Lawful Permanent Residents
A “Resident” is a “Resident” is a “Resident” – or Not?
Who is a “resident”? What is a “resident”? This sounds like such a basic question. It is not so simple for tax purposes; nor for other provisions of the law.
There is the colloquial meaning of resident. For instance, if Mr. Smith says, “I have been a resident of Montana on my ranch for 30 years”; to what does he refer? What if Mr. Smith has a house in California (which he has owned for 15 years) and another ranch in Alberta, Canada that he has owned for 45 years. Is he also a “resident” of Canada and California?
What if he is not a U.S. citizen but holds a particular type of visa, such as lawful permanent residency (an immigrant visa)? What if he has a non-immigrant visa, such as an E-2 visa? What if he only spends 4 months a year on his ranch in Montana, of where is he a “resident”?
Is he a “resident” in some or all of these scenarios? Why is this important in the context of “U.S. expatriation taxation”?
There are three sources of federal law where it becomes very important, which will be discussed in later posts:
- Title 31 – which is the “bank secrecy” law that creates the “FBARs” – see a prior post, Nuances of FBAR – Foreign Bank Account Report Filings – for USCs and LPRs living outside the U.S.
- Title 26 – federal tax law that has a myriad of definitions regarding “residents”; see, Oops…Did I “Expatriate” and Never Know It: Lawful Permanent Residents Beware! International Tax Journal, CCH Wolters Kluwer, Jan.-Feb. 2014, Vol. 40 Issue 1, p9.
- Title 8 – federal immigration law; see, Part II: Who is a “long-term” lawful permanent resident (“LPR”) and why does it matter?
In addition, various states, such as California, Texas and Washington D.C. (actually not a state; but all places I happen to be licensed to practice law) have their own definitions of who are “residents” for income tax and other purposes. 
Subsequent posts will discuss the importance of understanding who is a “resident” and the implications under these various laws.
Laymen regularly have an idea of where they are “resident” – but that idea is often very different from definitions of “resident” under federal Titles 31, 26 and 8 and state laws (e.g., Texas, D.C., Florida, California, New York, etc.).
Part II: Who is a “long-term” lawful permanent resident (“LPR”) and why does it matter?
A post in August 2014 explained the basic rule of who is a “long-term resident” as that technical term is defined for tax purposes in IRC Section 877 (e)(2). There is much confusion about how the tax law defines a “lawful permanent resident” (“LPR”) versus 
how immigration law defines what is almost the same concept. The statutes are different and have definitions in two separate federal codes (Title 26, the federal tax provisions and Title 8, the immigration law provisions).
See –
Who is a “long-term” lawful permanent resident (“LPR”) and why does it matter?
Posted on August 19, 2014
This follow-up comment is to highlight some key concepts about why it matters if you become a “long-term” resident as that term is defined in the tax law.
- A LPR can reside for substantially shorter periods in the U.S. (shorter than the apparent 7 or 8 years identified in the statute), and still be a “long-term resident” per IRC Section 877 (e)(2) depending upon the facts of any particicular case.
- There are far more LPRs who abandon their status (formally) than U.S. citizens who formally take the oath of renunciation. See the table above reflecting those who have formally renounced U.S. citizenship versus those who have formally abandoned their LPR status.
- Plenty of LPRs informally abandon their LPR status for immigration purposes by moving and living permanently outside the U.S.
- An individual who has/had LPR status, has no control over the timing of when their status ends; if it is determined to have been legally abandonmened by a federal immigration judge. See, The dangers of becoming a “covered expatriate” by not complying with Section 877(a)(2)(C).
- There are plenty of timing issues for LPRs surrounding how and when they have “abandoned” their LPR status for purposes of IRC Section 877 (e)(2). See –
Timing Issues for Lawful Permanent Residents (“LPR”) Who Never “Formally Abandoned” Their Green Card, Posted on August 15, 2015
Lawful Permanent Residents – Tax Law vs. Immigration Law – University of San Diego School of Law – Procopio International Tax Institute
The 12th annual international tax conference was held on campus on October 20 & 21st, 2016: The University of San Diego School of Law – Procopio International Tax Institute.
This specific course was addressed by tax and immigration law experts and views from a federal immigration court judge, as follows:
Course 3B: U.S. Lawful Permanent Residents – Tax Law vs. Immigration Law
Residentes legales permanentes de los Estados Unidos – Ley fiscal vs. Ley de inmigración
Speakers: 
The Honorable Rico J. Bartolomei, assistant chief immigration judge of the federal immigration courts
Patrick W. Martin, Esq., Partner – Procopio
Jan Joseph Bejar, Esq., Founder – Immigration Law Clinic
The speakers addressed numerous issues, including the immigration consequences of filing IRS Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), and the specific impact of IRC Section 7701(b)(6) that provides in relevant part 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. [emphasis added]
Act of Abandonment for Immigration Law Purposes?
Some of the key points made by the immigration law experts, including the immigration judge were:
- Permanent resident card is not a tourist visa.
- DHS will make a finding of abandonment following a single trip outside the U.S. of more than one year.
- Rebuttable presumption of abandonment following a single trip outside the U.S. of six months to one year.
- Residency may be deemed abandoned following multiple trips abroad, even if no single trip exceeds six months.
–Factors include the noncitizen’s family ties, employment, property holdings, and business affiliations in the U.S. and in the foreign country
–Filing a U.S. income tax return as a tax nonresident alien raises a rebuttable presumption of abandonment.
See prior posts regarding how and when lawful permanent residents can be deemed to have expatriated:
Unplanned Expatriation: Lawful Permanent Residents’ Deportation Risks for Filing U.S. Federal False Tax Returns, Sept. 28, 2015
Timing Issues for Lawful Permanent Residents (“LPR”) Who Never “Formally Abandoned” Their Green Card, August 15, 2015
IRS Creates “International Practice Units” for their IRS Revenue Agents in International Tax Matters
The U.S. international tax law has become increasingly complex. I am confident when I say that very few individuals in the world (including IRS revenue agents) understand the complexities of Title 26 and Title 31 as they apply to 
international matters such as gifts of foreign property, gifts involving U.S. intangible property, gifts to or inheritances from foreign estates with U.S citizens (USCs) or Lawful Permanent Residents (LPRs) beneficiaries, foreign partnerships with USCs, transfers of property to foreign trusts by USCs or LPRs residing outside the U.S., transfers of property to foreign corporations, etc.
Most USCs and LPRs who live in the U.S. certainly know and understand the basics of IRS Form 1040.
However, the type and scope of international transactions contemplated by the law can be significant and are rarely understood in any depth, even by many tax professionals. I have seen cases during my career of sophisticated individuals ranging from Nobel prize winners to U.S. Ambassadors, who had not a clue about the application of U.S. federal tax law to their lives. See, the Nov. 2, 2015 post, 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
The lack of knowledge of these complex laws within the IRS, and the LB&I (Large Business and International group) which specializes in international matters has led to IRS “International Practice Units”. These are designed to allow IRS revenue agents who are not necessarily specialists in the international tax area to review transactions and be prepared to assess taxes and penalties against USCs and LPRs in the international context. The preamble says in part ” . . . Practice Units provide IRS staff with explanations of general international tax concepts as well as information about a specific type of transaction. . . ”
There are currently 63 different IRS “International Practice Units” all with dates from the last 12 months. Several of them focus heavily on information return filings which carry stiff penalties, even if no U.S. income taxes are owing. For instance see, Monetary Penalties for Failure to Timely File a Substantially Complete Form 5471 –Category 4 & 5 
Filers.
Another interesting IRS International Practice Unit is titled – Basic Offshore Structures Used to Conceal U.S. Person’s Beneficial Ownership of Foreign Financial Accounts and Other Assets.
These IRS materials give a good perspective from where the IRS views the world; including the introduction to this particular IRS International Practice Unit where it states: “This Practice Unit focuses on a U.S. Person’s proactive steps to “conceal” their ownership of foreign financial accounts, entities and other assets for the purposes of tax avoidance or evasion, even though, there may be some situations where there are legitimate personal or business purposes for establishing such arrangements. This unit falls under the outbound face of the matrix and thus, will focus on U.S Persons living in the United States . . . Most U.S. taxpayers using an offshore entity or structure of entities to hold foreign accounts are simply hiding the accounts from the Internal Revenue Service and other creditors . . .” [emphasis added]
This is a breathtaking statement from the IRS internal training manuals that “Most U.S. taxpayers using an offshore entity or structure of entities to hold foreign accounts are simply hiding the accounts from the Internal Revenue Service and 
other creditors . . .”?
The vast majority of the USCs or LPRs who I see who renounce or abandon their citizenship or LPR status, are living outside the United States and in most cases have spent almost all (if not all) of their lives outside the U.S.
Does the IRS mean that a family living in Switzerland that have dual national family members are “. . . .simply hiding the accounts from the Internal Revenue Service . . . ” if they are using, for instance, a Liechtenstein Stiftung to hold their family assets as part of an estate plan recommended to them by their Swiss legal and tax advisers?
Does the statement that this IRS International Practice Unit focuses on ” . . . U.S Persons living in the United States . . . ” give USCs and LPRs residing outside the U.S. relief from the IRS perspective of USCs simply hiding assets from the Internal Revenue Service? Will IRS revenue agents be sophisticated enough to distinguish between these two different groups; U.S. resident versus non-resident USCs and LPRs? Will the law be applied differently with respect to these resident versus non-resident U.S. taxpayers?
What role will these IRS “International Practice Units” play in forming perceptions and molding ideas of IRS revenue agents who have had little to no life experience in international affairs, multi-national families, global finance and international business operations?
More observations to come from specific IRS “International Practice Units.
U.S citizens (USCs) and Lawful Permanent Residents (LPRs): Caution When Making Gifts. US Tax Court Recently Ruled a 1972 Gift by Sumner Redstone Still Open to IRS Challenge
The statute of limitations is one of the most important considerations for any individual when considering what tax consequences the Internal Revenue Service (“IRS”) might argue they have for years past. This can occur many years into the future as explained further below. 
Former USCs and LPRs can be in a particularly precarious position, as was recently demonstrated by a U.S. Tax Court case for a gift that was made decades ago in 1972. See, Redstone vs. Commissioner (TCM 2015-237). Although this U.S. Tax Court case involving Sumner Redstone had nothing to do with renunciation of citizenship, it shows how the IRS can reach back many years and even decades in assessing taxes it claims are owing. The newly (in year 2010) added IRC Section 6501(c)(8) makes this highly likely under current revised law.
Former USCs and any U.S. beneficiaries of theirs (e.g., U.S. resident children or grandchildren who might receive gifts or bequests from the former USCs) should be cognizant of the statute of limitations. See a prior post from 2014, When the U.S. Tax Law has no Statute of Limitations against the IRS; i.e., for the U.S. citizen and LPR residing outside the U.S.
As this prior post noted, there are at least three basic scenarios when there is no statute of limitations for federal tax matters are as follows:
1. The former USC or LPR does not file a U.S. income tax return, when they had a requirement to so file. IRC Section 6501(c)(3). See a post from 2014, When do I meet the gross income thresholds that require me to file a U.S. income tax return?
2. There is fraud on the part of the taxpayer (e.g., the taxpayer intentionally does not report income). IRC Sections 6501(c)(1), (c)(2).
3. The USC or LPR fails to report certain foreign transactions, including inadvertently neglecting to report. IRC Section 6501(c)(8). This rule was only recently adopted as part of the “HIRE Act” which also created FATCA. The types of transactions set above in the table provides a brief summary of when transactions can give rise to an “open” statute of limitations period. In other words, as many years and decades can pass (see Redstone 1972 gift transaction) before the IRS ever has to make a proposed assessment of taxes and penalties. These include numerous ownership or economic interests in foreign (non-U.S.) companies, partnerships, foreign trusts, foreign investment accounts, among others.
This is indeed one of those areas where the IRS can argue a “gotcha moment”; simply because the former USC or LPR was not aware of the extremely complex rules of reporting assets (normally in their own country of residence outside the U.S.). The consequences to these families can go on indefinitely, per post from September 2015, Finally – Proposed Regulations for “Covered Gifts” and “Covered Bequests” Issued by Treasury Last Week (Be Careful What You Ask For!)
For a more in depth review of the international (non-U.S.) transactions that give rise to this reporting, see IRS Forms 3520, 3520-A, 5471, 8865, 5472, 8938, 8858, 926 among others.
Foreign Government Receives a “FATCA Christmas Gift” from IRS: 1 Gigabyte of U.S. Financial Information
The last post discussed how the director of the Mexican tax administration was critical of the U.S. federal government for not providing FATCA information on U.S. financial accounts. See, Foreign Government Criticizes U.S. Government for 
NOT Providing FATCA IGA Information on Their Taxpayers with U.S. Accounts, dated December 14, 2015.
The automatic exchange of bank and financial information is driven by the U.S. Treasury driven Intergovernmental Agreement (IGA).
As a follow-up, the Mexican newspaper Reforma reported on the 17th of December that the U.S. just provided Mexico’s treasury with a gigabyte of Mexican taxpayer information regarding U.S. financial and bank accounts. See, Entrega EU un gigabyte a Hacienda, dated Dec 17, 2015.
This news comes on the heals of the earlier criticism by the Commissioner of the Mexican IRS (SAT – Servicio de 
Administración Tributaria (SAT)), Mr. Aristóteles Núñez Sánchez. The Reforma article quotes Óscar Molina Chié (who is in charge of the large taxpayers division at SAT) generously regarding how and what information was provided by the U.S. federal government.
Finally, the article emphasized that Mexico has sent the IRS information regarding Mexican bank accounts of U.S. citizens.
The question is how much Mexican bank and financial information has actually been provided by SAT of the hundreds of thousands (if not more than 1 million) dual national taxpayers, who are citizens of both Mexico and the U.S.? See, Where the IRS will likely look overseas: USCs are Millions Yet U.S. Tax Returns are Just a Few Hundred Thousand, dated January 28, 2015.
Revocation or Denial of U.S. Passport: More on new section 7345 (Title 26/IRC) and USCs with “Seriously Delinquent Tax Debt”
New Section 7345 completely modifies how U.S. citizens (“USCs”) living and traveling around the world have to now consider very seriously actions taken by the Internal Revenue Service (“IRS”). It is the IRS which now holds the power under this new law that requires the U.S. Department of State (“DOS”) to revoke or deny to issue a U.S. passport in the first place.
New Section 7345(e) provides in relevant part as follows: “upon receiving a certification described in section 7345 of the Internal Revenue Code of 1986 from the Secretary of the Treasury, the Secretary of State shall not issue a passport to any individual who has a seriously delinquent tax debt described in such section. . . ” [emphasis added].
This new law mandates (not at the discretion of the DOS) that various U.S. passports be denied at the direction of the IRS. Once the IRS issues the certification of “seriously delinquent tax debt.”
All it takes, is for the IRS to claim tax or penalties are owing of at least US$50,000 through an assessment (plus start a lien or levy action).
Of course, US$50,000 sounds like a large sum for many modest USCs, until an individual understands that there are a host of international reporting requirements for taxpayers. Specifically, the IRS can impose a US$10,000 penalty for each violation of failing to complete and file various IRS information forms; EVEN IF NO income 
taxes are owing. See IRS website – FAQs 5 and 8 regarding civil penalties (see also How is the offshore voluntary disclosure program really working? Not well for USCs and LPRs living overseas).
For a summary of these forms and filing requirements, see a prior post, Oct. 17, 2015, Part II: C’est la vie Ms. Lucienne D’Hotelle! Tax Timing Problems for Former U.S. Citizens is Nothing New – the IRS and the Courts Have Decided Similar Issues in the Past (Pre IRC Section 877A(g)(4))
Indeed, our office has seen and assisted numerous taxpayers around the world where the IRS has assessed tens of thousands, hundreds of thousands and in some cases in excess of US$1M (in proposed assessments) against an individual for failure to simply file information reporting forms. See, for instance, a prior post on Nov. 2, 2015, 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
Also, we have seen several IRS assessments of income tax (not just penalties) against individuals of hundreds of thousands of dollars which are not supported by the law. For instance, it is not uncommon for the IRS to issue a “substitute for return” alleging income taxes owing. See, How the IRS Can file a “Substitute for Return” for those USCs and LPRs Residing Overseas, posted Nov. 8, 2015. We have a number of those cases pending, where the IRS has taken erroneous information and made such assessments against USCs residing and working outside the U.S. for much if not most of their professional lives.
New Section 7345 requires that USCs, wherever they might reside, take great care in knowing about any actions the IRS might be taking against them; as to tax and penalty assessments, whether or not they are supported under the law.
One basic method of learning more about the activities of the IRS is to make a transcript request directly to the IRS regarding the status of a USC’s federal tax status according to IRS records. See, IRM, Part 21. Customer Account Services . . . Section 3. Transcripts.
It is also possible for the USC to obtain additional tax information from the IRS through a Freedom of Information Act (“FOIA”) request.
IT AIN’T FAIR: First (1) taxing me as a U.S. citizen and then (2) taxing me on my relinquishment or renunciation of U.S. citizenship or LPR abandoment and further (3) taxing my children on their inheritance from me!@!@!
This sums up the argument of many critics of U.S. citizenship based taxation of worldwide income.
Many may agree with this conclusion from an equity or sense of fairness argument. See proposal below at the end of this post.
However, the argument of fairness has little place in interpretations of Title 26, the U.S. federal tax law. For example, the U.S. Tax Courts are not courts of equity. See, The United States Tax Court – An Historical Analysis, Dubroff and Hellwig, footnote 668.
Also, virtually no courts of the U.S. find U.S. tax laws to be unconstitutional. It is a very rare occurrence that the U.S. Supreme Court even takes up a tax case to determine its constitutionality. The “Obamacare” with broad application throughout society was a case heard by the Supreme Court which upheld a law signed by President Obama on March 23, 2010, more correctly called the Patient Protection and Affordable Care Act. That law increased Medicare taxes and imposed a penalty surcharge on individuals who do not maintain certain health coverage.
In contrast, U.S. citizens and lawful permanent residents (LPRs) residing overseas are a relatively small population of the U.S. taxpayer population. Accordingly, it was only until late the U.S. government even began focusing on this population to collect taxes from them. See, Is the new government focus on U.S. citizens living outside the U.S. misguided or a glimpse at the new future?, posted March 6, 2014. 
Finally, see various proposals to modify the law: e.g., U.S. Citizenship Based Taxation – Proposals for Reform – “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.
Executive Summary
This paper proposes to eliminate the U.S. citizenship based taxation and create a consistent exit tax system. The complex web of the current U.S. tax law has made it nearly impossible for all but the most sophisticated U.S. citizens and lawful permanent residents (“LPRs”) residing overseas to file complete and accurate tax returns. The proposal should bring consistency, tax simplicity for taxpayers residing outside the U.S., and do so in part by eliminating the U.S. citizenship based tax system, which is unique in the world, dates to the civil war and is inappropriate for the global world we live in.
- Summary of Current Status of the Law
To date, there is no serious and comprehensive proposal to modify the U.S. federal tax law imposing U.S. taxation of the worldwide income of USCs and LPRs residing outside the U.S.
There are also no serious proposals to repeal the current U.S. “expatriation tax” on (1) mark to market income and gains (When does “Covered Expatriate” Status -NOT- matter?) and (2) the 40% tax on covered gifts and inheritances (see, Proposed Regulations for “Covered Gifts” and “Covered Bequests” Issued by Treasury Last Week (Be Careful What You Ask For!)
Unplanned Expatriation: Lawful Permanent Residents’ Deportation Risks for Filing U.S. Federal False Tax Returns
One sure way to “get expatriated” as a lawful permanent resident (even if that was not the plan) is to file a false federal tax return, statement or provide false information to the government. U.S. citizens cannot be deported for filing false tax returns, due to Constitutional rights. 
Kawashima vs. Holder, (2012), is a story of a Japanese family that lived legally in the U.S. with lawful permanent residency status. According to the L.A. Times,
“Akio and Fukado Kawashima came to Southern California in 1984 as lawful Japanese immigrants determined to succeed in business. They operated popular sushi restaurants in Thousand Oaks and Tarzana and recently opened a new eatery in Encino.
But after they underreported their business income in 1991, they paid a hefty price. The Internal Revenue Service hit them with $245,000 in taxes and penalties. The couple pleaded guilty and paid in full. A decade later, the Immigration and Naturalization Service decided to deport them. . . “
The crucial mistake was the filing of a false return as defined under IRC Section 7206(1):
“(1) Declaration under penalties of perjury . . . Willfully makes and subscribes any return, statement, or other document . . . made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter . . . “
The Supreme Court ruled in this case that the false return that generated a revenue loss of at least US$10,000 for the government was properly classified by the government as an “aggravated felony.” In other words, the tax returns were materially false (which the taxpayers had plead to previously) and created an unpaid tax liability of at least US$10,000. The Supreme Court cited the immigration law (Title 8) and found such an offense to be a violation of Section 1227(a)(2)(A)(iii) as an:
“(iii) Aggravated felony
Any alien who is convicted of an aggravated felony at any time after admission is deportable.
The false tax return which created a tax liability of a relatively low threshold of US$10,000 therefore carries potentially sever consequences.
See a prior post that briefly discusses IRC Section 7206(1), see, What could be the focal point of IRS Criminal Investigations of Former U.S. Citizens and Lawful Permanent Residents?
While most USCs residing overseas will never be concerned about deportation (which should generally not be available to the government, due to constitutional rights of the U.S. citizen) LPRs filing tax returns will indeed want to consider carefully the implications of ” . . . any [and all tax and other] return[s], statement[s], or other document[s] . . . ” submitted to the federal government.
Also, prior posts discussed the law and risks associated with filing or sending false documents, information or returns to the Internal Revenue Service (“IRS”) –
See,Take Caution when Completing a “Tax Organizer” Provided by Your Tax Return Preparer, posted July 19, 2014;
*Is the new government focus on U.S. citizens living outside the U.S. misguided or a glimpse at the new future?* posted March 6, 2014, Will the Justice Department and Criminal Investigation Division of the IRS Turn Their Sights on USCs or LPRs living Overseas? posted March 19, 2014,
The relevance of the Kawashima case to readers of this blog, is how a “long-term resident” may inadvertently find they will trigger the “mark-to-market” tax on their worldwide assets and later cause their U.S. beneficiaries to be subject to what is currently a 40% tax on the receipt of certain gifts and inheritances. See, prior posts on LPR status – Who is a “long-term” lawful permanent resident (“LPR”) and why does it matter?, posted August 19, 2014.
Some prior news coverage of the Kawashima v. Holder case here:
Legal immigrants face deportation for filing false tax return