87 thoughts on “Only the U.S. may tax its citizens living abroad – U.S. condemns use of Diaspora tax for other countries”

1. I agree Mona. Knowing the US they will be especially punitive toward people who renounce in the current environment. That’s why I think it would be best if the Canadian government could negotiate a mass renunciation on behalf of all dual citizens in Canada.

   Of course the Americans would not want to frame it that way. They would prefer to say they stripped you of your US citizenship as if you’ve lost something very valuable and they were in control. Whatever gets it done…

2. @omg, i believe that because what they’ll collect in double taxation and misc fines will be but a drop in the ocean, they will be merciful to those who ‘come clean’ and become fully compliant, especially those who are contrite. But those who are defiant and especially those who renounce could be severely targeted….unless, of course, they have hardly any assets. They could still punish them by making visiting difficult though.

3. @Mona, The US State Department will not issue a Certificate of Renunciation until the IRS certifies that all tax obligations have been fulfilled, so until then the person is sitll considered a US citizen and fair game for the IRS.

4. @ Roger Conklin
   What is your source for the statement that State doesn’t issue a CLN until IRS certifies tax obligations have been fulfilled? All the information we’ve seen to date indicates that State issues the CLN then tells IRS which does whatever it will do re taxation afterwards. CLN’s cannot be held back for taxation purposes, though renunciations that IRS deems to have been for tax reasons can result in pursuit of taxes and penalties after the issuing of the CLN. At least that’s the way I’ve been reading it. Unless there has been some very recent new legislation we haven’t heard of …

5. @Roger

   Please do write a letter to Hilary Clinton – I think it could be a big help. Obviously the letter should also reference your testimony before the Ways and Means Committee which was so well organized.

6. Mercy does not seem to be a chacteristic one can hope to experience from the IRS. Just ask the dual-national Canadians that crossed the border to visit the US with their Canadian passports, not even realizing that they were considered by the US to also have US citizenship, and had to pay most of their life savings to be released and allowed to return home. Is this any more mercifal that the treatment meeted out by by Eretria on its citizens living abroad who have returned to visit family members when they are informed “pay up or you will not leave?”

   I remeber many years ago when a one of the now-retired Canadian citizen. Northern Telecom, then still known as Northern Electric) employees with which I later worked recounted to me his experience in Nigeria when he and several others were denied permission to exit that country until Northern Electric agreed to supply millions of dollars worth of additional equipment, and install it, at no cost to that government.

7. @Roger, more than once you’ve mentioned this story of Canadians held by the US; do you have a specific details of such incidents.

   I’ve heard a story, once told on the now moribund Expat Forum about a friend of someone’s account who was delayed at YYZ (Toronto) until he showed his tax filings for six years and as a result, missed his flight to the states. The folks at the Expat Forum dismissed it as urban myth.

   I’ve also heard of people being delayed until they promise to get a passport. But so far, I am unaware of the kind of story in which a Canadian is held hostage in the United States until he makes his paperwork complete. If this can be documented, we need to highlight it here.

8. @Roger, When did were these Canadians detained and forced to pay extortionate fines? Are you sure this isn’t an urban legend?

   As for being cleared with IRS after renouncing, would have thought such people would still have to wait out their statute of limitations before being completely free from the IRS (even if given their cln certifiate).

9. @schubert I’ve heard this story to, the the CLN will be held up by State until checking with the IRS. The policy you state is actually what I’ve heard and think is official, unless it has changed. So Phil Hodgen once confirmed in a blog comment too.

   But alas, I’m still waiting for my CLN. Perhaps I should e-mail Mrs A. But she said that the Consulate would contact me. On 7 February, it will be 10 full months of waiting.

10. All,
    Here is the IRS reference:
    http://www.irs.gov/businesses/small/international/article/0,,id=97245,00.html

    Having not gone through this process I cannot confirm it from my own experience, but perhaps some of you who have done it can confirm what really happens. It is my understanding is that you raise your right hand and renounce your citizenship before a US Consular or Embassy official located outside of the US, but from the language in this IRS reference you do not receive your Certificate of Loss of Nationality, issued by the State Department, “until it is subseqently approved.” That is a process which generally takes several months and I have presumed includes confirmation from the IRS that everything is in order. It seems to me that this is the only leverage the IRS has to collect US taxes and penalties before the certificate is issued. When it is finally issued the effective date is the date when the oath was administered.

    The implication, not clearly stated, is that the exit tax and other obligations to the IRS described in this reference have to be paid before this certificate is approved, and that appproval is requred before it is issued.

    Have you or anyone any of you know received this CLN without first having settled all outstanding financial obligations with the IRS?

    @mona, I unfortunatey cannot cite the reference, but as I recall the first instance I learned about, I believe was forwarded by ACA but I cannot say for sure. It was a Canadian lady in British Columbia who had been born in San Diego to Canadian parents who were temporarily in the US as university students studying there. She was a freqent visitor to the US, but this time US immigration at the border noted that it was stated in her passport that she was born in the US, which, even though she was not aware of it, made her a US citizen. I recall the report stated that she was a person of modest means earning $36,000 per year and that she ended up paying $80,000 to the IRS in failure to file penalties, even though had she filed US tax returns on a timely basis she would have owed no US tax since her Canadian foreign tax credits were sufficient to totally cover her US tax obligations. Am I the only person that recalls this? Was it published in the Canadian press? This was several months ago, long before I became aware of these blogs, so at that time I did not really give it much thought.

11. @Roger:
    The procedure outlined in the link you give is normally thus:

    IRC 877A(g)(4) provides that a citizen will be treated as relinquishing his or her U.S. citizenship on the earliest of four possible dates: (1) the date the individual renounces his or her U.S. nationality before a diplomatic or consular officer of the U.S., provided the renunciation is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the U.S. Department of State; (2) the date the individual furnishes to the U.S. Department of State a signed statement of voluntary relinquishment of U.S. 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)), provided the voluntary relinquishment is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the U.S. Department of State; (3) the date the U.S. Department of State issues to the individual a certificate of loss of nationality; or (4) the date a U.S. court cancels a naturalized citizen’s certificate of naturalization.

    If the CLN is required for calculating the exit tax in some circumstances, as this text clearly shows, then the only logical conclusion is that the approval of the expatriation is determined by the State Department which issues the CLN and forwards it to the Consulate and a notification to the IRS, thus invoking the necessity of filing the 8854.

    Thus, according to the text you cited on the IRS website, the IRS cannot hold the CLN hostage. It is rather the proof that the person is required to pay the exit tax. This is the working assumption that both Schubert and I have had. Yet alas, I wait for the CLN.

12. As far as I understand, the statue of limitations clock only starts to run after you file your tax return and / or FBAR. I think the IRS is trying to show some sort of mercy by requesting only the last six years. So they probably could hold you accountable for all non filed documents if they wanted to. I just hope my assumption is incorrect though! Kinda reminds me of what my high school english teacher used to say
    “Never assume anything, because it makes an (ass) out of (u) and (me)” 🙂

13. @Petros, the proof of the pudding comes with the eating so we all are waiting with baited breath until you and Schubert have your CLNs in your hands in order to understand more clearly exactly how this process works.

14. @omghe’sstillanamerican— January 30, 2012 at 7:53 pm

    reminds me of Nigerian 419 scams… except in those they glaze your eyes promising you the sun, moon, and stars first.

15. @U, I am not a lawyer, but this is what I’ve read:

    Taxes have 3 year statute of limitations only once one has made the filing. That’s my understanding. So if I file 2007 taxes in 2012, then the IRS has until 2015 to audit me, fine me or press charges against me.

    FBARs have a six year statute of limitations whether or not a person files. If a person is under indictment in the United States but a fugitive in another foreign country, the statute of limitations never expires.

16. Hmmmm…. So that means if I file my delinquent 1040’s and FBAR’s for 2010, 2009, 2008, 2007, 2006 and 2005 like the IRS fact sheet says, and I fill my 1040 / FBAR for 2011, renounce in 2012 and file my last 1040, the IRS could still go after me for the 1040’s I didn’t file before 2005???
    I think I’m a bit confused.

17. Petros, this is generally correct about fbars and tax returns…. but if a return has under-reported more than 25% income (which could easily be done if, for instance, phantom gains in foreign mutual funds were not reported), then the statute of limitations is extended to six years. And for timely filed returns, the normal three year SOL doesn’t start running till the due date even if filed several months ahead.

18. My understanding, for what it’s worth, is that 1) State will approve the renunciation if there’s no reason to believe that it isn’t your own decision and you know what you’re doing, 2) they will inform the IRS, 3) it’s up to you to handle the IRS side of it, which mostly means the 8854 and the final tax returns.

19. @Uncke Tell, yes.

    Roger, there must have been more than meets the eye regarding that women being hit with $80,000 for merely failing to file unless they’re deciding to fine people at random to keep them on their toes.

    My impression though is that they’re more interested in going after rich people because they can generally get more money from them. She must have been already on the IRS radar for something else. Otherwise, it simply doesn’t make sense.

    I could see them doing random audits and/or fines just to remind US taxpayers that everyone is subject to the same rules but I still think they will focus more on wealthy delinquents because they are limited by tight budgets so probably can’t afford to conduct extensive examinations on minnows. Could also be part of why they’re using such frightening language– they have to terrify the masses into compliance, at least till they’/l have their tenticles in via fatca

20. I’m going to re-read all of this maze today.

    The IRS pages regarding this – and to interpret.
    http://www.irs.gov/businesses/small/international/article/0,,id=97245,00.html

    http://www.irs.gov/instructions/i8854/ch01.html says
    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.
    When To File
    File your initial Form 8854 as soon as possible after the date you relinquish U.S. citizenship or terminate your long-term residence. You remain subject to tax as a U.S. citizen or resident until you both file your initial Form 8854 and notify the appropriate authorities of your expatriating act. See the Caution in Date of Tax Expatriation, earlier.

    In most cases, you must file your annual Form 8854 by the due date for filing Form 1040NR, U.S. Nonresident Alien Income Tax Return, regardless of whether you are required to file Form 1040NR. If you are required to file Form 1040NR, attach Form 8854 to your Form 1040NR and file your Form 1040NR at the address in the Instructions for Form 1040NR. Also send a copy of Form 8854 to the address under Where To File below. If you are not required to file Form 1040NR, send your Form 8854 to the address under Where To File below.

    If you are present in the United States following your expatriation and are subject to tax as a U.S. citizen or resident under the rules described inException, earlier, file Form 8854 with your Form 1040 by the due date for filing Form 1040. Also send a copy of Form 8854 to the address under Where To File below by the due date for filing Form 1040.

    An interesting read from 1998 – has Rangel’s name included as a recipient of letter http://www.treasury.gov/press-center/press-releases/Documents/tax598.pdf

    From this site’s perspective: http://www.taxmeless.com/USCitizenRenounce.htm which refers to this: http://renunciationguide.com/Site-Overview.html which I am now going to re-read. It seemed such a wonderful resource when I first read it.

21. @Mona, Roger I think the story makes sense; it’s just that we are missing certain details. If the woman entered an OVDI, in addition to filing back taxes, it would make perfect sense, if she is late middle ages, and has financial assets around $300,000, including RRSPs, TFSAs, and real estate. Also one could consider that she may be married and co-signing on certain accounts with her husband, or enjoys a spousal RRSP–that would put her easily into an $80,000 fine at 25%.

    We just need more details. If you are the woman in BC, please contact me.

22. @A broken man on a Halifax pier. I like your boiling it down to something understandable.

    The 8854 filed; the final IRS tax returns completed and when all that determined by the IRS and verified to the DOS, then the Certificate of Loss of Nationality finally given to the lucky winner?

23. Uncle Tell wrote: “Hmmmm…. So that means if I file my delinquent 1040′s and FBAR’s for 2010, 2009, 2008, 2007, 2006 and 2005 like the IRS fact sheet says, and I fill my 1040 / FBAR for 2011, renounce in 2012 and file my last 1040, the IRS could still go after me for the 1040′s I didn’t file before 2005??? I think I’m a bit confused.”

    You and everyone else, including the people who are enforcing these rules. The Form 8854 requires only five years of tax return compliance for expatriation purposes. That should suffice.

24. @mona, I know that the tax reurn “failure to file” penalty can be as much as $25,000 and 1 year in prision and the non-wilful penalty is $10,000 for failre to file an FBAR report, which is requrired if you are the owner OR have signature authorithy over foreign bank accounts, the total value of which at anytime during the rear reaches $10,000, even though not your own. And if the IRS determines the failure to file was wilful, the penalty can well be $100,000. And “signature athority over” can be a pretty fine net which catches low-income “minnow” whose accounting department job responsibilities include signing checks for one’s employer to pay company bills. The IRS has some leeway in negotiating to agree to reduced payments for outstanding taxes in hardship cases, but it is my understanding that the tax laws grant the IRS no authority to reduce statuatory penalties. So even very small minnows can be targets for vigorous enforcement.

    The IRS website on tax treaties includes this statement: “Generally, all of the tax treaties to which the U.S. is a party contain a ‘saving clause,’ which is meant to prevent residents of the treaty partner who are also citizens or residents of the U.S. from using the treaty to reduce their U.S. tax liability.” That pretty well expresses the fact that tax treaties are primarily to insure that the foreign government agrees the IRS can collect its pound of flesh. These treaties, I don’t think, mention ex-citzens, so I am left to wonder if the implication is with respect to whether foreign goverments are bound to recognize the right the IRS to tax ex-citizens living outside of the US who have renounced or rescinded their US citizenship and whose certificates to this effect have been approved and issued by the State Department. Probably the idea of US citizens actually renouncing their citizenship never occured to the folks that draw up these treaties. But it is certainly a reality today.

25. But Roger, I still think that they should allow for reasonable cause. I do see what you’re saying though, especially with the possible fbar penalties. But outside of the ovdi and ovdp programmes, do you know of anyone who genuinely hadn’t known about fbar and pleaded reasonable cause still being hit with draconian fines? There don’t seem to be any cases specifically mentioned on any of these blogs.