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,
Will Treasury Ever Finalize the 2801 Regulations? Meanwhile – U.S. beneficiaries are exposed to tax on “covered gifts” and “covered bequests.”
Treasury has not yet finalized the 2801 regulations. The tax that is imposed under Section 2801 was passed into law in 2008, yet the collection of the tax has been suspended until the regulations are finalized.
In May 2014, I submitted comments awaiting expected proposed regulations. Covered Gifts and Bequests: The Need for Guidance (5+ Years Out)
The proposed regulations were eventually published in September 2015 by Treasury; but still are not final. See, Guidance under Section 2801 Regarding the Imposition of Tax on Certain Gifts and Bequests from Covered Expatriates
See, a prior post from September 2015 – Finally – Proposed Regulations for “Covered Gifts” and “Covered Bequests” Issued by Treasury Last Week (Be Careful What You Ask For!)
In May 2016 the ABA, Real Property, Trust and Estate Law Committee issued – “Comments on Guidance under Section 2801”
I addressed the following issues in my comments:
First, the collection of the tax has been suspended until after guidance is issued along with IRS Form 708.
Second, this is the first U.S. federal tax of its kind as a true “inheritance” tax, in the case of bequests. It is also apparently the first tax of its kind on the recipient of gifts, which are otherwise exempt from income tax.
Third, the IRS has no way to help effectively track the tax, its application, collection and general enforcement.
Fourth, there is no basic guidance beyond the statute for “any United States citizen or resident” who receives such a gift or a bequest to make a host of decisions to properly determine or calculate the tax.
Fifth, presumably no “United States citizen or resident” has ever even paid such a tax, due to its suspension; although the law is now almost six years old.
Sixth, the statute imposes no time requirement for when the tax must be paid.
Seventh, since many of the assets likely to be gifted or bequeathed will be located outside the U.S. in different countries with different currencies and economic variables and legal systems compared to the U.S., there is a particular need to know the allowable methods of valuing the property gifted or bequeathed.
Eighth, Chapter 4 of Subtitle A, FATCA will bring greater awareness of U.S. tax law requirements for U.S. citizens and residents living outside the U.S., specifically including Section 2801.
Ninth and finally, there have been a record number of U.S. citizens who have renounced or relinquished their citizenship during the year 2013, which increases the number of affected taxpayers who might receive covered gifts or bequests.
Finally, there have been other thoughtful comments, including from ACTEC regarding the proposed 2801 proposed regulations – but still no final regulations and no statute of limitations periods running against the government to collect taxes which may be owing going back nearly 10 years!!
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.”
See for instance –
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.
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.
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).
Accordingly, the regulations treat such SM-LLCs as domestic corporations and require them to file IRS Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. The regulations also require these SM-LLCs to maintain records with respect to the reported information.
Individuals who do not specialize in U.S. federal tax law, often have little detailed understanding of the U.S. federal “Chapter 3” (long-standing law regarding withholding taxes on non-resident aliens and foreign corporations and foreign trusts) and “Chapter 4” (the relatively new withholding tax regime known as the “Foreign Account Tax Compliance Act”) rules.
Indeed, plenty of U.S. tax law professionals (CPAs, tax attorneys and enrolled agents) do not understand well the interplay between these two different withholding regimes –
- 26 U.S. Code Chapter 3 – WITHHOLDING OF TAX ON NONRESIDENT ALIENS AND FOREIGN CORPORATIONS
- 26 U.S. Code Chapter 4 – TAXES TO ENFORCE REPORTING ON CERTAIN FOREIGN ACCOUNTS
Plus, the IRS forms have been significantly modified over the years; with increasing factual representations that must be made by individuals who sign the forms under penalty of perjury. They are complex and not well understood. For instance, the older 2006 IRS Form W-8BEN for companies was one page in length and required relatively little information be provided.
The entire form is reproduced here; indicating how foreign taxpayer information was optional and generally there was no requirement to obtain a U.S. taxpayer identification number. It was governed exclusively by Chapter 3 and the regulations that had been extensively produced back in the early 2000s.
The forms were even easier before those regulations (see old IRS Form 1001). No taxpayer identification numbers were ever required and virtually no supporting information regarding reduced tax treaty rates on U.S. sources of income.
Life was simple back then – compared to today!
The one thing all of these forms have in common is that all information was provided and certified under penalty of perjury. Current day IRS Forms W-8s can typically be completed accurately by experts who understand the complex web of rules. Plus, multiple versions of W-8s exist today; most running some 8+ pages in length.
See the potpourri of current day W-8 forms –
Making certifications under penalty of perjury are more complex, the more and more factual information that is being certified. If I certify the dog I see in front of me is “white and black” that is not a complex certification, if I see the dog and see the “white and black”. If the dog also has some brown coloring, my certification would necessarily not be false.
However, if I have to certify as to the colors of each dog in a pack of 8 dogs (and each and every color that each dog is/was), that becomes a much more complicated certification.
That’s my analogy for the old IRS Forms W-8s and the current day IRS Forms W-8s.
Compare that form, of just 10 years ago, with what is required and must be certified to under current law. It can be daunting.
Now to the rub. Individuals who certify erroneously or falsely, can run a risk that the government asserts such signed certification was done intentionally. I have seen it happen in real cases; even though the individual layperson (particularly those who speak little to no English and live outside the U.S.) typically has little understanding of these rules. They typically sign the documents presented to them by the third party; usually the banks and other financial institutions.
The U.S. federal tax law has a specific crime, for making a false statement or signing a false tax return or other document – which is known as the perjury statute (IRC Section 7206(1)). This is a criminal statute, not civil. Some people are also under the misunderstanding that a false tax return needs to be filed. The statute is much broader and includes “. . . any statement . . . or other document . . . “.
Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter; or . . .
Therefore, if a U.S. citizen living overseas (or anywhere) signs IRS Form W-8BEN (or the bank’s substitute form, which requests the same basic information), that signature under penalty of perjury will necessarily be a false statement, as a matter of law. Why? By definition, the statute says a U.S. citizen is a “United States person” as that technical term is defined in IRC Section 7701(a)(30)(A). Accordingly, IRS Form W-8BEN, must only be signed by an individual who is NOT a “United States person”; who necessarily cannot be a United States citizen. To repeat, a United States citizen is included in the definition of a “United States person.” Plus, the form itself, as highlighted at the beginning of the form, warns against any U.S. citizen signing such form.
Accordingly, if a U.S. citizen were to sign IRS Form W-8BEN which I have seen banks erroneously request of their clients, they run the risk that the U.S. federal government will argue that such signatures and filing of false information with the bank was intentional and therefore criminal under IRC Section 7206(1). See a prior post, What could be the focal point of IRS Criminal Investigations of Former U.S. Citizens and Lawful Permanent Residents?
Indeed, criminal cases are not simple, and I am not aware of any single criminal case that hinged exclusively on a false IRS Form W-8BEN. However, I have seen cases, where the government has alleged the U.S. born individual must have signed the form intentionally, knowing the information was false. It’s a question of proof and of course U.S. citizens wherever they reside, should take care to never sign an IRS Form W-8BEN as an individual certifying they are not a “United States person”; even if they think they are not a U.S. person
For further background information on this topic, see a prior post: FATCA Driven – New IRS Forms W-8BEN versus W-8BEN-E versus W-9 (etc. etc.) for USCs and LPRs Overseas – It’s All About Information and More Information
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).
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 –
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
The Honorable Rico J. Bartolomei, assistant chief immigration judge of the federal immigration courts
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:
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!@!@!, Oct. 25, 2015
The popular press has reported that the Canadian immigration service website crashed shortly after the results of the election. See Fox News, Nov. 9, 2016, Canadian immigration website crashes during election
It will be interesting to see if there will be a surge in United States citizens, not just the accidental American living outside the U.S., who will be inclined to renounce citizenship? These are not easy or legally simple steps, as various posts in this website explain. At a minimum, the individual must have citizenship in at least one other country, so as not to be left stateless.
It could be very difficult to mathematically determine whether this comes to pass, simply since the data provided for all names of individuals, does not include where they reside currently and for how long, inside or outside of the United States.
Of course, some may desire to move and live outside United States, without actually remounting their United States citizenship.