Month: May 2020

Why Most LPRs Residing Overseas Haven’t a Clue about the Labyrinth of U.S. Taxation and Bank and Financial Reporting of Worldwide Income and Assets (Part I)

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This is a companion post to explain why lawful permanent residents (LPRs) who have left the U.S. and do not continue to reside principally in the country are generally unaware of the detailed federal tax (Title 26) and foreign bank account (FBAR – Title 31) rules. It covers many of the same issues discussed for United States Citizens residing outside the U.S. See, Why Most U.S. Citizens Residing Overseas Haven’t a Clue about the Labyrinth of U.S. Taxation and Bank and Financial Reporting of Worldwide Income and Assets.

1998 Report from Department of Treasury to Chairman of House Committee on Ways and Means

Whether you have a “foreign bank account” for instance, is not intuitive, if you reside principally in a country outside the U.S. In other words, the accounts one may have in their country of tax residency (e.g., Germany, Canada, U.K., India, the U.S., Denmark, Mexico, etc.) will not seem like a “foreign bank account” at all. Rather, it is an account in a financial institution in their country of residency, i.e. a “domestic account.” Similarly, a U.S. bank account for an LPR residing outside the U.S. will intuitively seem like a “foreign bank account.” This is just one counter-intuitive example. Others will be explored in subsequent posts – e.g., “foreign corporations” and “foreign partnerships” among others.

This post focuses on those LPRs who have left the U.S., but never formally abandoned their immigration status by filing Form I-407. See, Few LPRs Who Leave (Emigrate from) the U.S. Formally Abandon their Immigration Status: Important Tax Consequences (Part I)

To better understand how even those in Congress at the U.S. federal government (in 1998) did not have a good understanding of the expansive global application of the tax law applicable to individuals residing outside the U.S., see Income Tax Compliance By U.S. Citizens And U.S. Lawful Permanent Residents Residing Outside The United States And Related Issues

There is a particularly formal way of abandoning LPR status, which is by filing Form I-407, Record of Abandonment of Lawful Permanent Resident. The very instructions to the form imply that it is not the only way to abandon – as the form ” . . . is designed to provide a simple procedure to record an individual’s abandonment . . . “

To complicate the law further, Treasury regulations provide for the so-called “green card test” – but do not contemplate the application of an income tax treaty for which we have nearly 70 with various countries:

(b) Lawful permanent resident –

(1) Green card test. An alien is a resident alien with respect to a calendar year if the individual is a lawful permanent resident at any time during the calendar year. A lawful permanent resident is an individual who has been lawfully granted the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws. Resident status is deemed to continue unless it is rescinded or administratively or judicially determined to have been abandoned.

Treas. Reg. § 301.7701(b)-1(b).

To review the nearly 70 income tax treaties with different countries, they can be reviewed on the IRS website – United States Income Tax Treaties – A to Z – The application of these treaties to LPRs will be explored in later posts. Incidentally, no where on the actual “green card” is there express reference to tax obligations as exists on the back page of a U.S. passport.

I will leave you with an excerpt from the 1998 report referred to above starting on page 14:

” . . . Other factors also operate to limit both compliance measurement and improvement. Because the United States asserts taxing jurisdiction over those with little or no connection to the United States other than citizenship or status as a lawful permanent resident, in many cases overseas U.S.taxpayers are difficult to trace or contact. Moreover, even when valid tax assessments can be made against overseas taxpayers, IRS has limited enforcement recourse if the taxpayer’s assets are physically located outside of the United States. In addition, persons may be unaware of their status as U.S. taxpayers with an obligation to file a U.S. tax return. As described in Section II.B, supra, IRS has undertaken various taxpayer education initiatives to increase awareness of filing and payment obligations. In some cases, however,education may not be sufficient. For example, an individual who was born outside the United States and has never even visited the country may, nevertheless, be a U.S. citizen by reason of his parents’ U.S. citizenship. Such a person may not even know that he is a U.S. citizen and thus likely will not know of his obligation to file a U.S. tax return. Similarly, the United States imposes tax on greencard holders who no longer reside in the United States but who have not surrendered their greencards. Although the immigration laws may no longer recognize the validity of the green card if the holder attempted to reenter the country, and the individual may no longer consider himself entitled to lawful permanent resident status, the individual [generally] remains subject to U.S. tax under the Code. [emphasis added along with clarifying language in brackets]

Importantly, no where throughout all of this extensive 1998 report is there even a mention of the foreign bank account reporting obligations. Imagine, the Treasury never once in their report explained how and to what extent FBAR reporting applied to these taxpayers – even-though the ” . . . report responds to section 513 of the Health Insurance Portability and Accountability Act, Pub. L. 104-191, which directs the Secretary of the Treasury to prepare a report that describes income tax compliance by U.S. citizens and lawful permanent residents residing outside the United States . . . “

Few LPRs Who Leave (Emigrate from) the U.S. Formally Abandon their Immigration Status: Important Tax Consequences (Part I)

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There are generally important tax consequences to lawful permanent residents (“LPRs”) who leave the U.S.  See, for instance an earlier post, Timing Issues for Lawful Permanent Residents (“LPR”) Who Never “Formally Abandoned” Their Green Card. There are a range of income, withholding and potentially estate and gift tax consequences depending upon the circumstances of each LPR. See, Oops…Did I “Expatriate” and Never Know It: Lawful Permanent Residents Beware! International Tax Journal (2014).

U.S. Green Card – USCIS Application

The next few posts will explain the significance of key immigration law concepts for LPRs (e.g., filing Form I-407, Record of Abandonment of Lawful Permanent Resident to formally abandon LPR status). They discuss formal administrative or judicial abandonment of LPR status and the specific relationship to U.S. tax law requirements.

MILLIONS HAVE LEFT – YET FEW HAVE FORMALLY ABANDONED – NO FORM I-407: Apparently a few million LPR individuals have emigrated from the U.S. with their green card in their pocket/purse and most are probably still deemed “United States persons” for federal income tax purposes.  This conclusion comes from comparing (i) federal government data indicating the number of LPRs who have emigrated (3.6 million LPRs through 2019) contrasted with (ii) those who have filed Form I-407. The next few posts explore the important tax/legal distinctions of LPRs who formally abandon and those who simply leave the U.S. ignorantly blissful of the complex U.S. tax laws. 

A LPR is a so-called “resident alien” by application of the U.S. federal tax law if she or he satisfies the statutory requirements of IRC Section 7701(b)(6), without application of an applicable income tax treaty. Tax treaties can change everything. A “resident alien” includes those who have LPR status who have not formally abandonment that status. See, the Treasury regulations that provide for the so-called “green card test” –

(b) Lawful permanent resident –

(1) Green card test. An alien is a resident alien with respect to a calendar year if the individual is a lawful permanent resident at any time during the calendar year. A lawful permanent resident is an individual who has been lawfully granted the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws. Resident status is deemed to continue unless it is rescinded or administratively or judicially determined to have been abandoned.

Treas. Reg. § 301.7701(b)-1(b).

There is extensive LPR data published by the Department of Homeland Security (DHS). These reports identify the estimated number of LPRs who currently reside in the U.S. and those who have left-emigrated. See, Estimates of the Lawful Permanent Resident Population in the United States and the Subpopulation Eligible to Naturalize: 2015-2019.

The number of LPRs emigrating exceed 3 million starting in 2015. These numbers bear no correlation to the formal abandonment numbers registered with the government, which require filing Form I-407, Record of Abandonment of Lawful Permanent Resident

As one DHS report points out there is no reliable direct measurements of LPR emigration. It does not exist. A 2019 Office of Immigration Statistics report states:

Emigration. Estimating emigration accurately is difficult.The U.S. government has not collected official statistics since 1957. Most observers agree that emigration of the LPR population from the U.S. is substantial. Between 1900-90, an estimated one-quarter to one-third of LPRs emigrated from the U.S. (see Warren and Kraly, 1985; Ahmed and Robinson, 1994; Mulder, et al., 2002).

DHS: Estimates of the Legal Permanent Resident Population and Population Eligible to Naturalize in 2002 (May 2014)

This apparent lack of information is what drove me to file a Freedom of Information Act (FOIA) request with the government to ask for the number of USCIS Forms I-407 that are filed with the government.

The information I obtained in the FOIA response was surprisingly low, since the government had record of only 46,364 Forms I-407 filed in the years 2013 through 2015, as follows:

SOURCE: Federal Government Response to FOIA Request: Office of Performance and Quality (OPQ), Performance Analysis and External Reporting (PAER), JJ

This represents an average of 15,455 individuals annually who formally abandoned their LPR status. Contrast this relatively small number with the more than 3.6 million LPRs estimated to have emigrated up to and through the year 2019 per the DHS report.  This leaves a massive gap of some millions (assuming about 15,000 per year file Form I-407) of LPRs who have left-emigrated from the U.S. yet never formally abandoned by filing Forms I-407.

What about the tax consequences? How many of them know, understand or have any idea whatsoever of their federal tax filing obligations regarding their continued status? Subsequent posts will explore these consequences.

What is the takeaway from (i) the Office of Immigration Statistics reporting and (ii) the LPR – I-407 information provided by the government’s response to my FOIA request? There is a discrepancy in the millions of individuals. Millions of LPRs where most of them are simply not aware of how the U.S. federal tax law continues to impact their lives after they have left the country. 

The successive posts will discuss the language and definition of a “lawful permanent resident” for purposes of the tax law and what it means for individuals residing outside the U.S. that still hold their green card in their purse/pocket:

(6) Lawful permanent resident. . . . an individual is a lawful permanent resident of the United States at any time if—

(A) such individual has the status of having been lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws, and

(B) such status has not been revoked (and has not been administratively or judicially determined to have been abandoned). [emphasis added]

IRC Section 7701(b)(6) without flush language.

Note: The USCIS provides quarterly reports that “Contains quarterly performance data on the abandonment of lawful permanent resident status, organized by field office and country.” Form I-407, Record of Abandonment of Lawful Permanent Resident Status. Fiscal Year 2020, 1st Quarter (17 forms processed); Fiscal Year 2019- 4th Quarter (693 forms processed); Fiscal Year 2019, 3rd Quarter (4,102 forms processed); Fiscal Year 2019, 2nd Quarter (3,874 forms processed); Fiscal Year 2019, 1st Quarter (3,886 forms processed); Fiscal Year 2018, 4th Quarter (3,559 forms processed); Fiscal Year 2018, 3rd Quarter (3,633 forms processed); Fiscal Year 2018, 2nd Quarter (2,725 forms processed); Fiscal Year 2017, 2nd Quarter (3,315 forms processed); Fiscal Year 2017, 1st Quarter (3,153 forms processed). The average annual Forms I-407 filed are approximately 14,000 annually in these years.

Coronavirus! Great Time to be Back from Hiatus: False 8854 and a “Covered Expatriate”

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I have not actively written on this blog for one and a half years. There has certainly been a lot to write about in the area of taxation, expatriation, citizenship renunciation and abandonment of lawful permanent residency status in that time. I was distracted (20/20) starting in the last quarter of 2018 when my writing was suspended. At least one good distraction among others was some awesome underwater cave exploration (see cave and cenote entrance below of one just discovered last year in the Yucatán peninsula). Plus membership into the Explorer’s Club – along with a case of dengue after a cave exploration excursion in the jungle. The latter not being a good distraction. https://www.explorers.org/about/about_the_club

None of which has anything to do with tax-expatriation matters, but I will now be back to writing about new developments in the tax law.

Newly Discovered Cave

This jump starts the Tax-Expatriation blog which has been viewed by hundreds of thousands (from around the world) since its inception. Hopefully it will have valuable information for you as you peruse its contents.

Most topics covered by this blog are civil in nature and not criminal. However, unlike Kipling’s ” . . .Oh, East is East, and West is West, and never the twain shall meet. . . ” federal tax law sometimes crosses over from civil to criminal. That’s the story of the recently unsealed indictment of a naturalized U.S. citizen, 52 year old Mr. Tinkov. The IRS reviewed his tax filings, and the U.S. Attorney’s Office (Northern District of California) has brought an indictment for filing a false IRS Form 8854 and a false tax return, for under-reporting his net worth. The indictment charges Tinkov with two counts of filing false returns or other documents in violation of 26 U.S.C. § 7206(1). The Indictment was filed under seal and the docket can be reviewed here.

The press release of the DOJ can be reviewed here.

This is not the first time the U.S. federal government has used IRS Form 8854, required to be filed by those who “expatriate”, as part of a criminal tax case.

The twain shall meet. See, the 2016 indictment of a NY business professor discussed here: Expatriation Tax Form 8854 is Part of Criminal Tax Case

Importantly, when the taxpayer signs their U.S. federal tax return, they do so under declaration of penalty of perjury. This declaration generally applies to and includes any statements, attached forms and IRS Form 8854, Initial and Annual Expatriation Statement (in those cases where the individual is “expatriating” from a taxation perspective). This “expatriation” Form 8854 has its own signature block that must be signed under penalty of perjury. This specific declaration plays a prominent role in the indictment.

The indictment alleges Mr. Tinkov became a U.S. citizen by naturalization in 1996 and he renounced his U.S. citizenship in October 2013. Therefore, if he was a naturalized citizen, he necessarily would have become a “covered expatriate” had he met any of the three statutory tests: (a) the net worth test, (b) tax liability test, or (c) the certification test (IRC Section 877(a)(2)(C)). The government alleges he met the net worth test.

See a previous post, Why a Naturalized Citizen cannot avoid “Covered Expatriate” status under IRC Section 877A(g)(1)(B).

The indictment charges that he met the net worth test and IRS Form 8854 (COUNT TWO) and IRS Form 1040 (COUNT ONE) were false. False, the indictment alleges (COUNT ONE), since he did not reflect his deemed “mark to market” gains from his property that he owned in 2013 at the time he became a “covered expatriate” on his income tax return. The indictment uses “technical tax” language calling such a “gain” as arising from a “constructive sale.”

This image has an empty alt attribute; its file name is signature-line-8854-perjury.jpg
Sign Here: line for taxpayer signature stating “Under penalties of perjury, I declare that I have examined this form, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete.

The relevant portion of the indictment as to Form 8854 (COUNT TWO: 26 U.S.C. § 7206(1) -Making and Subscribing A False Document or Statement) provides –

On or about April 15, 2014, in the Northern District of California, and elsewhere, the defendant, OLEG TINKOV, a/k/a Oleg Tinkoff, did willfully make and subscribe a Form 8854, Initial and Annual Expatriation Statement, for the calendar year 2013 (the “Expatriation Statement”), which was verified by a written declaration that it was made under penalties of perjury and which defendant TESfKOV knew was not true and correct as to every material matter. The Expatriation Statement, which was prepared, signed, and which TINKOV caused to be prepared and signed, in the Northern District of California and was filed with the IRS, (1) falsely reported on Part IV, Section A, Line 2, that TINKOV’s net worth as of his expatriation date was$300,000; (2) fraudulently failed to report any property in Part IV, Section B; and (3) falsely stated that to the best of TINKOV s knowledge and belief, the Expatriation Statement was true, correct, and complete, whereas TINKOV knew and believed his net worth as of his expatriation date was greater than $300,000, and that he was required to list property and report information related to such property on the Expatriation Statement, in violation of Title 26, United States Code, Section 7206(1).

It is curious that no further charges were brought, such as tax evasion ((26 U.S.C. § 7201) and there were no Title 18 crimes charged. The indictment alleges he under-reported his total income (not including the “mark to market” gains from the IRC § 877A(1)) and therefore it would seem to be ripe for a tax evasion charge? Interestingly, while the indictment uses the language “constructive sale” that term is found nowhere in the statute or the regulations. Instead, the statute uses the language “mark to market” and provides that –

(1) Mark to market

All property of a covered expatriate shall be treated as sold on the day before the expatriation date for its fair market value.

IRC § 877A(1)

The term “constructive” or “deemed” (e.g., “deemed sale” or “constructive distribution” or “constructive ownership”) are terms commonly used by U.S. tax professionals and the federal tax law throughout. It refers to a “legal fiction”, since there is no actual transaction that must occur; such as a sale, distribution or some type of actual ownership. Therein lies the “legal fiction.” Importantly, nowhere is “constructive” or “deemed” used in the specific expatriation language of IRC §§ 877 or 877A. The statute uses instead the terminology “mark to market” that treats the U.S. taxpayer (i.e., the “covered expatriate”) “as if” all of their property was ” . . . sold on the day before the expatriation date for its fair market value. . . .” Herein is the legal fiction in these tax expatriation rules since no sale actually occurs.

There is important case law that supports the argument that the government cannot impose taxation until an actual sale or exchange of property occurs. For an excellent review of the 1920 U.S. Supreme Court’s decision of Eisner v. Macomber, see the article prepared by Professor Henry Ordower at Saint Louis University – School of Law –

The Expatriation Tax, Deferrals, Mark to Market, the Macomber Conundrum and Doubtful Constitutionality

Pittsburgh Tax Review, Vol. 15, No. 1, 2017, Saint Louis U. Legal Studies Research Paper No. 2018-3

Maybe the U.S. Attorney’s office did not charge tax evasion ((26 U.S.C. § 7201) in the Tinkov case, because of their concerns that the “mark to market” tax imposed by statute may not even be Constitutional? Maybe they did not want to try to pursue a criminal charge on a tax, the very essence of it, which could be challenged by applying the realization principles set forth by the U.S. Supreme Court?