Tax Compliance

USC Renunciations: Ski Slope Upward – Ski Slope Downward

Posted on

The federal tax law has a very transparent system of reporting and identifying former U.S. citizens who have renounced their citizenship. The data with the names of each individual are published quarterly on the federal government’s website as Required by Section 6039G.  The complete set of lists including thousands of names of former U.S. citizens going back to the mid-1990s can be reviewed here.  Quarterly Publications.   Quarterly Publication of Individuals, Who Have Chosen to Expatriate.

See previous posts regarding the numbers of USCs who were renouncing at an increasingly rapid pace starting at just around and just before the year 2010. The FATCA transparency laws were passed in 2010 and so too were more international information reporting requirements (IRC 6038D) and strong enforcement efforts overseas by the IRS and DOJ Tax Division; which could be part of a cause and effect consequence? See, CHAPTER 4—TAXES TO ENFORCE REPORTING ON CERTAIN FOREIGN ACCOUNTS (§§ 1471 – 1474)

Why have U.S. Citizenship Renunciation Numbers Plateaued?

Posted on : The current renunciations and now steep decline starting in 2018 may be temporary or part of a trend?

Subsequent posts will discuss the new trend of how relatively fewer lawful permanent residents (“LPRs”) are formally abandoning their status compared to USCs who formally renounce. This is true even though the number of USCs renouncing is in decline.

The expatriation laws were modified substantially in 2008 per the “HEART” Act, as part of a trend of changes in the expatriation tax law during a dozen year time frame. See prior post, Timeline Summary of Changes in Tax Expatriation Provisions Since 1996

There have been no substantial modifications to the law since 2008 when the “mark to market” rules were adopted. Importantly, expatriates often must concern themselves The “Hidden Tax” of Expatriation – Section 2801 and its “Forever Taint.” These new taxes on “covered gifts” or “covered bequests” (currently taxed at 40% of the value of the property received) were adopted in 2008, but have yet to go into force. They can be particularly troublesome for LPRs – See, What are the Number of LPRs who Leave U.S. Annually without filing Form I-407 – Abandonment? and “LPR Tax Limbo” – Formal Abandonment of LPR (Form I-407) – BIG GAP with Actual Emigration of LPRs

Old News – Important News: U.S. Tax Court Rules IRS Rev. Rul. 91-32 is NOT the Law

Posted on

The U.S. Tax Court ruled that the IRS’ interpretation of when sales of partnership interests by non-U.S. persons (in this case, it was a foreign corporate partner with an interest in a U.S. limited liability company) is subject to U.S. income taxation is wrong.  See, Grecian Magnesite Mining vs. Comm’r (149 T.C. No. 3 – 2017).  

The Court ruled that the gain from the partnership (which was not attributed to real estate – which itself was taxable under FIRPTA/Section 897) was capital gain and not U.S. source income.  The Court said it would not follow the IRS’ interpretation in Rev. Ruling 91-32.

The significance for tax expatriation considerations is that IRS Revenue Rulings and other “administrative guidance” or IRS opinions of the law (such as private letter rulings, notices, technical advice memorandum, etc.) do not carry the weight of law. Let alone IRS instructions to forms.  There are a number of IRS opinions of the law regarding “expatriation tax” matters – e.g., IRS Notice 97–34 for those former citizens or LPRs who may be “covered expatriates.”

This conclusion of the Tax Court was (until Congress changed the law overriding the case law) particularly important for non-resident aliens (who were previously U.S. citizens or lawful permanent residents); as the IRS in the past has relied upon Rev. Rul. 91-32 to impose taxation on non-residents who sell their U.S. partnership interests.   See, for instance, the IRS Technical Memorandum where it states the law that ” . . . capital gains are not taxable under § 871(a)(2), unless an alien is present in the United States 183 days or more. . . ” yet still concluded the gain was “effectively connected income” (“ECI”) subject to U.S. taxation.  Memorandum – Internal Revenue Service

A second blow for the government came when the U.S. Court of Appeals for the D.C. Circuit confirmed the U.S. Tax Court and ruled in favor of the taxpayer. 

The government appealed the U.S. Tax Court opinion to the D.C. Circuit, which also ruled in favor of the taxpayer. See full 2019 opinion – here – The DOJ, tax division attorneys of course argued for the government and Michael J. Miller based in Manhattan, an exceptional international tax lawyer, litigated the case in the U.S. Tax Court also argued on appeal for the non-U.S. taxpayer.

While a win for the taxpayer, Congress repealed the result by amending IRC Section 864(c) as part of the major tax reform of 2017 (so-called Tax Cuts and Jobs Act of 2017). Now, such gain from the sale of a partnership interest is treated as “effectively connected” with a US trade or business (“ECI”) to the extent the seller of the partnership interest would have had ECI gain had the partnership itself sold all of its assets. The gain is measured by the fair market value as of the date of sale. Also a new 10% withholding tax was imposed with the same legislation under IRC Section 1446(f). It requires the buyer of a partnership interest to withhold a 10% tax on the “amount realized.”

“LPR Tax Limbo” – Formal Abandonment of LPR (Form I-407) – BIG GAP with Actual Emigration of LPRs

Posted on

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.

These individual are typically ill-informed about these rules and mistaken as to how the IRS typically has a different view of their on-going tax obligations. The IRS is increasingly pursuing LPR taxpayers residing outside the U.S. based upon my own anecdotal experience with individual clients and their IRS tax audits. For background information, see, the IRS’s own summary of “. . . Resident Aliens Abroad“. Also, see,  Timing Issues for Lawful Permanent Residents (“LPR”) Who Never “Formally Abandoned” Their Green Card and see the IRS practice unit discussion, Determining Tax Residency Status of Lawful Permanent … – IRS.gov

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.

Out of the total 13.6 million LPRs, there are a total of 9.13 million eligible to become naturalized citizens according to the report (see previous post Why a Naturalized Citizen cannot avoid “Covered Expatriate” status under IRC Section 877A(g)(1)(B)). Some 2.3M, 1.13M and .99M live in California, NY and Texas, respectively as the most LPR populated states.

China

This report provides only an estimate of “emigration” based upon the government’s research on emigration. See page 5 of the report –

Attrition due to emigration must be estimated because reliable, direct measurements of LPR emigration do not exist.

These estimates are not tied to “formal abandonment” filings of LPR status by filing USCIS Form I-407, Record of Abandonment of Lawful Permanent Resident

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?

16th Annual University of San Diego School of Law – Procopio International Tax Institute – Corona-virus Postponement

Posted on Updated on

The USD-PITI has been held for 15 years on the campus of the University of San Diego School of Law in the beautiful Peace & Justice Center.

The 16th annual conference was originally scheduled for October 28th through the 30th to be held off-campus due to major on-campus construction. The conference has been rescheduled to October 2021 due to the corona-virus.

A special thanks goes out to Dean of the law school, Stephen C. Ferruolo, who has served the law school for nine academic years and nine USD-PITIs. He has been an exceptional dean and wraps up his deanship tenure this month.

I, Patrick W. Martin, have had the good fortune of being involved and working closely with the law school as the original founder of the USD-PITI that first started in 2005 during the tenure of then dean Daniel B. Rodriguez. It has been successful because of the thousands of individuals around the world who have actively participated in these many years of international tax conferences. Review prior conference agendas and speakers here, going back to 2005.

As the chair of the advisory committee for the USD-PITI, I look forward to inviting you and seeing you in person at the 16th Annual USD-PITI Conference to be held October 28th and 29th, 2021.

Due to on-going campus construction the conference will be held at the beautiful Hilton San Diego Bayfront

USD-PITI international tax webinar courses are expected for the Fall of 2020.  Prior participants in USD-PITIs are eligible to obtain access to the prior years CLE video conferences of courses held in prior years.

Stay tuned . . .

Part III: Passport Revocation – Department of State Says its “Hands are Tied” – go Resolve with the Taxman/IRS

Posted on

Continued . . .

Sample letter from Department of State re Revocation of Passports - Seriosly Delinquent Tax Debt

For previous posts discussing this issue, see July 2018 post: The Time has Come: Revocation or Denial of U.S. Passports as IRS Begins Issuing Notices to U.S. citizens

See, also a September 2018 post:  Part II: Example of United States Department of State – Letter Denying Passport Renewal – The Time has Really Come: Revocation or Denial of U.S. Passports as IRS Begins Issuing Notices to U.S. citizens « Tax-Expatriation

The DOS asserts that it has to receive a new certification from the Internal Revenue Service (IRS) that the United States Citizen (USC) has “satisfied the seriously delinquent tax debt”  before it can process the passport application or renewal.  This sample letter from a specific case, provides the USC with 90 days to resolve the issue with the IRS in order for his name to be removed from the certified list. 

The IRS website has two important notifications, including from March 26, 2020 titled Understanding Your CP508C Notice | Internal Revenue Service .

The U.S. Department of State generally will not renew your passport or issue a new passport to you after receiving this certification from the IRS, and they may revoke or place limitations on your current passport.

The last FAQ set forth in this summary is as follows:

I’m a U.S. citizen living overseas and have plans to return to the U.S. Will I be able to return?

Yes. Under Internal Revenue Code Section 2714(e)(2)(B), if the U.S. Department of State decides to revoke your passport, they may either limit your passport only for return travel to the U.S., or issue you a limited passport that only permits return travel.

Finally, see IRS updated website as of March 10, 2020, Revocation or Denial of Passport in Case of Certain Unpaid Taxes

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)

Posted on

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)

Posted on Updated on

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”

Posted on

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?

Outstanding PowerPoint Presentation on All Things FBAR Penalties (Procopio #1) (11/5/18)

Posted on

I simply refer the reader to Jack Townsend’s reference to these FBAR materials – 

FBAR 114 electronic

Outstanding Powerpoint Presentation on All Things FBAR Penalties (Procopio #1) (11/5/18)

**
I [Jack Townsend] post a Powerpoint Presentation (in pdf format), here, that was offered at the 14th Annual University Of San Diego School Of Law Procopio International Tax Institute last week.  The panel was titled “Summer of Norman, Wahdan, Colliot:Defending Title 31 FBAR penalties: Pre and Post-Assessment, IRS & DOJ Policies and Strategy,” and the panelists were

  • Caroline D. Ciraolo, of Kostelanetz & Fink, here.
  • Robert S. Horwitz of Hochman Salkin Toscher & Perez PC, here.
  • Patrick W. Martin of Procopio, et al., here

Legal Question of the Day: FBAR Penalties for USCs and LPRs Residing Outside the U.S. Is the IRS Website correct as a matter of law?

Posted on

The IRS website has a specific statement on their website titled Delinquent FBAR Submission Procedures

Importantly, the website provides the following comforting statement:FBAR 114 electronic

The IRS will not impose a penalty for the failure to file the delinquent FBARs if you properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs, and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.

The question is the following: 

Is the IRS bound by their own statement on their website as a matter of law? 

In other words, can they go ahead and assess FBAR penalties notwithstanding the statement set forth above on their website?

USCs are necessarily subject to U.S. taxation on their worldwide income because they are defined as “United States persons” under title 26, Section 7701(a)(30)(A).  See,  The U.S. Civil War is the Origin of U.S. Citizenship Based Taxation on Worldwide Income for Civil War ImagePersons Living Outside the U.S. ***Does it still make sense?

Lawful permanent residents (“LPRs”) may, but are not necessarily defined as “United States persons” under title 26, Section 7701(a)(30)(A) by application of an applicable tax treaty and the flush language of Section 7701(b)(6).  See,  Timing Issues for Lawful Permanent Residents (“LPR”) Who Never “Formally Abandoned” Their Green Card and see the IRS practice unit discussion, Determining Tax Residency Status of Lawful Permanent … – IRS.gov

Now, this is all relevant to know and understand, in order to determine who exactly has a filing obligation under Title 31: regarding FBARs.  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

POSTED ON  UPDATED ON 

 Assuming you do have an FBAR filing requirement, e.g., residing in your country of residence with financial accounts in your FBAR sample list of civil penalty cases in USDC and COFC.PNGown country or in other financial institutions outside the U.S.; can the IRS assess a penalty against you for a delinquently filed FBAR?  What if you have properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs?

The answer may surprise you.  It will be addressed in a subsequent post.

Incidentally, to date, there have been more than 200 FBAR civil penalty cases filed in U.S. federal courts.  The Federal District Courts have seen approximately 200+ civil penalty cases and the Court of Federal Claims, much less popular venue, has seen 5 cases thus far.