Month: February 2015

WSJ (18 Feb. 2015): London Mayor Boris Johnson to Renounce U.S. Citizenship After Tussle With Uncle Sam

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Ironically, the outspoken London Mayor has decided to renounce his U.S. citizenship, according to an article published by the Wall Street Journal.

See, WSJ: (18 Feb. 2015) – London Mayor Boris Johnson to Renounce U.S. Citizenship After Tussle With Uncle Sam

This article reported that his U.S. tax bill was at issue – :

In case you missed it: London Mayor Boris Johnson has said he will renounce his U.S. citizenship following a high-decibel tax squabble with his country of birth. At issue: a tax bill U.S. tax authorities claimed he owed on some London property. The mayor will (of course) keep his citizenship in the U.K. as his political ambitions continue to play out.

A previous post in November 2014 discussed a news report of the London Mayor and his U.S. citizenship and hence U.S. tax residency status.  See, According to news press, London Mayor, dual citizen, refuses to pay United States income taxes

Surely, he will be careful and thoughtful about the steps he is taking as part of his U.S. citizenship renunciation.  His reported response to the news reporter last year could prove risky under U.S. law, to the extent he intentionally refuses to file U.S. income tax returns and pay taxes.  The following line of questions and answers could be quite damning for him:

Presenter Susan Page then pressed him whether he would pay the bill, to which he said: “I think it’s outrageous.

“Well, I’m – no is the answer. Why should I? I haven’t lived in the United States for, you know, well, since I was five years old.

“I could but I pay – I pay the lion’s share of my tax, I pay my taxes to the full in the United Kingdom where I live and work.”

Here, the London Mayor has indicated he is not filing tax returns, yet knows he has a legal duty to file them and pay a tax owing under U.S. law.  He goes further to say “I could . . . pay . . .”   While rarely used standing alone by prosecutors (without other criminal claims brought), it is a crime that carries up to a 12 month prison sentence, to not file a U.S. return, supply information or pay tax;  see, IRC § 7203.  The relevant language of the statute is as follows:

Any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return, keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than $25,000 ($100,000 in the case of a corporation), or imprisoned not more than 1 year, or both, together with the costs of prosecution.

Here, the government has yet another stick it can pull from its bag of sticks to be used against current and former U.S. citizens residing outside the U.S.  It is of course, very common, that individuals who have spent most of their lives outside the U.S. have not filed any U.S. tax returns nor paid any U.S. income taxes.  At what point, might these individuals have U.S. civil tax liability and what facts are necessary to give rise to criminal tax liability?

The vast majority of U.S. citizens residing overseas owe little to no U.S. income taxes because (i) modest income amounts and the impact of the “foreign earned income exclusion” or (ii) they reside in a country with higher taxes and tax rates than the U.S. because of the “foreign tax credit”.  See, USCs and LPRs Living Outside the U.S. – Key Tax and BSA Forms

A couple observations about London Mayor Boris Johnson.  First, he would be well advised not to make public statements about filing [or not] U.S. tax returns or paying [or not] U.S. taxes.  Second, he will want to carefully consider completing and filing accurate U.S. tax returns as part of his formal renunciation process; particularly for the year in which he sold his London home tax free under UK laws.    Third, he will want to understand carefully, the details of what is and should be filed on IRS Form 8854, after he has visited the U.S. embassy and files his Form DS-4080, Oath of Renunciation of the Nationality of the United States. 

Finally, the case could present a unique international political and public relations nightmare for the  U.S. Department of Justice, if they decided to bring any sort of criminal tax charges against the London Mayor.  It would seem highly unlikely in my opinion.

The government has a strict requirement that prohibits a United States Attorney (e.g., the high profile Preet Bharara, U.S. Attorney for the Southern District of N.Y. Attorney ) from unilaterally bringing tax charges against individuals.  See, 6-4.200, Tax Division Jurisdiction and Procedures, which provides in relevant part:

“. . . The Assistant Attorney General, Tax Division . . . must approve any and all criminal charges that a United States Attorney intends to bring against a defendant in connection with conduct arising under the internal revenue laws, regardless of which criminal statute(s) the United States Attorney proposes to use in charging the defendant. See 28 C.F.R. § 0.70.

Also, only the Tax Division can authorize warrants of public officials, which presumably would extend to London Mayor Boris Johnson.  See, See, 6-4.130, Search Warrants. 

On a related post, see, How many former U.S. citizens and long-term lawful permanent residents have filed (or will file) IRS Form 8854? and Revisiting the consequences of becoming a “covered expatriate” for failing to comply with Section 877(a)(2)(C).

WSJ: When American Expats Don’t Want Their Kids to Have U.S. Citizenship By: Chantal Panozzo

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WSJ:  When American Expats Don’t Want Their Kids to Have U.S. Citizenship
By: Chantal Panozzo (18 Feb. 2015)
A recent article this week by Ms. Chantal Panozzo in the Wall Street Journal, explains in practical terms the decisions faced by many multi-national families; typically where one parent is a U.S. citizen.  The child will typically be a U.S. citizen, as a matter of law through what is known as “derivative citizenship” as explained in prior posts (see, Famous Americans who Renounced U.S. Citizenship – Elizabeth Taylor!).
The Wall Street article uses various family scenarios around the world, with some key interviews , including the following with “Jessica” that demonstrates the choices individuals are making around the world:

Jessica, who asked that her last name not be used, says she initially looked forward to getting her infant son an American passport. But after considering the implications of American citizenship, including the possibility of her son being drafted or taxed by a country where he may never live, she and her husband decided against applying for the moment.

The article seems to imply that a U.S. citizen may be “U.S. person” for U.S. federal tax purposes, but will not need to file U.S. tax returns or report their worldwide assets, if they do not apply for a U.S. passport:
That said, U.S. citizens born abroad are technically liable for taxes even if their parents don’t register their birth with American authorities . . .
It’s probably worth clarifying, that Title 26, the federal tax law, has a clear dictate that all U.S. citizens (whether they know of their citizenship status or not) are “U.S. persons” and therefore subject to worldwide taxation and worldwide reporting of their assets.  Whether the U.S. citizen without a U.S. passport actually owe any taxes or not, is a different question.  See, How the IRS Can file a “Substitute Return” for those USCs and LPRs Residing Overseas
Every individual who is born to a parent who was a U.S. citizen must consider whether they too are a U.S. citizen as a matter of law via “derivative citizenship“; i.e., “derived” from a U.S. citizen parent.   The U.S. Citizenship and Immigration Services (USCIS) has a “Nationality Chart 1, for Children Born Outside U.S.” to help determine if the individual was a U.S. citizen at birth.  
Whether a U.S. passport is ever applied for, is irrelevant for purposes of the tax definition of who is a “U.S. person” (See, IRC Section 7701(a)(30)(A) and Treas. Reg. § 301.7701-6 Definitions; person, fiduciary); including for FATCA reporting requirements when forms and information are provided under penalty of perjury with financial institutions around the world.  See, Part 2 – Unintended Consequences of FATCA – for USCs and LPRs Living Outside the U.S.

U.S. Tax and Expatriation Tax Laws – They Are What They Are . . .

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The point of this post is a fairly simple one.  The law is complex, it has evolved significantly over the years and continues to evolve; if for no other reason how the IRS enforces it.  Some people might not like the law.

As those who have read and followed Tax-Expatriation.com know; it is not a place to seek legal advice.  It provides lots of information – a comprehensive source of information.   See, limitations.  It also does not attempt to contemplate every scenario when a particular point is made; e.g., as the IRS modifies how they interpret rules or how they enforce them.

For instance, for a fairly comprehensive article about how the law works, 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.  The net worth threshold (US$2M) and income tax thresholds (US$124,000, indexed for inflation) are spelled out in that article.  It does not have the indexed inflation amounts.  See, The “Average Annual Net Income Tax” Amounts for “Covered Expatriate Status” – Increases to US$160,000 for the Year 2015

Every individual who renounces their U.S. citizenship is taking, in what is my view, a very important decision.  Many individuals do not like U.S. tax laws; nor the expatriation tax laws.  Many individuals around the world do not like their home country tax laws; nor other laws.

This blog is not intended to be a policy blog debating whether the U.S. tax laws are good laws or bad laws.  It’s designed to provide information about the law and important developments and relevant information.

Finally, the “blogosphere” is full of  people who attempt to write about the law as if they understand it; particularly the complexity of Title 26, the regulations and a host of case law that spans almost 100 years.  These opinions are a dime a dozen.  Many get it terribly wrong – particularly in this politically charged topic – and will make statements and provide information that sounds attractive to the uninformed.  The following is the type of decision that is made every day.

Path 1:  If someone tells USC, Mr. X (or if he reads) the following, he might find it quite attractive:  “You will have no U.S. tax liabilities if you simply do “steps Y and Z.”  Plus, the U.S. federal government will never know and/or they will never be able to collect the taxes from you anyhow.  Simple.  Would you rather pay $0 or a bunch of money to the U.S. federal government?

Path 2:  On the other hand, if a qualified legal adviser accurately advises  USC, Mr. X  of the following, he may not find the answer so attractive:  “Sorry, given your factual circumstances, you will have US$ 100,00X of immediate income tax liabilities if you simply do steps “Y and Z.”  Plus, by doing so, if you ever bequeath or gift your U.S. citizen children, they will have to pay 40% (under current law) of the value of such inheritance or gift in U.S. taxes.  This latter tax obligation will not be your obligation, but rather your U.S. citizen children.”

Not surprisingly, Mr. X may well want to take Path 1, because it is the answer he prefers.  If Mr. X does steps “Y and Z”, he will now live with the U.S. legal consequences.  He well might not like those legal consequences and think they are unfair, unjust or borderline immoral for any government to impose, but that is how laws often work.

U.S. Tax and Expatriation Tax Laws – They Are What They Are . . .

The President’s Proposal is NOT the Same as Current Law – Section 877A(g)(1)(B)

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Some individuals are mistaken that the Obama proposal to exempt certain U.S. citizens from taxation (including the “mark to market” exit tax), is the same as the exception in IRC Section 877A(g)(1)(B).Form 8854 Yr 2013

It’s not.  They are not the same, although they have some similar requirements (e.g., 5 years of certification of U.S. tax law compliance under penalty of perjury).

For a brief discussion on the President’s proposal, see –The Proposal by the President to Exempt Certain U.S. Citizens from Worldwide Taxation: – Very Small, Select Group

IRC Section 877A(g)(1)(B) is not the same as the President’s green book/budget proposal.
 –signature line -8854 perjury.
There are important differences.  Most importantly, the IRC Section 877A(g)(1)(B) exception requires the individual not only have been a dual citizen (of at least two or more countries) at birth, along with U.S. citizenship; but also continue to reside and be a tax resident of that country, i.e., the country of which they were also a citizen at the time of their birth.  This tax residency/dual citizenship rule is necessarily required by IRC Section 877A(g)(1)(B).  If the person has moved to another country, they will not be eligible for this treatment and will be subject to the mark to market “exit tax” if they renounce their U.S. citizenship.  Their U.S. heirs and beneficiaries will also be subject to the 40% (current tax rate) tax on “covered gifts” and “covered bequests.”
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The President’s proposal (if it ever becomes law) will also apparently exempt all qualifying individuals from any type of U.S. taxation; other than tax that would apply to a “non-resident alien” (which would be no U.S. tax – if the individual had no U.S. source income).  Not only would no “exit tax” apply, but so too would no U.S. income tax on their income from their country of residence or any other country outside the U.S.   The President’s proposal would also exempt them from all U.S. tax filing requirements (other than the 5 years) and from FBAR filing requirements.  See, Nuances of FBAR – Foreign Bank Account Report Filings – for USCs and LPRs living outside the U.S.
Current law does not exempt U.S. citizens from U.S. taxation.  Indeed, to qualify for the exception to the “mark to market” tax under IRC Section 877A(g)(1)(B), the individual has to have complied with the provisions of Title 26 (which is a very complex U.S. tax law) for the last 5 preceding tax years.  See, Certification Requirement of Section 877(a)(2)(C) – (5 Years of Tax Compliance) and Important Timing Considerations per the Statute

 

The Proposal by the President to Exempt Certain U.S. Citizens from Worldwide Taxation: – Very Small, Select Group

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A prior post explained the green book proposal published earlier in February: Obama Budget Proposal to “Provide Relief for Accidental Americans”? Will the Proposal to Modify the Expatriation Rules Become Law?

The unique consequence of such a proposal, would be to eliminate U.S. citizenship based taxation forWorld Map a very small, select group of U.S. citizens.  See, Co-author. Tax Simplification: The Need for Consistent Tax Treatment of All Individuals (Citizens, Lawful Permanent Residents and Non-Citizens Regardless of Immigration Status) Residing Overseas, Including the Repeal of U.S. Citizenship Based Taxation,”  by Patrick W. Martin and Professor Reuven Avi-Yonah, September 2013.

The group affected would indeed be very small.  Most importantly, the requirements that would limit the number of eligible persons to a very small class of individuals are the following:

  • [those who] have never held a U.S. passport or . . . held a U.S. passport for the sole purpose of departing from the United States in compliance with 22 CFR §53.1,US Passport

 

  • [those who] relinquish . . .  his or her U.S. citizenship within two years after the later of January 1, 2016, or the date on which the individual learns that he or she is a U.S. citizen.

 

The immigration law regulations 22 CFR § 53.1 require that a U.S. citizen have a U.S. passport to enter or depart the United States.  The relevant part of the regulations is § 53.1(a) which provides as follows:

Passport requirement; definitions.

(a) It is unlawful for a citizen of the United States, unless excepted under 22 CFR 53.2, to enter or depart, or attempt to enter or depart, the United States, without a valid U.S. passport.
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These regulations were first published in 2006, and rely in part on a Presidential Executive Order made by President Bush (Jr.).
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Presumably, it is a very small and select group of individuals who obtained a U.S. passport, merely to comply with this regulation, in order to depart the country.   How many individuals even know of such requirement and would have applied for a U.S. passport while in the U.S., to legally depart under the U.S. passport requirement regulatory rule?  See, Part I of III: Tracking Travelers’ Entries and Exits – Guest Immigration Law Post by Atty Mr. Jan Bejar
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Assuming an individual was aware of such regulatory rule, they could not qualify for this proposed exception, if they ever lived in the U.S. since becoming 18 1/2 years old.  This means that only those individuals with U.S. passports who (i) obtained a U.S. passport as a child (presumably through their parents) while (ii) living in the U.S. and (iii) did so in order to comply with this regulation 22 CFR § 53.1 would be eligible.  Since the regulations were just passed in 2006, anyone who obtained a U.S. passport, for instance in 2002 (even if they never lived in the U.S.) would presumably be disqualified from this tax treatment.

Also, if they did not get a passport when they were in the U.S., leaving the country after the 2006 passport regulations were adopted, would have been a violation of the law.

Bottom line, it seems nearly impossible that anyone who ever had a U.S. passport would ever qualify for this exception.

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Further, the two year rule, would seem to exclude most all other foreign resident USCs (of course, virtually none of whom could ever have had a U.S. passport).  Once an individual becomes aware they are a U.S. citizen (even if they are unaware of any U.S. tax or bank reporting requirements), the two year window starts ticking.  If they do not renounce their U.S. citizenship within that time frame, they too would also not qualify for such an exception.
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Finally, it is worth noting that it often takes several months to get an appointment with the U.S. Consulate or Embassy to even renounce in the first place.
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Therefore, in conclusion, even if the Obama proposal were to make its way into the law, those who could actually obtain relief would be a rare group of individuals.  In short, U.S. citizenship based taxation on worldwide income, will continue to be the law of the land.

Part II: U.S. Department of State Communications to USCs overseas Regarding Tax Obligations with IRS

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A recent post discussed a rather surprising development of how the – U.S. Department of State, Starts Communicating with U.S. Citizens Overseas Regarding Tax Obligations with the IRS

There are several observations to be made about this approach.

First, some USCs living overseas will find this a welcome development, as it provides a method of Passport Inside Back Page - USC Taxation Referencebasic education of how U.S. tax laws work.  The newer U.S. passports do have an obscure reference to U.S. tax obligations of USCs.  In the past, there was generally no communications from the U.S. Department of State to USCs, including newly naturalized U.S. citizens about their U.S. tax obligations.

Second, there is much helpful information provided in the U.S. Department of State’s explanation.  The key tax forms that are most relevant for USCs and LPRs residing overseas are explained in the government e-mail.  See,  USCs and LPRs Living Outside the U.S. – Key Tax and BSA Forms

All of the following forms are identified by the U.S. Department of State:

These are the most relevant forms for the majority of USCs and LPRs;  although there are numerous other forms and calculations that may be required depending upon the particular circumstances, income, assets, employment, etc. for each individualUS Passport

The third observation, relates to how employees of the U.S. Department of State will use this information and communicate with USCs?  Will they begin asking (even if infrequently) whether a U.S. citizen overseas is in compliance with their U.S. federal tax requirements?  What are the consequences to the U.S. citizen if they state yes, no or refuse to answer?  What can happen to an individual if they provide a false statement to a federal employee or file a false document?  See What could be the focal point of IRS Criminal Investigations of Former U.S. Citizens and Lawful Permanent Residents?

The fourth and last observation, is whether the IRS will begin providing USC taxpayer information on a regular basis to the U.S. Department of State?  The law provides limitations upon how  the IRS can disclose and provide taxpayer information.  See,  26 U.S. Code § 6103 – Confidentiality and disclosure of returns and return information

However, there are significant exceptions in the law, that do allow disclosure of taxpayer financial and taxpayer information to other agencies (particularly “Intelligence Agencies,” which presumably includes the U.S. Department of State).  See, for instance, IRC Section 6103(i)(7).  The statutory requirements of 6103(i)(7) are not particularly rigid.

 

Obama Budget Proposal to “Provide Relief for Accidental Americans”? Will the Proposal to Modify the Expatriation Rules Become Law?

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[See follow-on post: The Proposal by the President to Exempt Certain U.S. Citizens from Worldwide Taxation: – Very Small, Select Group– published 18 Feb. 2015]

Every year, the President of the United States, releases his proposed budget.  The budget is prepared by his team of advisers at the Treasury Department and is known as the “green book“.

For a complete copy of the proposal, that was released on February 2, 2015, see, General Explanations of the Administration’s Fiscal Year 2016 Revenue Proposals (Released February 2015)

Buried deep into the proposal of the US$3.99 trillion fiscal year 2016 expenditure plan, is a provision to “provide relief for certain accidental dual citizens.”  See pages 282 and 283 of the proposal.

It appears someone is listening in the Administration at Treasury; at least a little bit?   Will Congress similarly be interested in such proposals?  See, Will Congress Intervene to make USC based Tax Laws More User Friendly to USCs and LPRs Residing Outside the U.S.?

The proposal would not adopt residency based taxation for all U.S. citizens, as exists in the rest of the world, but would exclude certain U.S. citizens from the “mark to market” tax on expatriation (i.e., the “exit tax”).  See, “Tax Simplification: The Need for Consistent Tax Treatment of All Individuals (Citizens, Lawful Permanent Residents and Non-Citizens Regardless of Immigration Status) Residing Overseas, Including the Repeal of U.S. Citizenship Based Taxation,”  by Patrick W. Martin and Professor Reuven Avi-Yonah, 2013.

Those excluded from the exit tax and the tax to their U.S. heirs or beneficiaries who receive gifts or inheritances (See, The “Hidden Tax” of Expatriation – Section 2801 and its “Forever Taint.”) are those individuals who:

 

  1. became at birth a citizen of the United States and a citizen of another country,
  2. at all times, up to and including the individual’s expatriation date, has been a citizen of a country other than the United States,
  3. has not been a resident of the United States (as defined in section 7701(b)) since attaining age 18½,
  4. has never held a U.S. passport or has held a U.S. passport for the sole purpose of departing from the United States in compliance with 22 CFR §53.1,
  5. relinquishes his or her U.S. citizenship within two years after the later of January 1, 2016, or the date on which the individual learns that he or she is a U.S. citizen, and
  1. certifies under penalty of perjury his or her compliance with all U.S.  Federal tax obligations that would have applied during the five years preceding the year of expatriation if the individual had been a nonresident alien during that period.

 

This would be a significant change from current law.  However, the no passport requirement will narrow significantly the number of individuals who may be eligible for this relief;  if it becomes law?

Most interesting about the proposal, is that it seems to say these  U.S. citizen individuals (who meet all 6 criteria) will not be subject to any U.S. tax as a U.S. citizen.  In other words, it seems to say they will be taxed the same as a non-resident alien, which in effect is residency based income taxation for this narrow class of U.S. citizens.  The word tax is used generically, to presumably also exclude them from U.S. estate, gift and generation skipping transfer taxes.

The proposal has a window of opportunity that starts to close with time and then shuts in January 1, 2018;  i.e., the 2 year period after January 1, 2016.  This will mean that those future “Accidental Dual Citizens/Americans” who later learn of their U.S. citizenship, will only have 2 years from the moment they became aware of their U.S. citizenship status.  One thing is to know you are a U.S. citizen as you live wherever you may around the world;  another is to know and understand the U.S. taxes that are imposed upon you on your worldwide assets.