The United States is like an ex-wife or ex-husband who hasn’t figured out how to let go. Indeed, the IRS stalks its former citizens by insisting upon a messy divorce process, which aims at dissuading the wealthy from leaving. But like any bad relationship, stalking makes the former lover hate even more the one who can’t let go. Certainly, this stalking behavior will not lead the expatriated person to run back into the arms of his former lover!
To wit, the United States requires that every person who has relinquished their citizenship to file a form 8854, established by the HEART Act of 2008; if a person is a covered expatriate (usually a person with more than $2,000,000 in assets), the IRS code requires that the person pay an exit tax on all capital gains, imagining that all real estate, stocks and all other assets were liquidated the day of expatriation. Then, anything above $600,000 in gains is taxed at an exorbitant rate. In some cases, the United States may impose the Reed Amendment (1996) which requires the former citizen to pay taxes for the next 10 years while forbidding that same person from entering the United States.
Now, the IRS code has a very specific definition of a United States person for tax purposes:
(30) United States person
The term “United States person” means—
(A) a citizen or resident of the United States,
(B) a domestic partnership,
(C) a domestic corporation,
(D) any estate (other than a foreign estate, within the meaning of paragraph (31)), and
(E) any trust if—
(i) a court within the United States is able to exercise primary supervision over the administration of the trust, and
(ii) one or more United States persons have the authority to control all substantial decisions of the trust.
Since it is clear that all citizens must pay taxes, then how can one lose this citizenship? US law states that a person will lose US citizenship if a relinquishing act takes place (See 8 U.S.C. 1481). In accordance with the law, I relinquished my citizenship the day I became a Canadian on February 28, 2011. But according to the IRS instructions for form 8854, however, you are still a citizen until you renounce in front of consular official or inform the State Department in writing that you have performed a relinquishing act:
You are considered to have relinquished your U.S. citizenship on the earliest of the following dates.
1. The date you renounced your U.S. citizenship before a diplomatic or consular officer of the United States (provided that the voluntary renouncement was later confirmed by the issuance of a certificate of loss of nationality).
2. The date you furnished to the State Department a signed statement of your voluntary relinquishment of U.S. nationality confirming the performance of an expatriating act (provided that the voluntary relinquishment was later confirmed by the issuance of a certificate of loss of nationality).
3. The date the State Department issued a certificate of loss of nationality.
4. The date a U.S. court canceled your certificate of naturalization.
But I was not able to get an appointment to see a State Department person until 7 April 2011. Thus, according to the IRS that’s the date I become a non-citizen. But it is not that simple because the IRS now has yet a third date which they call , “date of tax expatriation”:
Date of Tax Expatriation
For purposes of filling out Part I, the date of your expatriation is the later of the date you notified the relevant agency of your expatriating act or the date Form 8854 was first filed in accordance with these instructions. Apply the rules of section 7502 to determine the date on which this form is filed. Generally, the postmark date is the filing date.
Until you file Form 8854 and notify the Department of State or the Department of Homeland Security of your expatriating act, your expatriation for immigration purposes does not relieve you of your obligation to file U.S. tax returns and report your worldwide income as a citizen or resident of the United States.
Ok, so let me get this straight: I am now no longer a US person, being neither a US citizen nor a resident of the US. But I am still a US person because I have not filed Form 8854? This relationship with the IRS is like being divorced from your wife, being deprived of all the benefits of marriage, but having to pay alimony and not being able to take a second wife. But why should I even give a damn about this form, since I am no longer “subject to the jurisdiction of the United States” being neither a citizen nor within her realms? I believe these laws create a legal fiction, a non-resident, non-US person who the IRS still considers a US person for tax purposes.
Well there is a $10,000 fine for not filing this form. Furthermore, the IRS will consider the person who does not complete the expatriation process a “covered expatriate”. This could have serious consequences for US source income or US based assets. The IRS has the ability to seize, to withhold and to put liens on US based income and assets.
But what about the long term resident of Canada or elsewhere abroad who has no assets in the states? Consider this from Don Cayo of the Vancouver Sun, with regard to whether the CRA would collect for IRS on a citizen of Canada under the tax treaty:
Moreover, the obligation to collect taxes imposed by the other country does not apply in cases where the individual was a citizen of the requested state at the time the tax liability arose in that other country. This means that the CRA would not collect the U.S. tax liability of a Canadian citizen if the individual was a Canadian citizen at the time the liability arose (whether or not the individual was also a U.S. citizen at that time).
So this would assume therefore that the exit tax or penalties do not apply to those who relinquish by taking Canadian citizenship, because the penalties are not collectable. What can they do? Well, short of harassing folks at the border for the $10,000 or anything else that think that you owe them, I’m not sure. So being a citizen of a foreign country and having all your assets in that country is like putting a restraining order on your stalker, the IRS. They are not allowed to touch you.
Finally, the exit tax, the fines, the requirement to file 8854 with its invasive questions which violate the privacy of the person, are all obstacles to the exercising of a fundamental right, that of expatriation.