The number of U.S. citizens who have renounced has plateaued starting in 2016. That was the peak year with 5,409 renunciations followed by a similar number of 5,132 in 2017. See an older 2014 post that highlighted the then record of 2,999 for the entire year.
The data used for these running compilations, with the individuals names published can be reviewed on the federal government’s website. The complete set of lists going back to the mid-1990s can be reviewed here. Quarterly Publications. Quarterly Publication of Individuals, Who Have Chosen to Expatriate
The total number of renunciations for the first two quarters of 2018 was 2,185.
None of this answers why these numbers have stopped increasing in a ski slope fashion?
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.).
Mr. Dewees gets Smacked! U.S. District Court Upholds Multiple $10,000 Penalties (US$120,000 – NO Forms 5471) for USC Residing in Canada
United States Citizens (“USCs”) and lawful permanent residents (“LPRs”) residing overseas should read the story of Mr. Dewees to learn what could happen if they go into the offshore voluntary disclosure program (“OVDP”); when he appears to have been a “good faith” taxpayer. The IRS issued a press release in March 2018 – IRS to end offshore voluntary disclosure program; Taxpayers with undisclosed foreign assets urged to come forward now The IRS explained that it will close the program next month on September 28, 2018. Take the story of the Dewees into consideration before rushing into the OVDP.
This is not a new case, as the U.S. District Court for the District of Columbia issued its opinion a year ago – Dewees v. United States, 2017 U.S. Dist. LEXIS 124989 (D.C. D.C. 2017). However, it is an important case if anyone is confused about whether they should go into the OVDP. See the story of the Dewees.
Mr. Dewees resided in Canada and did file U.S. income tax returns, but not all information returns. See a related previous 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
He also did not initially pay information reporting penalties assessed by the IRS regarding his Canadian company. He resided in Canada where is business and company was located. The Court noted that he “. . . voluntarily disclosed [to the IRS] his failure to file the required informational returns . . . ” The Dewees were “rewarded” by their good faith efforts by the IRS which then turned around and ” . . . assessed a statutory penalty of $120,000, $10,000 for each year of non-compliance . . . “
The Canadian revenue authority would not refund his Canadian tax refund until the IRS penalty was paid in full. He eventually paid $120,000 of information penalties and brought a suit for refund in U.S. District Court.
The U.S. District Court first explained the obligations of USCs residing overseas with –
(i) controlling interests in foreign corporations (i.e., filing obligations under IRC Section 6038 to file IRS Form 5471) – see an earlier related post Many Canadians have expressed frustration with U.S. tax policy of worldwide taxation of U.S. citizens., and
(ii) interests in foreign financial accounts (i.e., filing obligations of foreign bank account reports under Title 31) see a previous post, Nuances of FBAR – Foreign Bank Account Report Filings – for USCs and LPRs living outside the U.S.
The Court then dismissed the suit for refund on the grounds that Mr. Dewees failed to state a viable claim and the Court therefore lacked jurisdiction to hear his claims (which were “excessive fines”, “equal protection” and “due process” claims).
Here, the USC residing in Canada was apparently well intended, since the District Court said that Mr. “Dewees learned that he had failed to comply with these requirements . . . ” In another part of the opinion, the Court uses the word “neglected” to file information returns for over a decade.
“Learned” and “neglected” certainly does not sound intentional, which is probably why the IRS did not attempt to pursue Title 31 willfulness FBAR penalties.
The USC entered the OVDP on the advice of a tax specialist and then withdrew after the IRS was proposing to assess an “OVDP in-lieu of penalty” of US$185,862.
The IRS ultimately did not pursue any FBAR penalties in this case, not even the annual $10,000 per year penalty for failure to file the FBAR form.
Had Mr. Dewees lived in any other country (other than Canada) he probably would not have had the local taxman (i.e., the Canada Revenue Agency) step in to indirectly help the IRS collect the penalty amounts assessed. See an earlier post, U.S. Enforcement/Collection of Taxes Overseas against USCs and LPRs – Legal Limitations
The U.S.-Canada income tax treaty has a special “assistance in collection” provision, which provides in part as follows –
Article XXVI A
Assistance in Collection
1. The Contracting States [referring to the U.S. and Canada] undertake to lend assistance to each other in the collection of taxes
referred to in paragraph 9, together with interest, costs, additions to such taxes and civil penalties, referred to in this Article as a “revenue claim”.
I explained in an earlier post, how the “Revenue Rule” was a common law concept that generally prohibited the U.S. government from assisting in the collection of taxes of another country. Hence, the U.S. Treasury renegotiated the treaties with five countries (including Canada) that now have a specific treaty provision such as XXVI A above:
As a result of these cases and the Revenue Rule, the U.S. and Canada modified their income tax treaty to (at least in theory) allow for the international enforcement of taxes. The U.S. now has five income treaties with “mutual assistance” provisions: Canada, Sweden, France, Denmark, and the Netherlands (with a clause in the newly negotiated, but yet to go into force, Swiss treaty).
In the Dewees case, we learned that the assistance in collection provision is not merely a theoretical tool that can be used in collecting taxes. The actions of both the Canadian (CRA) and U.S. governments (IRS and District Court Judge), made the provision effective. The US$120,000 penalty, that has nothing to do with any U.S. taxes, was collected by the IRS.
Questions to ponder in this case:
- Would the USC have been better off, by getting proper advice as to how to file on a going forward basis?
- Why did the USC ever go into the OVDP program in the first place under these facts?
- Did the USC know about the “streamlined” filing procedures of the IRS for U.S. Taxpayers Residing Outside the United States?
- In this case, the program did not exist at the time the taxpayers went into the OVDP in 2009.
- Why did Dewees not simply consider (assuming he had good faith facts) filing amended tax returns to include late filed IRS Form 5471 forms?
- Why did the IRS aggressively pursue these $120,000 in information penalties (presumably because he opted out of the OVDP program and they like to make examples out of those taxpayers that leave the program)?
- Would and will the IRS assess more $10,000 per year penalties for additional companies for a good faith failure to file IRS Form 5471 forms? In other words, what if the Dewees had four Canadian companies, would the IRS have assessed US$480,000 (US$10,000 per year X 4 – per company – X 12 – the number of years the form was not filed)?
- Will the IRS have success with any other country that does not have a similar tax treaty provision on the collection of taxes as the unique U.S.-Canada provision?
- Will the aggressive actions of the IRS in this Dewee case to collect penalties backfire? Will USCs residing overseas be less likely to go into specific IRS programs for fear of being smacked down to the tune of US$120,000 (plus legal fees and costs) for merely neglecting to file information returns when no U.S. taxes are even owing?
Congress passed largest federal tax reform since the 1986 TRA – key provisions can impact “expatriates” –
I have not devoted the time to post regular blogs these last few months.
Now that we have major tax revisions to the U.S. federal tax law (many that can impact various individuals who are considering renouncing their U.S. citizenship or abandoning their U.S. lawful permanent resident – LPR – immigration status), I will find some more time to identify key provisions and provide some observations.
As always, the federal tax law is complex and these posts do not represent formal legal advice to anyone who might read them. Do get proper advice from a qualified tax professional to help you navigate your particular circumstances.
White House Tax Reform Proposal – Light on Details (Non-residents and Expatriates are No Where to be Found)
The White House announced on September 27, 2017 it’s so-called Unified Framework for Fixing Our Broken Tax Code
Nowhere is there any discussion about the “expatriation” provisions; e.g., IRC Section 877, et. seq. See, for instance, 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))
One important proposal that would impact (i) U.S. citizens residing overseas, (ii) long-term lawful permanent residents, and (iii) those who renounce/abandon such status; is the proposed repeal of the entire estate and gift tax regime (referred to “affectionately” in the report as the “death tax”).
The Tax Policy, Urban Institute – Brookings Institute, Research report, A Preliminary Analysis of the Unified Framework has concluded that the elimination of the estate and gift tax provisions will cause a loss of federal revenues of $238 and $443 billion over the next two decades, respectively. The overall loss of revenue impact, according to this study of the “Unified Framework for Fixing our Broken Tax Code” will be significant. The report provides in summary:
We find they would reduce federal revenue by $2.4 trillion over ten years and $3.2 trillion over the second decade (not including any dynamic feedback)
Separately, the Tax Foundation last year in 2016 did its own prelimiary anlaysis and concluded:
- According to the Tax Foundation’s Taxes and Growth Model, the plan would reduce federal revenue by between $4.4 trillion and $5.9 trillion on a static basis. The amount depends on the nature of a key business policy provision.
Will any of these provisions get passed into legislation? Only time will tell, but so far the White House and Republican controlled Senate and House have not been able to pass any major legislation to date. Pundits who follow legislation in the Congress and this President are not optomistic that large swaths of these general tax proposals will ever become law.
Will Congress Repeal the Estate Tax? If so, will the “Inheritance Tax” for “Covered Expatriates” get Repealed too?
The current U.S. Treasury Secretary announced in an April 26, 2017 press briefing the intention of the current Administration to repeal the estate tax.
The current estate tax has been in existence for 101 years (with prior versions in the 19th century). Please see the following articles published some years ago for a history of the estate tax since its enactment with the Revenue Act of 1916; Patrick Fleenor, staff economist at the Tax Foundation, A History and Overview of Estate Taxes in the United States and The Estate Tax: Ninety Years and Counting, by Darien Jacobson, Brian Raub and Barry Johnson.
See Figure C from the article by Jacobson, et. al. that provides a highlight of significant changes in the U.S. estate tax law:
If Congress and the President do repeal a tax that has been in existince for over 100 years, it is hard to imagine that such a repeal will be permanent going forward in other administrations and congressional bodies? In contrast, the U.S. Treasury released its FACT SHEET: Administration’s FY2017 Budget Tax Proposals a little over a year ago where its then stated goal (under a very different Administration) was to increase the scope and amount of the estate and gift tax –
Restore the Estate, Gift, and Generation-Skipping Transfer (GST) Tax Parameters in Effect in 2009. This proposal would make permanent the estate, GST, and gift tax parameters as they applied during 2009. The top tax rate would be 45 percent and the exclusion amount would be $3.5 million per person for estate and GST taxes, and $1 million for gift taxes. The proposal would be effective for the estates of decedents dying, and for transfers made, after December 31, 2016.
The important question for “covered expatriates” (really for their future U.S. beneficiareis) is whether a repeal of the estate tax for U.S. persons will also include the repeal of the “inheritance tax” under Section 2801 that was newly adopted in 2008. See, prior posts relevant to Section 2801,