International Tax · Citizenship Renunciation · LPR Abandonment
International Tax Shareholder
What Questions Need to be Asked if You Live (with a “green card”) in one of the 67 Countries – with a U.S. Income Tax Treaty?
Depending upon the factual circumstances of each individual, they may be able to benefit from the international tax treaty law articulated by the U.S. Federal District Court in Aroeste v United States – Order (Nov 2023). Future posts will explore the legal relevance of some of the following questions to consider:
Has the individual filed any U.S. federal income tax returns since leaving the United States?
Was a professional tax return preparer hired or consulted about the filing of a federal income tax return (e.g., a certified public accountant, an enrolled agent, a full time tax return preparer, ta tax attorney, etc.)?
Has the individual been filing IRS Form 1040 Resident Tax Returns in the same way Mr. Aroeste was filing – based upon the advice (that turned out to be erroneous -although given in good faith) from their U.S. tax return preparer?
What steps if any have been taken to notify the U.S. federal government (irrespective of the agency) regarding their physical residency outside the United States?
This information is intended to provide general information about tax expatriation legal concepts under U.S. law to help readers better understand often very complex issues within the U.S. international tax field for citizens and lawful permanent residents. General legal information is not the same as legal advice, that is, the concrete application of law to a specific case with unique and particular facts.
Legal advice also should include strategic planning and advice to a particular case. A legal adviser should be able to assist an individual in taking important decisions and steps, related to the specific goals of the individual, while understanding the legal and tax consequences of each step. There are a range of consequences that the “U.S. tax expatriation” laws impose upon different types of transactions, transfers, reorganization of assets, etc. None of these items are discussed in this Tax-Expatriation.com This is not legal advice.
Countries From Which Viewers Read Posts – Tax-Expatriation.com – First Week of 2024 (Which Ones are Tax Treaty Countries?) – Applying the “Escape Hatch”
The whole idea of the “escape hatch” for tax treaties is an excellent way of explaining how and when tax treaty law applies in different circumstances. Importantly, the U.S. federal government cannot deny an individual (or presumably a company either) from properly applying the law of a tax treaty – even if they “gave [an] untimely notice of his treaty position “. See further comments at the end of this post and the District Court’s opinion here – Aroeste v United States – Order (Nov 2023). Meanwhile, see below the 22 countries from where global readers viewed Tax-Expatriation.comduring the first full week of 2024.
Below is the list of 22 countries (including the United States) from where readers hailed, who read Tax-Expatriation.comduring the first week of 2024. All, but Brazil, Croatia, Nigeria, the United Arab Emirates, Colombia, Kenya and Bermuda have income tax treaties with the United States.
This means that all other individuals are connected with the following 14 countries that have tax treaties with the United States:
Mexico
India
Canada
United Kingdom
Switzerland
Australia
China
Spain
Turkey
Germany
Japan
Romania
Portugal
Netherlands
Further, all individuals who might have never formally abandoned their lawful permanent residency (“green card”), maybe never filed specific IRS tax forms, and yet reside in one of these fourteen (14) treaty countries could be eligible for the application and the specific benefits of international income tax treaty law. This, along the lines of the decision in Aroeste v United States (Nov. 2023). In addition, there could be other tax treaty benefits applicable to those individuals in these fourteen countries depending upon where are their assets, what type of income they have, where does the income come from, and where do they reside.
The tax treaty rights discussed here are established by law, as elucidated by the Federal District Court in Aroeste v United States (Nov. 2023). The Court determined that the IRS cannot simply assert an individual’s ineligibility for treaty law provisions based solely on the failure to file specific IRS forms within the government-defined “timely” period. The Court emphasized that there is no automatic waiver of treaty benefits as a matter of law, while acknowledging: “. . . Aroeste gave untimely notice of his treaty position. . .” For specific excerpts from the opinion, please refer to the highlighted portions below. To access the complete opinion, please consult Aroeste v United States – Order (Nov 2023).
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B. Whether Aroeste Did Not Waive the Benefits of the Treaty Applicable to Residents of Mexico and Notified the Secretary of Commencement of Such Treatment.
To establish Mexican residency under the Treaty, and thus avoid the reporting requirements of “United States persons,” Aroeste must have filed a timely income tax return as a non-resident (Form 1040NR) with a Form 8833, Treaty-Based Return Position Case 3:22-cv-00682-AJB-KSC Document 90 Filed 11/20/23 PageID.2722 Page 8 of 17 9 22-cv-00682-AJB-KSC Disclosure Under Section 6114 or 7701(b). Indeed, Aroeste did not submit Form 8833 to notify the IRS of his desired treaty position for the years 2012 and 2013 until October 12, 2016, when he submitted an amended tax return for both years at issue. (Id.) The Government asserts that because Aroeste did not timely submit these forms, he cannot establish that he notified the IRS of his desire to be treated solely as a resident of Mexico and not waive the benefits of the Treaty. (Id. at 4.) The Government relies upon United States v. Little, 828 Fed. App’x 34 (2d Cir. 2020) (“Little II”), a criminal appeal in which the court held a lawful permanent resident of a foreign country was a “‘resident alien’ or ‘person subject to the jurisdiction of the United States’ with an obligation to file an FBAR.” Id. at 38 (quoting 31 C.F.R. § 1010.350(a), (b)(2)).
In response, Aroeste asserts that while he agrees with the Government that I.R.C. § 6114 requires disclosure of a treaty position, he disagrees as to the consequences for a taxpayer’s failure to timely file the disclosure. (Doc. No. 75-1 at 6.) While the Government asserts the failure to timely file Forms 1040NR and 8833 deprives individuals of the Treaty benefits provided, Aroeste argues instead that I.R.C. § 6712 provides explicit consequences for failure to comply with § 6114. Specifically, § 6712 states that “[i]f a taxpayer fails to meet the requirements of section 6114, there is hereby imposed a penalty equal to $1,000 . . . on each such failure.” I.R.C. § 6712(a). Based on the foregoing, Aroeste argues the taxpayer does not lose the benefits or application of the treaty law.1 (Doc. No. 75-1 at 6.) In United States v. Little, 12-cr-647 (PKC), 2017 WL 1743837, at *5 (S.D. N.Y. 1 Aroeste further asserts that published agency guidance, letter rulings, and technical advice support his position. (Doc. No. 75-1 at 7.) For example, in 2007, an IRS agent sought advice from IRS Counsel asking, “Do we have legal authority to deny a tax treaty because Form 8833 is not attached or the treaty is claimed on the wrong Form (1040EZ or 1040)?” Legal Advice Issued to Program Managers During 2007 Document Number 2007-01188, IRS. IRS Counsel responded, “No, you cannot deny treaty benefits if the taxpayer is entitled to them. You may impose a penalty of $1,000 under section 6712 of the Code on an individual who is obligated to file and does not.” Id. As to this, the Court finds it has no precedential value under I.R.C. § 6110(k)(3), which states that “a written determination may not be used or cited as precedent.” See Amtel, Inc. v. United States, 31 Fed. Cl. 598, 602 (1994) (“The [Internal Revenue] Code specifically precludes [plaintiff] and the court from using or citing a technical advice memorandum as precedent.”) Case 3:22-cv-00682-AJB-KSC Document 90 Filed 11/20/23 PageID.2723 Page 9 of 17 10 22-cv-00682-AJB-KSC May 3, 2017) (“Little I”), a criminal case for the plaintiff’s willful failure to file tax returns, the court stated the plaintiff’s same argument “that the failure to take a Treaty position can result only in a financial penalty also lacks merit. 26 U.S.C. § 6712(c) expressly states that ‘[t]he penalty imposed by this section shall be in addition to any other penalty imposed by law.’” (emphasis added).
I have been consulted over the years by other taxpayers which are cited now as published decisions by the government and the Federal District Court (Southern District of California). These cases are referenced and cited in my own most recent case of Aroeste v United States (Nov. 2023).
However, in Little I, the plaintiff never attempted to take a treaty position. Next, in Shnier v. United States, 151 Fed. Cl. 1, 21 (2020), the court denied the plaintiffs’ claims for relief based on tax treaties because they failed to disclose a treaty based position on their tax returns pursuant to I.R.C. § 6114 “and did not attempt to cure this omission in their briefing[.]” Although the plaintiffs in Shnier were naturalized U.S. citizens who attempted to recover their income taxes under I.R.C § 1297, the court’s brief discussion of I.R.C. § 6114 in relation to a treaty-based position is instructive that an untimely notice of a treaty position does not bar the individual from taking such position. Moreover, in Pekar v. C.I.R., 113 T.C. 158 (1999), the court noted that a taxpayer who fails to disclose a treaty-based position as required by § 6114 is subject to the $1,000 penalty, but stated “there is no indication that this failure estops a taxpayer from taking such a position.” Id. at 161 n.5.2 The Court agrees with Aroeste.
Although Aroeste gave untimely notice of his treaty position, the Court finds this does not waive the benefits of the Treaty as asserted by the Government. Rather, I.R.C. § 6712 provides the consequences for failure to comply with I.R.C. § 6114, namely a penalty of $1,000 for each failure to meet § 6114’s requirements of disclosing a treaty position.
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For individuals living in any of these 14 tax treaty countries (or any of the total 67 income tax treaty countries), the key takeaway is that, based on their specific circumstances, they might be eligible to leverage the international tax treaty principles outlined in the Aroeste v United States case (Nov. 2023). The forthcoming post will pose questions for consideration by the potentially millions of individuals affected by these rules of law.
DHS Report: 3.89M Emigrated LPRs — Who Falls Under the Tax Treaty Escape Hatch?
Clear U.S. tax and legal relief now exists for a significant portion of the 3.89 million Lawful Permanent Residents (LPRs) who never formally abandoned their U.S. immigration status. This relief stems from two sources in the law:
(i) Tax treaty laws that apply to individuals residing in one of the 67 income tax treaty countries with the United States, recently including Chile.
(ii) Legal principles, recently confirmed by the Federal Court in Aroeste v. United States, that establish that individuals can apply tax treaty laws (when applicable) even if they missed certain filing deadlines set by the Internal Revenue Service. The Court termed this provision an “escape hatch,” allowing individuals, depending on specific circumstances, to be considered non-residents of the United States (not “United States persons”). This can be true under the relevant treaty, even if they never formally abandoned their LPR status.
The 2023 DHS report estimates that nearly 4 million individuals have emigrated from and left the United States and are now living somewhere around the world. Notably, Mexico constitutes the largest share at about 25% of the total LPR population who have left the United States.
The DHS report allows the reader to extrapolate that around 1 million individuals, similar to Mr. Aroeste, are living in Mexico and did not formally abandon their LPR status by filing Form I-407, Record of Abandonment of Lawful Permanent Resident.
Aroeste v. United States is the third case I’ve litigated, examining whether individuals with a “green card” residing outside the United States in a tax treaty country are considered U.S. income tax residents. The previous two cases (involving Mexican and German citizens) didn’t progress to the oral argument stage; as the government conceded both before trial. See, IRS Chief Counsel Concedes Tax Treaty Residency Position for LPR German Taxpayer in Tax Court
A FOIA response yielded surprising information; the government records indicate that only 46,364 Forms I-407 were filed from 2013 to 2015.
(Source: Federal Government Response to FOIA Request: Office of Performance and Quality (OPQ), Performance Analysis and External Reporting (PAER), JJ)
SOURCE: Federal Government Response to FOIA Request: Office of Performance and Quality (OPQ), Performance Analysis and External Reporting (PAER), JJ
What can we glean from the DHS report and the LPR – I-407 information obtained through the FOIA response? There is a substantial gap in the millions; millions of individuals who have physically left the U.S. to reside elsewhere globally, compared to the relatively smaller number of tens of thousands who have officially filed Form I-407, Record of Abandonment of Lawful Permanent Resident.
Conclusion
Importantly, now under the legal principles established in Aroeste v. United States, individuals residing in one of the 67 countries covered by an income tax treaty have specific legal relief from the worldwide reporting of income to the United States government.
Mérida – the Place to be in February (19th and 20th)
The implications of the Aroeste v United States – Order (Nov 2023) particularly for millions of taxpayers globally and “U.S.” taxpayers affected by pertinent tax treaty provisions, will be a focal point of discussion at the upcoming international tax conference in February.
The University of San Diego School of Law – Chamberlain International Tax Institute will take place on February 19th and 20th, 2024, at the International Convention Center in Mérida, Yucatán, México. You can register for the conference – HERE –
Among the courses offered, there will be a detailed examination of- Aroeste v. the United States: Limits on Government Authority Re: Tax Treaty Law ++– along with other international tax topics and sessions featuring much Moore:
United States Supreme Court – Tax Decisions & Moore
International Tax Reporting: New Reporting of International Partnerships – K-2s & K-3s
United States-based Cross-Border Real Estate Investments (Advanced)
U.S. Investor Visa Options and Limitations
California, Texas & Florida Probate Proceedings of Cross-Border Estates
Recent Articles re: Aroeste v. United States (Tax Treaty – Nonresident; Lawful Permanent Resident) – IRS Notice 2009-85 Lacks Authority
There have been numerous articles being written about the key case of the author (Patrick W. Martin) who has represented Mr. and Mrs. Aroeste for nearly 8 years.
Federal District Court Rules in Favor of Mexican Citizen – Aroeste vs. United States (LPR) – Tax Treaty Applies: Government’s Motion for Summary Judgment is Denied
Last week (Nov. 20, 2023), Judge Battaglia in the Southern District of California (San Diego) ruled in favor of our client Mr. Alberto Aroeste regarding the application of the U.S.-Mexico Tax Treaty. The DOJ, Tax Division arguments on behalf of the Internal Revenue Service in the case (and their Motion for Summary Judgment – MSJ) were largely rejected by the Court.
A thorough read of the Order from the Court is recommended to understand the substantial legal findings and legal analysis made by the Court relevant to those who possess a “green card” referred to as “lawfully admitted for permanent residence” in Title 8, § 1101(a)(13) [Immigration and Nationality Act]. Key to this case, Title 26, § 7701(b)(6) [Federal Tax Code] then rather contorts the concept by saying an individual is a “lawful permanent resident” in accordance with immigration laws; but then goes on to put conditions on who apparently is a “lawful permanent resident” for federal tax purposes. While immigration law requires the individual be ” . . . accorded the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws, such status not having changed”; the tax definition seems to ignore that status (i.e., has it changed and is the personal no longer accorded the privilege of residing permanently in the U.S.?).
The Board of Immigration Appeals (the “Board”), has long recognized that an alien’s status may change by operation of law, such that an alien may abandon his LPR status without a finding of removability (or, formerly, deportability or excludability) after a formal adjudicatory process. See United States v. Yakou, 428 F.3d 241, 247 (D.C. Cir. 2005); at 247-51 (discussing case law regarding abandonment and holding that an alien may abandon LPR status without formal administrative action); see also Matter of Quijencio, 15 I. & N. Dec. 95 (B.I.A. 1974); Matter of Kane, 15 I. & N. Dec. 258 (B.I.A. 1975); Matter of Muller, 16 I. & N. Dec. 637 (B.I.A. 1978); Matter of Abdoulin, 17 I. & N. Dec. 458, 460 (B.I.A. 1980); Matter of Huang, 19 I. & N. Dec. 749 (B.I.A. 1988).
The Court did not need to get into the nuances of immigration law to rule against the government in this case.
Some of the substantial takeaways from the decision are:
Waiver of the Tax Treaty: The government cannot assert an individual waived the treaty law because she initially filed the wrong IRS forms (1040) instead of the non-resident form (1040NR) and IRS Form 8833.
The Court agrees with Aroeste. Although Aroeste gave untimely notice of his treaty position, the Court finds this does not waive the benefits of the Treaty as asserted by the Government. Rather, I.R.C. § 6712 provides the consequences for failure to comply with I.R.C. § 6114, namely a penalty of $1,000 for each failure to meet § 6114’s requirements of disclosing a treaty position.
Aroeste v United States – Order 20 Nov 2023 (p. 17)
Expatriation Tax form – IRS Form 8854: Validity and its Failure to Comply with the Administrative Procedure Act (“APA”)
C. Whether Aroeste Was Required to File Form 8854 The Government next argues that even if the IRS had accepted Aroeste’s amended returns, neither amended return would have properly notified the IRS of a commencement of treaty benefits because both failed to attach Form 8854, as required by IRS Notice 2009-85. (Doc. No. 76-1 at 4–5.) The Government concedes Aroeste attached Form 8833 to both amended forms. (Id.) Aroeste responds that Notice 2009-85 is not binding authority as it fails to comply with the Administrative Procedures Act (“APA”). (Doc. No. 78-1 at 8 (citing Green Valley Investors, LLC v. Comm’r of Internal Revenue, 159 T.C. No. 5, at *4 (Nov. 9, 2022)) (under the APA, agencies must follow a three-step procedure for “notice-and-comment” rulemaking, but this requirement does
not apply to “interpretive rules, general statements of policy, or rules of agency organization, procedure, or practice.”).) The Court agrees. In Mann Construction, Inc. v. United States, 27 F.4th 1138 (6th Cir. 2022), the court found that Notice 2007-83 failed to comply with the APA’s notice-and-comment procedure. Similarly here, because Notice 2009-85 has not been subject to a notice-and-comment procedure, it does not comply with the APA and thus is not binding. As such, Aroeste was not required to file Form 8854 with his amended returns.
Aroeste v United States – Order 20 Nov 2023 (p. 11)
Tax Treaty Law Applies – Article 4 Regarding Tax Residency
Various detailed analysis and discussions from the Court –
Aroeste v United States – Order 20 Nov 2023 (p. 11-14)
The Preamble to the FBAR Regulations is Not the Law –
. . . the Government points to the preamble to the 31 C.F.R. Part 1010 regulations, providing that “[a] legal permanent resident who elects under a tax treaty to be treated as a non-resident for tax purposes must still file the FBAR.” Amendment to the Bank Secrecy Act Regulations—Reports of Foreign Financial Accounts, 76 Fed. Reg. 10234-01 (Feb. 24, 2011). The Court finds this unavailing. The Government’s argument does not refute the plain language of the FBAR regulations, which explicitly invoke provisions of Title 26, including the provision that requires consideration of an individual’s status under an applicable tax treaty for the purpose of determining whether an individual is a “United States person” subject to FBAR filing. Specifically, Title 31 C.F.R. § 1010.350, which governs reporting of FBARs, subsection (b)(2) states that a “resident of the United States is an individual who is a resident alien under 26 U.S.C. 7701(b) and the regulations thereunder . . . .” The Government fails to cite to any case law or statue indicating otherwise, and the Court finds none. As such, because the Court finds the Treaty applicable to Aroeste, then the residence provisions of the Treaty, or the “tie breaker rules” dictates whether Aroeste may be treated as a nonresident alien.
Aroeste v United States – Order 20 Nov 2023 (p. 14)
This is the third court case (the other two were in U.S. Tax Court) I have had over the last several years where the IRS tried to assess substantial penalties and taxes against LPRs who resided substantially outside the United States. The other two cases were conceded by the IRS prior to going to trial. One case had over US$40M at stake as assessed by the IRS. This case, in federal district court, was pushed all the way to this favorable (to Mr. Aroeste and those around the world in similar circumstances) outcome by the government. We were successful with all of these non-U.S. citizen cases (two brothers from Mexico and an individual from Germany).
Three Precedent Setting Cases in International Information Reporting (“IIR”) in 6 Weeks: * Aroeste, * Bittner, and * Farhy: all Interconnected via Title 26, Title 31 and U.S. Income Tax Treaties
In just over six weeks, there have been three key judicial precedents favorable to international individuals. These cases have helped clarify the requirements of individuals and the limitations on the powers of the IRS in assessing IIR penalties. Please see the full article on tax notes. These IIR decisions relate to:
Title 31 penalties for Foreign Bank Account Reports (“FBARs”),
How these two federal statutory regimes of Title 31 and 26 crossover into international law as set forth in U.S. income tax treaties negotiated with different countries around the world.
Each of these three cases are interconnected and have significant impact to individuals with global lives, global assets, multi-national family members and those who have businesses or accounts in different parts of the world.
Aroeste v. United States
First, on February 13th, 2023, the Southern District of California District Court (the “District Court”) made a key determination in a Joint Discovery Motion decision in Aroeste.[2] The District Court concluded in Aroeste that the IRS/DOJ[3] could not ignore the U.S.-Mexico income tax treaty (“Treaty”) and its application to a Mexican national who has resided almost all of his life in Mexico City and has maintained a “green card” for immigration purposes in the United States. It is a non-willful FBAR case. The District Court applied the interconnected statutes and regulations of Titles 31 and 26 to help determine who qualifies as a “United States person”; specifically with reference to international law and obligations set forth in the Treaty. The key question in that case that remains to be answered is who (specifically Mr. Aroeste and by extension to a pool of millions of green card individuals residing outside the United States who are not citizens[4]) must file FBARs?
Second, on February 28th, 2023, the Supreme Court of the United States (“SCOTUS”) resolved in Bittner[5], that the applicable non-willful FBAR penalty is not measured by every foreign account of the individual as the Service has argued for years. That case also dealt with non-willful filing of FBARs and the SCOTUS concluded the IRS cannot impose penalties of $10,000 on each and every account held; but rather the penalty is “per report” that was not correctly filed. Hence, the total maximum penalty per year is $10,000. A maximum penalty of $50,000 (x5 years) applied per the SCOTUS versus the IRS determined amount of US$2.7M+.
Farhy v. Commissioner
Lastly, on April 3rd, 2023, the United States Tax Court (the “Tax Court”) issued a decision in Farhy,[6] stating that the IRS does not have statutory authority to assess IIR penalties under section 6038(b). The IIR that is required by this statute is IRS Form 5471, which includes multiple filing categories. This has far reaching implications about how the government will be able to collect the IIR penalties the Service administratively determines are owed.[7] The Taxpayer Advocate previously issued a report on point titled: The IRS’s Assessment of International Penalties Under IRC §§ 6038 and 6038A Is Not Supported by Statute, and Systemic Assessments Burden Both Taxpayers and the IRS[8] In that report, the Taxpayer Advocate identified more than $310M of penalties just for the tax year 2014 the IRS “assessed” under Sections 6038 and 6038A.[9] We now know these “assessments” were invalid.
[1] See, footnote 19 regarding United States Tax Court’s Order in the case of Alberto Aroeste & Estela Aroeste vs. Commissioner.
[3] The “IRS” or the “Service” are used as shorthand for the Internal Revenue Service; and the Department of Justice; Tax Division is referred to as the “DOJ.”
[4] See, the Homeland Security, Office of Immigration Statistics – Estimates of the Lawful Permanent Resident Population in the United States and the Subpopulation Eligible to Naturalize: 2015-2019. According to the report, more than 1 million individuals become LPRs each year and 4.8 million are estimated to have died and/or emigrated. The authors have extrapolated from these estimates in the report to conclude that more than 3 million of these individuals have emigrated and left the United States. The millions of individuals do not reside in the U.S. of which Mr. Aroeste is one of these individuals; although a tax treaty must exist in the country of residence for the analysis of the District Court in Aroeste v. United States to be applicable.
[5] No. 31—1195 (U.S. Feb. 28, 2023); 598 U. S. ____ (2023); The majority opinion by Justice Gorsuch cited to the ACTEC amicus brief (where Patrick W. Martin, the author of tax-expatriation.com and a fellow of ACTEC worked on the drafting of the brief) and concluded:
“Best read, the BSA treats the failure to file a legally compliant report as one violation carrying a maximum penalty of $10,000, not a cascade of such penalties calculated on a per-account basis.” The ACTEC brief was cited by the majority opinion- “ We see evidence, too, that the point of these reports is to supply the government with information potentially relevant to various kinds of investigations, criminal and civil alike. But what we do not see is any indication that Congress sought to maximize penalties for every nonwillful mistake (whether a late filing, a transposed account number, or an out-of-date bank address). See Brief for American College of Trust and Estate Counsel as Amicus Curiae 5–7.”
[7]See, Patrick W. Martin, Megan L. Brackney, Robert Horowitz, and Javier Diaz de Leon Galarza: Problems Facing Taxpayers with Foreign Information Return Penalties, November 12, 2020.
“LPR Tax Limbo” – Formal Abandonment of LPR (Form I-407) – BIG GAP with Actual Emigration of LPRs
Millions of lawful permanent residents (LPRs) who have left the U.S. and not “formally abandoned” their LPR status (by filing Form I-407, Record of Abandonment of Lawful Permanent Resident) typically remain in some kind of “LPR U.S. tax limbo.” How many individuals worldwide are in this LPR U.S. tax limbo?
Why are these numbers important for the tax-expatriation analysis? See, a recent post, 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). Indeed, most individuals probably do not think they are a U.S. federal income tax resident when they leave the U.S. to reside overseas back to their home country. Why would they? There is no tax training manual provided to LPRs who leave the U.S. and no tax advisories – reflected on the card itself (unlike the last page of the U.S. passport, paragraph D). More precisely, most are probably not giving much, if any thought, to the complex U.S. federal tax residency rules and their extraterritorial application.
The “big gap” referred to above can be identified from the the Office of Immigration Statistics (OIS) report titled: Estimates of the Lawful Permanent Resident Population in the United States and the Subpopulation Eligible to Naturalize: 2015-2019. According to the report, more than 1 million individuals become LPRs each year. Between naturalization, mortality and emigration the report shows that the LPR population, year over year, has remained stable. In 2019 the total number of LPRs per this report was 13.6 million, up from just 13.0 million in 2015.
The “gap” is the difference between the numbers of LPRs who have left-emigrated the U.S. (some 3+ million) compared to something like an annual average of 15-19 thousand who have filed Form I-407. The gap is in the millions of persons who are in LPR U.S. tax limbo.
Mexico
The report is also worth reading if you want to understand the demographics of the LPR population. Mexico has about 2.5 million (which is by far the greatest number) of the total 13+ million LPR population.
As the report points out there is no reliable direct measurements of LPR emigration. They do not exist. This lack of information is what drove me to file a FOIA request with the government to request information about the number USCIS Forms I-407 that are filed with the government. See, also quarterly statistics of the USCIS – Form I-407, Record of Abandonment of Lawful Permanent Resident Status (partial information for years 2016-2019).
The information I obtained in the FOIA response was surprising, since the government had records showing only 46,364 Forms I-407 were 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 only 15,455 individuals who formally abandoned their LPR status. Contrasted with more than 3.6 million estimated to have emigrated in 2019 per the DHS report leaves a massive gap of well over 3 million persons who held a “green card” and have left. They are now in LPR U.S. tax limbo.
What about the tax consequences? How many of these LPRs who left the U.S. know, understand or have any idea whatsoever of the federal tax filing obligations regarding their status?
What is the takeaway from the DHS report and LPR – I-407 information provided to me by the FOIA response? There is a discrepancy in the millions of people. Millions of individuals who actually leave or have left the U.S. to reside somewhere else around the world; compared to only some tens of thousands of individuals who have formally filed Form I-407, Record of Abandonment of Lawful Permanent Resident.
What can these individuals do to get out of the LPR U.S. tax limbo?
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:
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.).
New Treasury Regulations Can Effect Some Long-Term Residents (“Green Card” Holders)
There have been numerous posts about how Lawful Permanent Residents (“LPRs”) who have not formally abandoned their green card might have adverse U.S. tax consequences as part of the U.S. “expatriation tax.”
The U.S. Treasury issued new Regulations that can impact LPRs who have previously filed U.S. 1040NR tax returns under an applicable income tax treaty. On December 13, 2016, the these final regulations require foreign-owned, single-member U.S. limited liability companies (“SM-LLCs”) that are treated as disregarded entities for U.S. tax purposes to file an information return to report certain transactions. These Treasury Regulations, 26 CFR § 1.6038A-1(c) require these foreign-owned SM LLCs to be treated as if they are a separate domestic “C” corporation specifically for reporting purposes.
An individual who is a LPR can fall into this category in certain circumstances; namely where they cease to be a “U.S. person” under IRC Section 7701(b)(6). See, IRS Form 5472 directly here –
ar case. A legal adviser should be able to assist an individual in taking important decisions and steps, related to the specific goals of the individual, while understanding the legal and tax consequences of each step. There are a range of consequences that the “U.S. tax expatriation” laws impose upon different types of transactions, transfers, reorganization of assets, etc. None of these items are discussed in this Tax-Expatriation.com This is not legal advice.
