The whole idea of the “escape hatch” for tax treaties is an excellent way of explaining how and when tax treaty law applies in different circumstances. Importantly, the U.S. federal government cannot deny an individual (or presumably a company either) from properly applying the law of a tax treaty – even if they “gave [an] untimely notice of his treaty position “. See further comments at the end of this post and the District Court’s opinion here – Aroeste v United States – Order (Nov 2023). Meanwhile, see below the 22 countries from where global readers viewed Tax-Expatriation.comduring the first full week of 2024.
Below is the list of 22 countries (including the United States) from where readers hailed, who read Tax-Expatriation.comduring the first week of 2024. All, but Brazil, Croatia, Nigeria, the United Arab Emirates, Colombia, Kenya and Bermuda have income tax treaties with the United States.
This means that all other individuals are connected with the following 14 countries that have tax treaties with the United States:
Mexico
India
Canada
United Kingdom
Switzerland
Australia
China
Spain
Turkey
Germany
Japan
Romania
Portugal
Netherlands
Further, all individuals who might have never formally abandoned their lawful permanent residency (“green card”), maybe never filed specific IRS tax forms, and yet reside in one of these fourteen (14) treaty countries could be eligible for the application and the specific benefits of international income tax treaty law. This, along the lines of the decision in Aroeste v United States (Nov. 2023). In addition, there could be other tax treaty benefits applicable to those individuals in these fourteen countries depending upon where are their assets, what type of income they have, where does the income come from, and where do they reside.
The tax treaty rights discussed here are established by law, as elucidated by the Federal District Court in Aroeste v United States (Nov. 2023). The Court determined that the IRS cannot simply assert an individual’s ineligibility for treaty law provisions based solely on the failure to file specific IRS forms within the government-defined “timely” period. The Court emphasized that there is no automatic waiver of treaty benefits as a matter of law, while acknowledging: “. . . Aroeste gave untimely notice of his treaty position. . .” For specific excerpts from the opinion, please refer to the highlighted portions below. To access the complete opinion, please consult Aroeste v United States – Order (Nov 2023).
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B. Whether Aroeste Did Not Waive the Benefits of the Treaty Applicable to Residents of Mexico and Notified the Secretary of Commencement of Such Treatment.
To establish Mexican residency under the Treaty, and thus avoid the reporting requirements of “United States persons,” Aroeste must have filed a timely income tax return as a non-resident (Form 1040NR) with a Form 8833, Treaty-Based Return Position Case 3:22-cv-00682-AJB-KSC Document 90 Filed 11/20/23 PageID.2722 Page 8 of 17 9 22-cv-00682-AJB-KSC Disclosure Under Section 6114 or 7701(b). Indeed, Aroeste did not submit Form 8833 to notify the IRS of his desired treaty position for the years 2012 and 2013 until October 12, 2016, when he submitted an amended tax return for both years at issue. (Id.) The Government asserts that because Aroeste did not timely submit these forms, he cannot establish that he notified the IRS of his desire to be treated solely as a resident of Mexico and not waive the benefits of the Treaty. (Id. at 4.) The Government relies upon United States v. Little, 828 Fed. App’x 34 (2d Cir. 2020) (“Little II”), a criminal appeal in which the court held a lawful permanent resident of a foreign country was a “‘resident alien’ or ‘person subject to the jurisdiction of the United States’ with an obligation to file an FBAR.” Id. at 38 (quoting 31 C.F.R. § 1010.350(a), (b)(2)).
In response, Aroeste asserts that while he agrees with the Government that I.R.C. § 6114 requires disclosure of a treaty position, he disagrees as to the consequences for a taxpayer’s failure to timely file the disclosure. (Doc. No. 75-1 at 6.) While the Government asserts the failure to timely file Forms 1040NR and 8833 deprives individuals of the Treaty benefits provided, Aroeste argues instead that I.R.C. § 6712 provides explicit consequences for failure to comply with § 6114. Specifically, § 6712 states that “[i]f a taxpayer fails to meet the requirements of section 6114, there is hereby imposed a penalty equal to $1,000 . . . on each such failure.” I.R.C. § 6712(a). Based on the foregoing, Aroeste argues the taxpayer does not lose the benefits or application of the treaty law.1 (Doc. No. 75-1 at 6.) In United States v. Little, 12-cr-647 (PKC), 2017 WL 1743837, at *5 (S.D. N.Y. 1 Aroeste further asserts that published agency guidance, letter rulings, and technical advice support his position. (Doc. No. 75-1 at 7.) For example, in 2007, an IRS agent sought advice from IRS Counsel asking, “Do we have legal authority to deny a tax treaty because Form 8833 is not attached or the treaty is claimed on the wrong Form (1040EZ or 1040)?” Legal Advice Issued to Program Managers During 2007 Document Number 2007-01188, IRS. IRS Counsel responded, “No, you cannot deny treaty benefits if the taxpayer is entitled to them. You may impose a penalty of $1,000 under section 6712 of the Code on an individual who is obligated to file and does not.” Id. As to this, the Court finds it has no precedential value under I.R.C. § 6110(k)(3), which states that “a written determination may not be used or cited as precedent.” See Amtel, Inc. v. United States, 31 Fed. Cl. 598, 602 (1994) (“The [Internal Revenue] Code specifically precludes [plaintiff] and the court from using or citing a technical advice memorandum as precedent.”) Case 3:22-cv-00682-AJB-KSC Document 90 Filed 11/20/23 PageID.2723 Page 9 of 17 10 22-cv-00682-AJB-KSC May 3, 2017) (“Little I”), a criminal case for the plaintiff’s willful failure to file tax returns, the court stated the plaintiff’s same argument “that the failure to take a Treaty position can result only in a financial penalty also lacks merit. 26 U.S.C. § 6712(c) expressly states that ‘[t]he penalty imposed by this section shall be in addition to any other penalty imposed by law.’” (emphasis added).
I have been consulted over the years by other taxpayers which are cited now as published decisions by the government and the Federal District Court (Southern District of California). These cases are referenced and cited in my own most recent case of Aroeste v United States (Nov. 2023).
However, in Little I, the plaintiff never attempted to take a treaty position. Next, in Shnier v. United States, 151 Fed. Cl. 1, 21 (2020), the court denied the plaintiffs’ claims for relief based on tax treaties because they failed to disclose a treaty based position on their tax returns pursuant to I.R.C. § 6114 “and did not attempt to cure this omission in their briefing[.]” Although the plaintiffs in Shnier were naturalized U.S. citizens who attempted to recover their income taxes under I.R.C § 1297, the court’s brief discussion of I.R.C. § 6114 in relation to a treaty-based position is instructive that an untimely notice of a treaty position does not bar the individual from taking such position. Moreover, in Pekar v. C.I.R., 113 T.C. 158 (1999), the court noted that a taxpayer who fails to disclose a treaty-based position as required by § 6114 is subject to the $1,000 penalty, but stated “there is no indication that this failure estops a taxpayer from taking such a position.” Id. at 161 n.5.2 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.
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For individuals living in any of these 14 tax treaty countries (or any of the total 67 income tax treaty countries), the key takeaway is that, based on their specific circumstances, they might be eligible to leverage the international tax treaty principles outlined in the Aroeste v United States case (Nov. 2023). The forthcoming post will pose questions for consideration by the potentially millions of individuals affected by these rules of law.
Clear U.S. tax and legal relief now exists for a significant portion of the 3.89 million Lawful Permanent Residents (LPRs) who never formally abandoned their U.S. immigration status. This relief stems from two sources in the law:
(i) Tax treaty laws that apply to individuals residing in one of the 67 income tax treaty countries with the United States, recently including Chile.
(ii) Legal principles, recently confirmed by the Federal Court in Aroeste v. United States, that establish that individuals can apply tax treaty laws (when applicable) even if they missed certain filing deadlines set by the Internal Revenue Service. The Court termed this provision an “escape hatch,” allowing individuals, depending on specific circumstances, to be considered non-residents of the United States (not “United States persons”). This can be true under the relevant treaty, even if they never formally abandoned their LPR status.
The 2023 DHS report estimates that nearly 4 million individuals have emigrated from and left the United States and are now living somewhere around the world. Notably, Mexico constitutes the largest share at about 25% of the total LPR population who have left the United States.
The DHS report allows the reader to extrapolate that around 1 million individuals, similar to Mr. Aroeste, are living in Mexico and did not formally abandon their LPR status by filing Form I-407, Record of Abandonment of Lawful Permanent Resident.
Aroeste v. United States is the third case I’ve litigated, examining whether individuals with a “green card” residing outside the United States in a tax treaty country are considered U.S. income tax residents. The previous two cases (involving Mexican and German citizens) didn’t progress to the oral argument stage; as the government conceded both before trial. See, IRS Chief Counsel Concedes Tax Treaty Residency Position for LPR German Taxpayer in Tax Court
A FOIA response yielded surprising information; the government records indicate that only 46,364 Forms I-407 were filed from 2013 to 2015.
(Source: Federal Government Response to FOIA Request: Office of Performance and Quality (OPQ), Performance Analysis and External Reporting (PAER), JJ)
SOURCE: Federal Government Response to FOIA Request: Office of Performance and Quality (OPQ), Performance Analysis and External Reporting (PAER), JJ
What can we glean from the DHS report and the LPR – I-407 information obtained through the FOIA response? There is a substantial gap in the millions; millions of individuals who have physically left the U.S. to reside elsewhere globally, compared to the relatively smaller number of tens of thousands who have officially filed Form I-407, Record of Abandonment of Lawful Permanent Resident.
Conclusion
Importantly, now under the legal principles established in Aroeste v. United States, individuals residing in one of the 67 countries covered by an income tax treaty have specific legal relief from the worldwide reporting of income to the United States government.
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).
This is true, depending upon the laws of the other country. The United States will not require the individual to forsake citizenship to the other country.
Consulate wishes to clarify on the citizenship status of OCI cardholders. Constitution of India does not allow holding Indian citizenship and Citizenship of a foreign country simultaneously. The Government of India has decided to register Persons of Indian Origin of certain category as has been specified in the Section 7A of the Citizenship Act, 1955 as Overseas Citizenship of India (OCI) Cardholder. It is basically a life long Visa and with some other privileges attached which can be seen on the Ministry of Home Affairs’ website. It is reiterated that holding an OCI card in no way entitles its holders to claim the status of dual citizenship.
Indian Consulate in San Francisco –
The U.S. State Department explains U.S. dual nationality in some detail on its website – including the following statement (U.S. Department of State -Dual Nationality):
U.S. law does not impede its citizens’ acquisition of foreign citizenship whether by birth, descent, naturalization or other form of acquisition, by imposing requirements of permission from U.S. courts or any governmental agency. If a foreign country’s law permits parents to apply for citizenship on behalf of minor children, nothing in U.S. law impedes U.S. citizen parents from doing so.
U.S. law does not require a U.S. citizen to choose between U.S. citizenship and another (foreign) nationality (or nationalities). A U.S. citizen may naturalize in a foreign state without any risk to their U.S. citizenship.
Those who have their “lawful permanent resident” status and live largely outside the U.S. (or plan on moving to do so in the future) should be keenly aware of the definition of a “long-term” resident. See, IRC Section 877 (e)(2).
Importantly, the U.S. Tax Court just entered a Decision for a case involving a German citizen who had been a lawful permanent resident for many years (U.S. Tax Court Docket 18451-19). In that case the IRS revenue agent took the position the German citizen was a “United States person” and therefore subject to U.S. taxation on his worldwide income and subject to “international information reporting requirements.”
As is increasingly common in IRS tax audits of international individual matters, information penalties become a cudgel to impose greater
economic pressure (when the income tax determinations are relatively modest) to pursue cross border cases. In the recent U.S. Tax Court case (U.S. Tax Court Docket 18451-19), the IRS had assessed substantial penalties for more than 10 tax years for failure to file IRS Form 8865.
What was striking about the German citizen case who had been a lawful permanent resident for many years (U.S. Tax Court Docket 18451-19) is that the IRS conceded the case as part of a “qualified offer” procedure (Section 7430) where the taxpayer offered what was less than 1% of the total tax, penalty and statutory interest amounts determined by the IRS. Plus, there was both a statutory notice of deficiency (90/150 day letter) on income tax and negligence penalties plus a separate direct assessment of information penalties under IRC Section 6038(b) for not filing IRS Form 8865.
The importance of an international information penalty assessment, is that the U.S. Tax Court will often times not have jurisdiction to address the issue; at least not on first blush. See, Flume v. Commissioner, T.C. Memo 2017-21, Judge Goeke addressing 5471 penalties and IRC Sections 6330(c)(2)(B) and 6330(c)(4)(A). For an excellent discussion on these issues, see two outstanding tax authors –
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.
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:
(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 . . . “
One of the most burning questions of the day in expatriation tax law is whether changes in the tax law in 2008 regarding the date of “relinquishment of citizenship” mean what the plain language of the statute says in IRC Section 877A(g)(4). This statutory rule is referenced in IRC Section 7701(a)(50). See, a prior post on 6 May 2014, Why Section 7701(a)(50) is so important for those who “relinquished” citizenship years ago (without a CLN). . .
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Section 877A(g)(4), provides as follows:
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(4) Relinquishment of citizenship
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A citizen shall be treated as relinquishing his United States citizenship on the earliest of—
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(A)the date the individual renounces his United States nationality before a diplomatic or consular officerof the United States pursuant to paragraph (5) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(5)),
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(B)the date the individual furnishes to the United States Department of State a signed statement of voluntary relinquishmentof United States nationality confirming the performance of an act of expatriation specified in paragraph (1), (2), (3), or (4) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(1)–(4)),
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(C)the date the United States Department of State issues to the individual a certificate of loss of nationality, or
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(D)the date a court of the United States cancels a naturalized citizen’s certificate of naturalization. [emphasis added]
I sympathize with the arguments made by Mr. Miller and Ms. La Torre Jeker and others. The statutory language creates what appears to be a very harsh result to a U.S. citizen who argues they did some type of act that terminated their U.S. citizenship many years ago. Many individuals argue: “I should not have to be subject to U.S. federal tax law that follows U.S. citizens, their assets and their income, wherever in the world they might be located, as I am no longer a U.S. citizen (although I have no CLN or similar document from the U.S. government saying otherwise).”
Reviewing old case law and IRS revenue rulings is instructive in this area to see how the Courts and the IRS considered the tax consequences to those individuals who had purportedly lost their U.S. citizenship in the past.
This is the first discussion (Part I) of a discussion of these cases and IRS rulings.
In a 1970 IRS Revenue Ruling (Rev. Rul. 70-506) the naturalized individual had actually been deemed to have lost her citizenship under a specific statutory provision (section 352(a)) of the Immigration and Nationality Act. This immigration law determination however was found to be unconstitutional by the U.S. Supreme Court in Schneider v. Rusk, 377 U.S. 163 (1964). In the revenue ruling, the IRS made the following determination saying she ” . . always has been since naturalization, a citizen of the United States and is taxable under section 1 or section 1201(b) of the Code on income from sources both within and without the United States. [emphasis added]”:
1 Tax treatment of naturalized citizens mistakenly deemed to have lost their citizenship under section 352(a) of the Immigration and Nationality Act of 1952, declared unconstitutional by the Supreme Court.
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Advice has been requested whether under the circumstances described below, an individual is taxable as a United States citizen or as a nonresident alien.
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A, a national of a foreign country, became a naturalized citizen under the immigration and nationality laws of the United States. A resided, except for visits to the United States, continuously in a foreign country for a period in excess of 5 years. By operation of section 352(a) of the Immigration and Nationality Act of 1952 (8 U.S.C. 1484(a)), A lost his United States citizenship.
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*2 In Schneider v. Rusk, 377 U.S. 163 (1964), the Supreme Court ruled on the constitutionality of section 352(a)(1) of the Immigration and Nationality Act of 1952. Mrs. Schneider, born in Germany, acquired derivative United States citizenship at age 16 through her mother, but later returned to Germany, married a German national and resided in Germany for more than three years after her marriage. The United States denied her a passport, the State Department certifying that she had lost her United States citizenship under section 352(a)(1) of the Act. The Supreme Court held that the statute was so unjustifiably discriminatory against naturalized citizens, as opposed to native born citizens, that it was violative of due process under the Fifth Amendment of the Constitution.
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The decision in Schneider v. Rusk has been interpreted to apply as well to action taken by the State Department pursuant to section 352(a)(2) of the Immigration and Nationality Act to certify loss of citizenship in the case of a naturalized citizen continuously residing for at least five years in a foreign state other than the state of which he was formerly a national or in which he was born. Such action is considered void ab initio and thus any such individual continues to be a naturalized citizen of the United States in the absence of facts establishing that he is not a United States citizen by virtue of other provisions of law.
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As a result of the decision in Schneider v. Rusk, any Certificate of Loss of Nationality of the United States issued by reason of section 352(a) of the Immigration and Nationality Act of 1952 is considered null and void and the individual affected thereby is a citizen of the United States and taxable under section 1 or section 1201(b) of the Code on income received from sources within and without the United States.
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Accordingly, A is, and always has been since naturalization, a citizen of the United States and is taxable under section 1 or section 1201(b) of the Code on income from sources both within and without the United States. [emphasis added]
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This conclusion by the IRS sounds particularly harsh, since the individual who thought she was NOT a U.S. citizen by operation of an express statutory provision of the law, was actually deemed to be a USC and “retroactively” subject to U.S. income taxation for each year since her naturalization. This sounds similar to the arguments made by individuals who assert they have “relinquished” their citizenship years ago, but never obtained a CLN.
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For better or worse, its seems clear the tax statute supports this conclusion in IRS Revenue Ruling 70-506; i.e., that a “U.S. person” which necessarily includes a U.S. citizen is subject to U.S. income taxation on their worldwide income for the entire time he or she was a citizen. See, IRC § 61 and Treas. Reg. §§ 1.1-1(b) and 1.1-1(a)(1). The question is, what will the Courts say, if and when a taxpayer is willing to challenge the IRS’ determination as to the meaning of IRC Section 877A(g)(4).
This dilemma affects numerous USCs throughout the world, which is now compounded by the certification and reporting requirements of USCs and third parties, such as FFIs and NFFEs[2] under the Foreign Account Tax Compliance Act (“FATCA”).
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The regulations provide the specific rule that all USCs must have a SSN[1] as their TIN. There are no general exceptions in the regulations to the requirement that a USC must have a SSN as their TIN.
This regulatory requirement specifically directs the USC to the forms that must be completed and filed with the SSA, in order to obtain a SSN, as follows:[2]
(1) Social security number. Any individual required to furnish a social security number pursuant to paragraph (b) of this section shall apply for one, if he has not done so previously, on Form SS-5, which may be obtained from any Social Security Administration or Internal Revenue Service office. He shall make such application far enough in advance of the first required use of such number to permit issuance of the number in time for compliance with such requirement. The form, together with any supplementary statement, shall be prepared and filed in accordance with the form, instructions, and regulations applicable thereto, and shall set forth fully and clearly the data therein called for. Individuals who are ineligible for or do not wish to participate in the benefits of the social security program shall nevertheless obtain a social security number if they are required to furnish such a number pursuant to paragraph (b) of this section. [emphasis added]
These Title 26 regulations discuss individuals requesting forms from “any Social Security Administration or Internal Revenue Service office” which clearly implies that the SSA and the IRS have offices overseas.
Unfortunately, this is not the case, as the IRS recently announced it is closing its full-time walk-in offices in London, Frankfurt and Paris, as the office in Beijing, China was closed in 2014.[3] Similarly, the SSA has no overseas offices, but does have limited field office operations in Canada, the British Virgin Islands and Samoa.[4]
Therefore, it is clear that the above regulations are speaking to individuals who reside and live in the U.S., and not USCs residing overseas when it requires USCs to “ . . . make such application far enough in advance of the first required use of such number to permit issuance of the number in time for compliance with such requirement.[5]
These Title 26 regulations require the application be made well in advance of any tax filing requirements are not realistic for USCs residing overseas as is explained herein. This author has seen the issuance of SSNs take more than 6 months, even when the USC could have an interview in their country of residence.
More importantly, there are very few countries (only 17) where in-person interviews can even be held. See, discussion below.
USCs who have lived most, if not all of their lives outside the U.S., commonly do not have a SSN. The procedural requirements imposed by the SSA to obtain a SSN in these cases are complicated and unrealistic for USCs living overseas.[6] This author has seen cases where USCs residing overseas have even spent the money and resources and time to travel to the U.S. to apply for a SSN, yet were turned away by the SSA, due to various procedural requirements which were not satisfied.
Often times obtaining a SSN overseas is nearly impossible, depending upon which country and where within that country the USC resides.
A. Obtaining a SSN Outside the US by a USC – Much More than Just Filing SSA Form SS-5
The SSA does not have offices outside the U.S. although they have a so-called “Office of International Operations.”[7] The focus of OIO is the administration of social security benefits, not obtaining SSNs for USCs residing overseas. Since the SSA is assisted by the U.S. Department of State (who are not SSN experts), USCs have to rely upon various U.S. embassies and consulate offices around the world, as they try to obtain a SSN.
B. Tax Return Filing Requirements – Minimum Gross Income
Any USC individual is obligated under the U.S. federal tax law to file a federal income tax return IRS Form 1040 if they meet minimum thresholds of income. For the tax year 2015, the thresholds are low, and are reached once the gross income is at least the sum of (i) the “exemption” amount (currently $4,000) and (ii) the “standard deduction” amount (currently $6,300 for single and married filing jointly and $12,600 for married couples filing jointly).[8]
This is true, even if all of the income is earned income and eligible for the foreign earned income exclusion, which is $100,800 for the tax year 2015.[9]
Additionally, USCs living overseas necessarily have a U.S. tax return filing requirement, when they meet these low thresholds of gross income. In these cases, tax returns that are not filed by the 15th of June are not considered timely filed.[10]
II. The Social Security Administration Rules Make it Nearly Impossible for Many USCs Overseas to Reasonably Obtain a SSN
The policy and procedures of the SSA regarding issuing SSNs have changed significantly over the years.[11] The Social Security Administration (SSA) provides a detailed chronology of the major changes in policy and procedures regarding filing for and obtaining a SSN.[12] One of the most significant revisions in the last decade came from The Intelligence Reform and Terrorism Prevention Act of 2004 (P.L. 108-458), which imposes various standards for the verification of documents or records submitted by an individual.
A. Only a Few Countries Around the World have Personnel at U.S. Embassies or Consulate Offices that Can Process SSN Applications – SSA Form SS-5-FS
Applying for SSNs overseas is severely restricted compared to an application in the U.S.
According to the U.S. Department of State, Foreign Affairs Manual (“FAM”), only certain “Claims-Taking Posts” in specific countries “may” include “processing applications for Social Security Numbers.” [13]
These 17 countries (and a city in the case of Jerusalem) with Claims-Taking Posts include:
“Austria, Argentina, Costa Rica, Dominican Republic, France, Germany, Greece, Ireland, Italy, Japan, Jerusalem, Mexico, Norway, Philippines, Poland, Portugal, Spain, and the United Kingdom.”
Noticeably absent are many Western European countries, virtually all of Latin America, virtually all of Asia, virtually all of Eastern Europe, all of the Middle East (except Jerusalem), all of the African continent, all of the Australian continent and surrounding island countries and Russia, among many other significant countries, including OECD member countries.[14]
Nothing in the FAM requires any of these “Claims-Taking Posts” to actually process applications for a SSN. Plus, there are of course hundreds of other countries throughout the world, not listed above, which do not have such a U.S. Department of State Post. For these reasons, USCs in countries such as China must travel to a U.S. Department of State Post (e.g., the Philippines) which is able to process applications for SSNs.
B. In Person Interview Required for Individuals Older than 11 Years Old
Individuals who are older than 11 years old must personally go to the U.S. Embassy or Consulate with a Claims-Taking Post. See 7 FAM 530, pages 7, 12, 13 and 7 FAM EXHIBIT 530(D) Mandatory In-Person Interview Worksheet SSN Applicant Age 12 or Older – Original SSN * * *
All of these rules makes you wonder whether foreign born individuals, such as actress Kim Cattrall from Sex & the City fame would have ever obtained a social security number overseas while she lived in Canada or the UK.
[3]See, Bloomberg article, 14 January 2015 by Kocieniewski, IRS Will Shut Last Overseas Taxpayer-Assistance Centers: “After budget reductions over the last four consecutive years, the IRS is forced to make tough choices during this period of fiscal austerity and these closures have relatively little impact on taxpayers and treaty partners,” said Julianne Breitbeil, an IRS spokeswoman. Also, see IRS website that still reflects the London and Paris offices as open http://www.irs.gov/uac/Contact-My-Local-Office-Internationally.
[6] See discussion below, regarding requirements to obtain a SSN. I.II, I.I,The Social Security Administration Rules Make it Nearly Impossible for Many USCs Overseas to Reasonably Obtain a SSN
[7] See SSA website, “Office of International Operations” – http://www.ssa.gov/foreign/ “Service Around the World – Welcome to SSA’s Office of International Operations (OIO) home page. The purpose of this site is to assist Social Security customers who are outside the U.S. or planning to leave the U.S. OIO is responsible for administering the Social Security program outside the U.S. and for the implementation of the benefit provisions of international agreements. Since SSA has no offices outside the U.S., OIO is assisted by the Department of State’s embassies and consulates throughout the world.”
[8]See, IR-2014-104, Oct. 30, 2014 and IRS Publication 501.
[12]See, SSA website, Significant Milestones in Social Security Number Policy. A detailed chronology of the major changes in policy and procedures. http://www.ssa.gov/history/ssn/ssnchron.html.
[14] In contrast to these 17 countries (and one city – Jerusalem) where a USC residing overseas must travel to apply for a SSN, the Treasury Department has announced it has around 100 countries that have signed, or “have reached agreements in substance” a FATCA IGA. USCs throughout the world are required by the Foreign Account Tax Compliance Act (“FACTA”) to provide their U.S. TIN to financial institutions throughout the world (on IRS Form W-9, or its equivalent), which under current law necessarily must be a SSN. Of course, if they have no SSN, they cannot sign IRS Form W-9 which provides in Part II: “Under penalties of perjury, I certify that: 1. The number shown on this form is my correct taxpayer identification number . . .”
U.S. Citizens Overseas who Wish to Renounce without a Social Security Number (“SSN”) will Necessarily be a “Covered Expatriate”
The Dilemma of SSNs, TINs and USCs Residing Overseas
The prior post discussed some of the complications of United States Citizens (“USCs”) who reside outside the U.S. and do not have a social security number (“SSN”) . This dilemma exists, even though USCs are not generally required to file for or obtain a SSN (e.g., at birth – See, SSA Publication – “Social Security Numbers For Children” page 2, It is not obligatory to file for a SSN at birth. “Must my child have a Social Security number? No. Getting a Social Security number for your newborn is voluntary. But, it is a good idea to get a number when your child is born. . . . ).
. . . the IRS’ increased focus on international tax compliance has made clear that USCs residing overseas have U.S. tax return filing obligations, even if they have no assets, no income, or no real personal connections in or with the U.S. See IRS notice from 2011 which addresses numerous aspects of tax compliance for USCs overseas, including various penalties under the law[1]:
. . . U.S. Citizens or Dual Citizens Residing Outside the U.S. . . .
The IRS is aware that some taxpayers who are dual citizens of the United States and a foreign country may have failed to timely file United States federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs), despite being required to do so. . . .2. Penalties imposed for failure to file income tax returns or to pay tax . . . 3. Possible additional penalties that may apply in particular cases . . . 6. Possible penalties for failure to file FBAR . . . 7. New reporting requirement for foreign financial assets . . . [emphases added]
USCs residing overseas are subject to the range of tax penalties that apply to all individual taxpayers (e.g., negligence penalties, failure to file penalties, late payment or failure to pay penalties, etc.).[2] Additionally, USCs residing overseas are subject to other, typically much harsher penalties for not timely filing U.S. federal information returns regarding assets located outside the U.S.[3]; alluded to above in the IRS 2011 notice.[4]
These civil penalties typically are a minimum of US$10,000 per statutory violation. USCs who live outside the U.S. necessarily have assets, such as financial accounts in their country of residence. These Title 26 information reporting requirements[5] are referred to herein as “International Information Returns.”
The IRS will not process federal tax returns and International Information Returns without a valid TIN.[6] Plus, the law does not provide for an exception for USCs overseas who do not file returns, if they do not have a SSN. Late filed, or incomplete International Information Returns and tax returns (e.g., lacking a SSN) will typically subject USCs to these penalties even in those cases when the taxpayer has no federal income tax liability.[7]
[1]See, IRS FS-2011-13, December 2011, updated February, 2014.
[2]See, IRS FS-2011-13 and as a sample of some of the many statutory penalties that could typically apply, IRC §§ 6048, 6652(f), 6677, 6654, 6655, 6698, 6699, 6166, 6653, 6675, 6715, 6715A, 6717, 6718, 6719, 6720A, 6725, et. seq.
[7]See, IRC §§ 911 (foreign earned income exclusion) and 901 (foreign tax credit), et. seq. A USC residing overseas may have no actual federal income tax liability (for various reasons), typically due to the foreign earned income exclusion and/or foreign tax credit calculation.
The above explains fairly clearly the dilemma facing USCs residing overseas.
The complexity of getting a SSN and the requirements are covered in more detail in the paper. Some key points are:
I. The Social Security Administration Rules Make it Nearly Impossible for Many USCs Overseas to Reasonably Obtain a SSN
The policy and procedures of the SSA regarding issuing SSNs have changed significantly over the years.[1] The Social Security Administration (SSA) provides a detailed chronology of the major changes in policy and procedures regarding filing for and obtaining a SSN.[2] One of the most significant revisions in the last decade came from The Intelligence Reform and Terrorism Prevention Act of 2004 (P.L. 108-458), which imposes various standards for the verification of documents or records submitted by an individual.
A. Only a Few Countries Around the World have Personnel at U.S. Embassies or Consulate Offices that Can Process SSN Applications – SSA Form SS-5-FS
Applying for SSNs overseas is severely restricted compared to an application in the U.S.
According to the U.S. Department of State, Foreign Affairs Manual (“FAM”), only certain “Claims-Taking Posts” in specific countries “may” include “processing applications for Social Security Numbers.” [3]
These 17 countries (and a city in the case of Jerusalem) with Claims-Taking Posts include:
“Austria, Argentina, Costa Rica, Dominican Republic, France, Germany, Greece, Ireland, Italy, Japan, Jerusalem, Mexico, Norway, Philippines, Poland, Portugal, Spain, and the United Kingdom.”
Noticeably absent are many Western European countries, virtually all of Latin America, virtually all of Asia, virtually all of Eastern Europe, all of the Middle East (except Jerusalem), all of the African continent, all of the Australian continent and surrounding island countries and Russia, among many other significant countries, including OECD member countries.[4]
Nothing in the FAM requires any of these “Claims-Taking Posts” to actually process applications for a SSN. Plus, there are of course hundreds of other countries throughout the world, not listed above, which do not have such a U.S. Department of State Post. For these reasons, USCs in countries such as China must travel to a U.S. Department of State Post (e.g., the Philippines) which is able to process applications for SSNs.
[2]See, SSA website, Significant Milestones in Social Security Number Policy. A detailed chronology of the major changes in policy and procedures. http://www.ssa.gov/history/ssn/ssnchron.html.
[4] In contrast to these 17 countries (and one city – Jerusalem) where a USC residing overseas must travel to apply for a SSN, the Treasury Department has announced it has around 100 countries that have signed, or “have reached agreements in substance” a FATCA IGA. USCs throughout the world are required by the Foreign Account Tax Compliance Act (“FACTA”) to provide their U.S. TIN to financial institutions throughout the world (on IRS Form W-9, or its equivalent), which under current law necessarily must be a SSN. Of course, if they have no SSN, they cannot sign IRS Form W-9 which provides in Part II: “Under penalties of perjury, I certify that: 1. The number shown on this form is my correct taxpayer identification number . . .”
The Necessary “Covered Expatriate Status” of a USC without a SSN
If a USC has no SSN, they by definition will never be able to comply with the Certification Requirement of Section 877(a)(2)(C) since they will not be able to comply with IRC § 6109(a) and Treas. Reg. § 301.6109-1. As the SSN/TIN paper explains:
All United States citizens (“USCs”) must have a social security number (“SSN”) under current law as their TIN to file a federal income tax return.[1]
[1] See, IRC § 6109(a) and Treas. Reg. § 301.6109-1.
The IRS will not process federal tax returns and “International Information Returns”, as defined below, without a valid TIN[1]; which currently must be a SSN for a USC.
These numbers of I-407 forms filed annually were obtained through a freedom of Information Act (“FOIA”) request and provided by the USCIS. See tabl:
Of course, this statistic does NOT identify the number of the approximate 13.3+ million LPRs who leave the U.S. to live elsewhere in another country without completing Form I-407 and formally abandoning. The estimated number of LPRs was 13.3 million for the year 2012 as reported by the Office of Statistics of the DHS. See, Estimates of the Legal Permanent Resident Population in 2012.
Maybe the number of individuals who fall into this latter category (i.e., moving out of the U.S. without filing Form I-407) is several hundred of thousands of individuals annually?
Importantly, from a taxation perspective, anyone who moves and lives in a country with a U.S. income tax treaty (the list of these countries is set out below – from the IRS website), needs to be careful not to be deemed to be a “covered expatriate” due to the application of IRS Form 7701(b)(6). See, IRS Notice 2009-85.
what appears to be a very harsh result to a U.S. citizen who argues they did some type of act that terminated their U.S. citizenship many years ago. Many individuals argue: “I should not have to be subject to U.S. federal tax law that follows U.S. citizens, their assets and their income, wherever in the world they might be located, as I am no longer a U.S. citizen (although I have no CLN or similar document from the U.S. government saying otherwise).”
obtain a SSN (e.g., at birth – See, SSA Publication – “Social Security Numbers For Children” page 2, It is not obligatory to file for a SSN at birth. “Must my child have a Social Security number? No. Getting a Social Security number for your newborn is voluntary. But, it is a good idea to get a number when your child is born. . . . ).
regarding filing for and obtaining a SSN.[2] One of the most significant revisions in the last decade came from The Intelligence Reform and Terrorism Prevention Act of 2004 (P.L. 108-458), which imposes various standards for the verification of documents or records submitted by an individual.
