens”, regardless of their “Relinquishment Date”. If true, this would mean that the “Tax responsibilities of expatriation” would apply to any person who ever was a U.S. “citizen”, regardless of his “expatriation date”.
Understand that the “Exit Tax”, compliance costs, past tax owing, interest and penalties (need I continue?) have the potential to result in the confiscation of a significant portion of your retirement assets.
What follows is an accurate description of “U.S. birthplace anxiety”:
It’s a large world out there. People move from the United States to many different countries with a variety of different customs, languages and cultures. But however different their circumstances may be, many expatriates of the United States have one thing in common. Having relinquished their U.S. citizenship long ago, they now live in fear. They wake up in a cold sweat worrying that the IRS will effectively pull the lever on a time machine, rewriting history so that their relinquishment of U.S. citizenship never happened, and exposing them to decades worth of taxes, plus, of course, interest and draconian penalties. As discussed in greater detail below, this article is written in the hope that the IRS will issue written guidance putting their fears to rest
Michael Miller and Ellen S. Brody – Expats Live in Fear of Malevolent Time Machine – March 5, 2013
Again, the concern expressed by Mr. Miller and Ms. Brody, is whether the S. 877A rules apply to those who relinquished U.S. citizenship prior to June 16, 2008. (A “renunciation” is one form of “relinquishment”.) Are the S. 877A rules somehow retroactive in application? Could it really have been the intent of the United States to confiscate the present day assets of those who ceased to be U.S. citizens many years ago?
Perhaps, but the interpretation of “retroactive confiscation” includes the following three fantastic assumptions.
1. Fantastic – The idea that the U.S. Congress (remember that’s where the law comes from) intended to retroactively confiscate the retirement assets of former U.S. citizens (living outside the United States) is fantastic.
2. More Fantastic – The idea that the retroactive confiscation of wealth could have been intended without that specific intention clearly conveyed in the statute (which was buried in a section of the “HEART Act”) is more fantastic.
3. Most Fantastic – The idea that a former U.S. “citizen” should have to consult a lawyer to determine whether the law (which nobody would even imagine exists) should be interpreted as confiscation of (“post U.S. “Citizen”) assets is the most fantastic.
Could the “HEART ACT” really be that “heartless”? What is the “plain language” of the statute? How should it be understood?
Should the IRC S. 877A Expatriation Rules be understood to be: Young Lady (keep assets) or Old Hag (lose assets)?! https://t.co/9rQIVEDf32
— Citizenship Lawyer (@ExpatriationLaw) May 7, 2015
We begin by reading the statute itself. We begin with the plain wording of S. 877A of the Internal Revenue Code. What is the “plain language”? What does it actually say? There are two perspectives:
1. The plain language of S. 877A suggests that the section is NOT intended to apply retroactively.
2. The plain language suggests that S. 877A does apply retroactively.
“Retroactive application” – The “Genesis” of the concept
The concept of “retroactive application” appears to have its Genesis in the tax compliance community. Why do they do so? What is their justification? As “Homelander_Not” implies this issue is of vital importance.
If you relinquished U.S. citizenship prior to June 16, 2008 you must understand any possible “877A issues” before consulting a lawyer or an accountant. The retention of your retirement savings may depend on it!
A self-fulfilling prophecy
Americans abroad who retain professional tax advisers generally follow the advice they receive from the adviser. U.S. law can be very complicated. U.S. law can be very unclear. Therefore, advisers often formulate their advice based on how their colleagues interpret the law. Therefore, if a “critical mass” of of tax advisers presumes that S. 877A has retroactive application, and enough advisers follow this advice, S. 877A may evolve to the point that it does – in practice – have retroactive application.
To put it another way: Might the tax community create a situation where S. 877A is understood to be retroactive and (in practice) becomes retroactive? This is what has gradually happened in the world of TFSAs (treating them as Foreign Trusts) and other areas of uncertainty (3.8% Obamacare surtax anyone?). The taxation of U.S. citizens abroad is fraught with areas of difficulty and uncertainty.
The tax advisers who advise that S. 877A is retroactive should be asked to clearly explain the reason for this advice.
Remember: U.S. tax law is NEITHER created NOR enforced by the IRS – It’s created by Congress and enforced (in practice and interpretation) by the lawyers and accountants.
In conclusion – so what’s a poor former “Citizen” to do?
Caution is warranted! A through analysis of your individual facts is essential. Your outcome will be determined as much by your choice of advisers as it will be by the law and the IRS.
“Common sense” and “U.S. tax law” often appear to be incompatible. That said, at those bad times when the law is unclear, it may be a good time to let common sense prevail.
Further detail and elaboration (If you can stomach it) …
The S. 877A”Relinquishment Date” – Some pieces of the puzzle and how they fit together
The above post is an attempt to address a very complicated topic in (I hope) a simple way. It is a complex problem with many moving parts. Each part could be seen as a piece of your:
“Solving your problem of U.S. birthplace puzzle”
Some of you may want further analysis of the pieces of the puzzle. Below are separate posts, with each addressing a piece of the puzzle. Once the puzzle is complete, it may assist you in making a decision that you believe is appropriate to your circumstances.
Purpose: Many people are confused over the difference between “relinquishment” and “renunciation”. “Renunciation” is just one form of “relinquishment”. What matters is the DATE of “relinquishment” – not the form of “relinquishment”.
“Citizens” (for nationality purposes) vs. “Tax Citizens” (we will tax you regardless)
Purpose: The definition of “U.S. citizen” is different for different laws. It has one definition for the purpose of “Immigration and Nationality” law. It (since 2004) has had a different definition for Tax law. It is impossible to fully understand this problem without understanding the differing and shifting definitions of citizenship. How does a “Citizen” differ from a “Tax Citizen”?
Purpose: We begin our analysis with what the statute actually says. All regulations and commentary are subject to the statute. The “Plain Language” of the S. 877A rules suggests that S. 877A does NOT have “retroactive application”.
Original Post By: John Richardson