Burdens of U.S. International Tax Compliance: Why some USCs residing overseas ultimately renounce U.S. citizenship (dizzying tax compliance)
The value of a U.S. citizenship is known throughout the world. Immigrating to the U.S. is something that is valued by millions of individuals around the world. The following table from State Department data explains the principle reasons people chose to immigrate to the U.S. – to come to the U.S.:
The year before last, 2023, nearly 900,000 individuals became naturalized citizens. Many of these individuals who immigrate become naturalized citizens or lawful permanent residents (LPRs) ultimately leave the U.S.
See, the National Taxpayer Advocate blog report –
Filing and Paying Taxes for U.S. Citizens or Residents Living Abroad
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?
Why Sir Paul McCartney would have to give up his Knighthood – if he were to become a U.S. Citizen?
Successful athletes, singers, writers, actors, artists and other talented individuals from outside the United States rarely consider becoming a U.S. citizen unless they plan on living permanently in the U.S. for the rest of their lives. The reason can often be found in how the U.S. federal tax regime (particularly estate and gift taxes) can apply on their worldwide assets and worldwide income. These talented individuals typically generate income from around the world, most every major country and therefore will have business and investment interests around the world.
A non-citizen artist or entertainer can usually enter into the U.S. for performances and employment opportunities on a range of visa options. For instance, many of these individuals can typically get an O-1 visa, because of their extraordinary abilities.
The petitioner must provide evidence demonstrating your extraordinary ability in the sciences, arts, business, education, or athletics, or extraordinary achievement in the motion picture industry.
Back to British knighthoods and damehoods. British nationals can receive these honors from the British Crown, as did Paul McCartney from the Queen in 1997. Individuals who are British nationals and citizens of commonwealth countries (e.g., Canada, Australia and New Zealand) are eligible for these UK Honors. However, it appears that U.S. citizens (who are not also nationals of the UK or a commonwealth country), will not be eligible for these formal UK honors. There are many honorary UK honors granted to various U.S. citizens over the last several decades, including –
Short Window of Wait Times for CLN: One Month to 6 Weeks?
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.
The Number of LPRs Declined in the Corona-virus Pandemic
Not surprisingly, the number of new LPRs into the U.S. dropped substantially in correlation with the Corona-virus pandemic. See, the Office of Immigration Statistics, 28 Sept. 2021: Fiscal Year 2021 U.S. Lawful Permanent Residents Annual Flow Report. The Figure 1 (highlighted by me) and that report notes:
Just over 700 thousand persons became LPRs in 2020, as reduced international travel during the COVID-19 pandemic and policy changes brought new LPR admissions in 2020 to their lowest
level since 2003. The majority of these LPRs (62 percent) were already present in the United States when they were granted lawful permanent residence. A little under two-thirds (63 percent) were granted LPR status based on a family relationship with a U.S. citizen or current LPR. The leading countries of birth of new LPRs were Mexico, India, and People’s Republic of China (China). In 2020, there was a 31 percent reduction in U.S. grants of LPR status compared to 2019.
Largely due to the COVID-19 pandemic, LPR flows in 2020 were not representative of typical trends (Figure 1). Travel restrictions and processing slowdowns generally resulted in fewer inflows, while foreign-born residents within the United States also confronted immigration status-specific COVID-19 vulnerabilities.5
The key tax question for LPRs who no longer live in the U.S. (or who are planning to leave the U.S. to live in another country) is: Are they (or will they become) a so-called “long-term resident” as defined in the federal “expatriation” tax law?
IRC Section 877(e)(1) and (2) define a “long-term resident” and these paragraphs are included below in their entirety:
(1) In general
Any long-term resident of the United States who ceases to be a lawful permanent resident of the United States (within the meaning of section 7701(b)(6)) shall be treated for purposes of this section and sections 2107, 2501, and 6039G in the same manner as if such resident were a citizen of the United States who lost United States citizenship on the date of such cessation or commencement.
(2) Long-term resident
For purposes of this subsection, the term “long-term resident” means any individual (other than a citizen of the United States) who is a lawful permanent resident of the United States in at least 8 taxable years during the period of 15 taxable years ending with the taxable year during which the event described in paragraph (1) occurs. For purposes of the preceding sentence, an individual shall not be treated as a lawful permanent resident for any taxable year if such individual is treated as a resident of a foreign country for the taxable year under the provisions of a tax treaty between the United States and the foreign country and does not waive the benefits of such treaty applicable to residents of the foreign country.
The Next Post on this topic will break down the elements of –
(1) who will necessarily be a “long-term resident”?
(2) who may be “long-term resident”?
(3) what steps can be taken to necessarily avoid “long-term resident” status?
Finally, a discussion will be had in the last post in this series of some of the potential adverse tax consequences to “long-term residents” depending upon different factual scenarios.
Citizenship Renunciations Continue a Trend – Upward in 2020
The total number of USCs who have renounced annually continues a trend upward; on a moving average basis.
The year 2020 was a record year (by far) of 6,705 total USCs reported by the Treasury to have renounced citizenship. That breaks the prior single year record of 5,409 for the year 2016. The number of USCs who renounced declined in 2019 substantially. Maybe the low reported numbers for the 3rd and 4th quarters for the year 2019 represented a backlog in cases that were not reported by the Treasury until the first two quarters in 2020?
The State Department provides the information to the Treasury who then publishes it publicly pursuant to the law.
I create these charts based upon the raw data and names published quarterly by the Treasury Department.
I will update these numbers through each quarter that is available for the year 2021. Currently that is through the 3rd quarter of 2021.
The type of additional data that would be valuable for those of us who have many cases and study this area of the law and practice are as follows:
How many renounced prior to the age of 18?
From which country did the USC reside?
How many applied specific benefits of a U.S. income tax treaty? The following is a list of the U.S. income tax treaties by country:
I create these charts based upon the raw data and names published quarterly by the Treasury Department. This information can be found online here:
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)
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.
Old News – Important News: U.S. Tax Court Rules IRS Rev. Rul. 91-32 is NOT the Law
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.”
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.
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.
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.