Tax-Expatriation

LPR status can be abandoned for tax purposes (since 2008 tax law changes) by merely leaving and moving outside the U.S. in some cases?

Posted on April 28, 2014 Updated on August 19, 2014

Lawful permanent residents may erroneously think they have not “expatriated” for U.S. tax purposes, as long as they have not returned it to the U.S. Citizenship and Immigration Services (USCIS) – i.e., formally abandoned their green cards.  Unfortunately, for these individuals, they can be in for a rude awakening regarding the application of IRC Section 7701(b)(6) that was added by Congress in 2008.

The relevant portion of the statute provides as follows:

• An individual shall cease to be treated as a lawful permanent resident of the United States if such individual commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country, does not waive the benefits of such treaty applicable to residents of the foreign country, and notifies the Secretary of the commencement of such treatment.

This statutory language has three tests for when the individual is no longer a LPR for federal tax purposes:

1. The individual is treated as a resident of a foreign country under the provisions of a tax treaty;
2. The individual does not waive the benefits of the treaty, and
3. Notifies the Secretary of the commencement of such treatment.

Each of the above tests seem to be satisified by any “green card” holder who files IRS Form 1040NR as a non-resident, when they live in a country with a U.S. income tax treaty.  A list of treaty countries is to follow in a later post.

There can be a host of unintended consequences to the individual who falls into this category; i.e., who ceases to be a “lawful permanent resident” under the federal tax law.  The expatriation provisions of Section 877A and 2801 (among others) can be implicated, along with many other provisions of the law.  See, Accidental Americans” – Rush to Renounce U.S. Citizenship to Avoid the Ugly U.S. Tax Web” International Tax Journal, CCH Wolters Kluwer, Nov./Dec. 2012, Vol. 38 Issue 6, p45.

For those who wish to formally abandon their LPR, there is a specific DHS/USCIS form (I-407) that is used for this purpose: