Many individuals have no idea that, under the legal principles confirmed in the federal district court case I litigated — Aroeste v United States, 22-cv-00682-AJB-KSC (20 Nov. 2023) – they may already be treated as “covered expatriates” as a matter of law.
Along Comes Section 2801 – and 2025 Final Regulations – The “Forever Taint” to Family and Friends (Paying the Taxman)
Aroeste – Landmark Decision Confirms the Law – Tax Treaty Law Applies – Taxpayers Do Not Waive Benefits per Gov’t
These writings all addressed the same underlying legal and policy expectations that courts would eventually be required to confront — issues now directly addressed in Aroeste. The Aroestedecision is also consistent with positions I successfully advanced in three separate U.S. Tax Court cases involving green card holders, none of which resulted in published opinions because the government ultimately conceded to my arguments and my clients prevailed prior to trial.
This case law has great impact on green card holders who are living principally outside of the U.S. There are 3.88 million individuals who are living outside the U.S. – per the 2024 report by the U.S. federal government. Many of them live in a treaty country. Many of these individuals might be considering their immigration law consequences (particularly after the latest announcement from the USCIS – impact these immigration consequences: U.S. Citizenship and Immigration Services Will Grant ‘Adjustment of Status’ Only in Extraordinary Circumstances (May 2026) Few have considered the tax law implications.
Those individuals who have green cards and live in and outside of the United States, should understand the tax and legal implications to them.
There are millions of individuals in this category. i.e., those who have “emigrated” with an “e” from the United States. There are 3.88 million of these green card holders, as of 2024 according to the U.S. federal government’s latest report. The statistics are striking – that so many individuals reside outside the U.S.
These nearly 4 million individuals who do not reside principally in the U.S. are similar to the fact pattern of Mr. Aroeste residing in Mexico City. See the case where yours truly, Patrick W. Martin, was lead counsel in that landmark case – and the analysis of the District Court in Aroeste v. United States. The government lost.
Today’s post is a series of simple and key questions for those with green cards, to help them better hone in on the legal issues and U.S. tax risks that may be applicable to them:
Am I still a U.S. taxpayer?
What does it mean to be a U.S. taxpayer, when there are technical tax terms such as “United States person” and an individual who is a “lawful permanent resident” (not defined in the immigration law)?
I have a green card but I’ve lived outside the U.S. for years — do I still have to file U.S. tax returns?
The date on my physical green card has expired – does that mean I am no longer a a “lawful permanent resident” for tax purposes?
Does it matter whether my green card is expired, taken back at the airport, or just sitting in a drawer overseas?
Is there a difference between “giving up” my green card and just letting it lapse?
Aroeste v. United States — what does it mean for me? –
Why are all of the above questions so important to me – since I previously obtained a “green card”?
Subsequent posts will address additional key questions that can have a significant legal consequence to individuals who had or have a green card and spend substantial time outside of the United States. For a preview, look at Oops.. .Did I Expatriate and Never Know It – International Tax Journal 2014
Assets and income earned in high tax states such as California and New York, are taxed very differently compared to low-tax states such as Texas, Nevada, Florida or Tennessee. Focusing on “expatriation” (e.g., renouncing USC or abandoning LPR status) of the individual might be misplaced if the person wants to live mostly in the United States. See earlier post, Form 8854 Filing: TIGTA Report Reveals Compliance Gap
Does TIGTA have the Answer: to the Question – How many former U.S. citizens and long-term lawful permanent residents have filed and should have filed IRS Form 8854?
The short answer to the question above – is NO!
The government does not know how many IRS Forms 8854 should have been filed.
Note the total numbers of 8854 returns filed as reported in Figure 2 of the TIGTA Report were less than 25,000 during a ten year period. This report focuses really only on former U.S. citizens (“USC”) who have renounced their citizenship. Not on lawful permanent residents (“LPRs), which during that same ten year period there were around 200,000 who filed USCIS Form I-407.
* How Many Individuals Should have Filed Form 8854?
Many tax practitioners think they are prohibited from discussing with a taxpayer the probability or likelihood that a tax return, tax position or a form (e.g., IRS Form 8854, Initial and Annual Expatriation Statement) will be audited by the IRS.
Many practitioners think such a statement is somehow taboo – and cannot be answered when a client asks the question: “Will my tax return get audited?”
Someone who has become a “covered expatriate” might want to know – whether the IRS audit of expatriate tax returns is high or low? What if I do not even have a social security number (e.g., as a U.S. citizen born outside the U.S.) from my date of birth, and I have lived outside the U.S. almost all of my life? Will that impact the chances of tax audit? Can answers be provided to these logical questions raised by taxpayers?
First, no one ever knows whether any tax return or position will get audited. The answer necessarily requires the ability to peer into the future.
The U.S. tax law is complex, including when an individual (i) becomes and (ii) ceases to be, a U.S. income tax resident (USITR). USITR is not a technical term used under the tax law. The U.S. tax and information reporting requirements are very different depending the status of an individual. Anyone who is not a United States citizen, is either a –
“Resident alien“, or a
“Nonresident alien” as the tax law defines both of these categories.
You can’t be both.
“Resident aliens” are generally also “United States persons” (both technical terms in the federal tax law).
“Non-resident aliens” as defined are necessarily not “United States persons.”
Being one versus the other has huge U.S. tax and reporting consequences.
An individual who is a “lawful permanent resident” as referenced in the tax law (Section 7701(b)(6)) cross-references the U.S. immigration law. The first requirement of that statutory tax rule in § 7701(b)(6)(A)) is that “(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 [such status not having changed]. . .[emphasis added]” This means the tax definition is dependent upon the immigration laws, which are found in Title 8, Immigration and Nationality Act. Importantly, the last part of that sentence (i.e., [such status not having changed] is a requirement in the immigration law (Title 8), but does not appear in the tax definition.
The term “lawful permanent resident” cannot be found in Title 8 as a noun or object (i.e., the individual). Instead, the immigration law defines the status of a person in 8 U.S. Code § 1101(a) as follows:- “. . . (20) The term “lawfully admitted for permanent residence” means 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, such status not having changed.“
This analysis is fundamental to be able to determine whether an individual who holds a “green card” in their pocket even has the status of being “lawfully admitted for permanent residence. . . such status not having changed.” It’s a fundamental legal question under immigration law that must be answered first, to then be able to answer the tax question.
Each form an individual files or does not file (e.g., IRS tax form 1040 v. 1040NR; 8833, 5471, 8854, 8621, 3520, 8864, 8858 and FinCEN forms 114; and immigration forms, e.g., I-485, I-407, etc.) can have a potential impact on the tax residency status of an individual.
The immigration law and when forms, such as Form I-485, Application to Register Permanent Residence or Adjust Status are submitted to the U.S. federal government can have an impact on this determination. The government can use it against the individual as they did unsuccessfully in Aroeste (see below – Pages 9 and 11 of 17); asserting that Mr. Aroeste waived the treaty by not submitting certain forms.
The entire case from the Federal District Court can be read here: Aroeste v. United States, 22-cv-00682-AJB-KSC (20 Nov. 2023):
The tax residency analysis for those who have kept their “green card” in their pocket, can be even more complex as was analyzed by the Court. There are additional provisions of the law that must be considered including old Treasury Regulations that pre-date many provisions of various U.S. income tax treaties.
For instance, each of the following federal tax statutory rules, which will be considered in more detail in later posts (II and III):
Additional posts will review the impact of these provisions in the law and how various immigration forms (including I-485 and I-407, Record of Abandonment of Lawful Permanent Resident Status) and tax forms (including 1040 v. 1040NR; 8833, 5471, 8854, 8621, 3520, 8864, 8858) and FinCEN form 114, can impact the determination of whether someone who has a “green card” in their pocket is or is not a United States person.
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.
The Federal District Court made numerous key legal findings in its Order on November 20, 2023; in Aroeste v. United States, Case No. 22-cv-00682-AJB-KSC. One of the more significant findings was that IRS Notice 2009-85 is not binding authority. This blog is dedicated to tax expatriation related matters under U.S. law.
IRS Notice 2009-85 is Not Binding Authority per the Court
expatriation.com has represented him for several years throughout the IRS audits and the on-going U.S. Tax Court cases along with his wife.
While many may consider this case to be a Title 31/FBAR case (which it is), it has greater ramifications under the tax expatriation laws in the author’s view. The finding by this Court regarding IRS Notice 2009-85 is significant with far reaching implications. The IRS Notice 2009-85 is broad in its scope and is more than 60 pages in length. It notes that, “Section 877A(i) provides that the Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of section 877A.” (p.4)
No Treasury Regulations Ever Issued – After 15 Years of IRS Notice 2009-85
The Treasury Department never issued regulations under 877A, which is now 15 years old. The notice provides the historical background as follows:
Notice 2009-85 PURPOSE Section 301 of the Heroes Earnings Assistance and Relief Tax Act of 2008 (the “Act”) added new sections 877A and 2801 to the Internal Revenue Code (“Code”), amended sections 6039G and 7701(a), made conforming amendments to sections 877(e) and 7701(b), and repealed section 7701(n) with respect to individuals who on or after June 17, 2008, relinquish U.S. citizenship or cease to be lawful permanent residents of the United States. This notice provides guidance for individuals who are subject to section 877A.
The Court in Aroeste concluded that Mr. Aroeste ceased to be a lawful permanent resident.
Specifically, the Court finds Aroeste . . . ceased to be treated as a lawful permanent resident of the United States because he commenced to be treated as a resident of Mexico under the Treaty, did not waive the benefits of such Treaty, and notified the Secretary of the commencement of such treatment.
Many practitioners have questioned the accuracy and validity of many of the conclusions asserted in the 2009 notice; such as the timing of when someone becomes a “covered expatriate”. How and why they become a “covered expatriate” by the concepts introduced in the 2009 notice. The multiple examples presented, reflecting various tax outcomes according to the IRS, were never commented on by the public.
Another question many have raised is the effectiveness of IRS Form 8854? Throughout the notice, the IRS uses the word “must” some 88 times regarding the individual who ceased to be a U.S. citizen or a “lawful permanent resident” (or in some instances references to third parties). Does the IRS imply that if any of these “must”/conditions imposed under the notice are not satisfied, the individual is necessarily a “covered expatriate” with the adverse tax consequences that might follow?
Are their other adverse tax consequences that might follow? For instance, can the IRS repeatedly assert international information penalties regarding the individual’s
companies in her own country,
beneficiary rights of a trust or an estate in her own country, or
other investment assets or financial accounts in her country of residence that might be deemed a “specified foreign financial asset” if the individual is a United States person”?
For instance, the 2009 notice provides that a “covered expatriate” must file a “dual status return” and file a Form 1040NR with a 1040 attached as a schedule for the “year of expatriation”. See, IRS Notice 2009-85, p. 49.
The IRS goes on to say in that notice that individuals “must file Form 8854 in order to certify, under penalties of perjury, that they have been in compliance with all federal tax laws during the five years preceding the year of expatriation.” Id., p. 50. The government asserts that if this condition is not satisfied, the individual will necessarily be treated as ” . . . covered expatriates within the meaning of section 877A(g) whether or not they also meet the tax liability test or the net worth test.“
These would be pretty damning consequences to an individual, if they otherwise met the statutory test of certifying compliance with the tax laws for the preceding five years.
Importantly, the Court in Aroeste v. United States concluded as a matter of law that 2009-85 is not binding authority as it fails to comply with the Administrative Procedures Act (“APA”). It concluded Mr. Aroeste did not need to file Form 8854 with his amended returns. He had filed Form 8833 – treaty based reporting.
The court cited to ” . . . 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.”
None of these comments represent legal advice. Complex laws applied to specific facts require a legal expert to opine on the consequences and recommended courses of action. It is worth noting that individuals who have a “green card” and who have not previously articulated the application of a U.S. income tax treaty, should consider taking proactive steps to protect their rights under the law. Also, United States citizens who formally renounced their citizenship, who may never have taken specific tax reporting positions should consider taking proactive steps to help avoid the risk the IRS might assert substantial penalties or conclude the individual became a “covered expatriate”.
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).
The wait times for the State Department to issue a Certificate of Loss of Nationality (“CLNs”) used to be quite long, based upon the author’s experience with various clients. That has all changed since about the beginning of this year 2023. The author has seen cases that are taking less than 6 weeks from the date of the meeting to take the oath of renunciation before a consular officer.
Please first read Part I of this series: Most important Questions for “Green Card” Holders (“lawful permanent residents”): Part I of VI, which outlines some of the foundational questions every green card holder should consider before addressing the additional issues questions below.
Many individuals have no idea that, under the legal principles confirmed in the federal district court case I litigated — Aroeste v United States, 22-cv-00682-AJB-KSC (20 Nov. 2023) – they may already be treated as “covered expatriates” as a matter of law.
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.
