Cross posted from RenounceUScitizenship.
“Get out while the getting is semi-good. Don’t wait for more time. More time means more laws.”
– Phil Hodgen – “Why people expatriate”
Anybody who reads this blog is surely familiar with Phil Hodgen’s blog. Mr. Hodgen is California based tax lawyer who appears to have moved firmly into the practice of “Expatriation Law” – AKA helping people to renounce U.S. citizenship or get rid of that green card. Mr. Hodgen’s latest blog post about “Why people expatriate” is proof that good things can come from long flights. Speaking of “good things”: one commentator wrote that:
This the best, even-handed analysis I’ve seen of the pros and cons of a US citizen bailing out. It should be required reading for every congressman and senator in the US — as well as the president.
Sadly, it’s clear that Phil has little hope for an improvement. As he points out, it is the citizenship-based taxation that is the root of all this evil, and he sees very little chance of that ever changing.
When great powers begin their decline into eventual irrelevancy, it is rarely just one thing that historians finger as a root cause. But for the US, this may well be it.
In any case:
1. Thanks to Mr. Hodgen for a wonderful objective analysis of the reason(s) why people renounce U.S. citizenship;
2. Mr. Hodgen’s objectivity underscores why we DO need lawyers. In an earlier moment, Mr. Hodgen noted that “U.S. citizenship is a problem to be solved“. His post explains how to solve that problem. For the most part, the solution lies in expatriation – and he is absolutely correct.
Given the complexity of citizenship-based taxation, it is now an “emotional impossibility“, “financial impossibility” and “practical impossibility” for U.S. citizens who intend to live outside the United States, to retain U.S. citizenship. Mr. Hodgen prognosticates (and I agree that this problems of U.S. citizenship will get worse). He suggests that:
I expect the future to be more of the same. Expect the same exit tax rules, but more of them, and worse. Expect more expatriations. The floggings will continue until morale improves.
In short, Mr. Hodgen’s post is a superb intellectual analysis of the reality that “U.S. citizenship is a problem to be solved”. His advice is to solve the problem sooner rather than later – in other words, Get out while you can!
In life we experience things on both an intellectual and an emotional level. This needs also to be understood on an emotional level. The level of desperation and fear experienced by many U.S. citizens living abroad needs to be acknowledged. Many U.S. expats have been among the most patriotic and loyal U.S. citizens. They have been repaid for their patriotism and loyalty, by an attack by the IRS that has treated Ambassador Jacobson’s “70 year old grandmothers” the same way that it treats criminals who have laundered billions of dollars. The perverse effect of this is that it has offered the wealthy criminal (who knew he was breaking the law) a very good deal to get back into the system. It has destroyed the lives of hard working middle class expats (with no knowledge of Mr. FBAR) who have tried their best to save for retirement. The expats have saved for retirement by investing in RRSPs, mutual funds and other forms of PFICs. Some of them purchased life insurance policies that are punished by the IRS. The list goes on and on.
From the point of view of the IRS:
“The law in its majesty prohibits both the rich and the poor from sleeping on the park bench”.
The criminal U.S. tax cheat can come back into the system and retain 75% of his assets. In all probability he will live happily ever after and PROVE THAT CRIME DOES PAY!
The middle class expat who attempts to fix any compliance problems can do so only at the cost of their retirement savings (which incidentally is “after tax” money) DEMONSTRATING THE CLEANING UP PAST COMPLIANCE PROBLEMS MAY NOT PAY.
Steven Mopsick in an insightful post noted that “Becoming compliant is not easy to do.”
Furthermore, the legal and accounting fees are so high, that many U.S. citizens abroad cannot fix past compliance problems and have simply been forced underground. They cannot bring themselves into tax compliance. (The rules are such that when it comes to U.S. tax, there are only degrees of non-compliance). As Mr. Hodgen notes, 5 years of tax compliance is a necessary condition to ensure that one is NOT a “covered expatriate”. But, having 5 years of tax compliance is not a sufficient condition for showing that you are NOT a “covered expatriate”. (Life associated with U.S. citizenship (aka “Form Nation” is nothing but a series of forms. It’s just that some forms are more important than others.)
Why renunciations are increasing – an additional perspective
The most productive, law abiding and responsible U.S. citizens abroad now live in a state of terror. Their lives have now been “stolen from ” by the fear of the IRS. Only those who have experienced the magnitude of this assault from the U.S. government can, on an emotional level, understood it. In order to “reclaim their lives” and have a hope of living “productive lives” they feel they must escape the reign of terror that has been unleashed by the Obama administration. This necessitates the relinquishment of U.S. citizenship. But, severing ties with the U.S. is NOT easy. The difficulty in cutting ties with the U.S. has been compared to the difficulties of leaving the former Soviet Union.
In the same way that the “Midnight Express” was Billy Hayes way of escaping prison in Turkey, expatriation is the only way that U.S. citizens can escape the tyranny of the U.S. government. Furthermore, people are willing to pay lots of money in the form of an Exit Tax to for a ticket on the “Midnight Express”. To put it another way, if you are a U.S. citizen living outside the U.S.:
You have a choice of being a U.S. citizen or having a life!
Expatriation is the new “Midnight Express”.
Renouncing U.S. Citizenship Without Being Able To Certify 5 Years of Tax Compliance
Does a failure to demonstrate a lack of five years of tax compliance mean that one cannot renounce U.S. citizenship? Yes and no. One can expatriate without being tax compliant. It’s just that expatriation will NOT solve past tax issues. It will end any tax obligations going forward. Although one can get a CLN (certificate of Loss of Nationality) without being tax compliant, it appears that the IRS will learn of your expatriation. Mr. Hodgen notes that:
You might or might not have to pay income tax because you expatriated. The IRS looks at you as either an “expatriate” (and you do paperwork only) or a “covered expatriate” (you do paperwork plus pay some tax).
So, what’s a “covered expatriate?” Continuing the discussion he notes:
A covered expatriate is someone who is rich by IRS standards. You had an average Federal income tax liability of more than $151,000 (for expatriations in 2012) for the prior five years? Or your net worth is $2,000,000 or more? Either way, you are rich. You are a covered expatriate.
A covered expatriate is also someone who–regardless of net worth or prior Federal income tax liability–cannot say under penalty of perjury that the prior five years of Federal tax obligations are fully satisfied. Finally, a covered expatriate is someone who is late filing the exit year income tax return on time.
If you cannot certify under penalties of perjury that you have been tax compliant for the five years prior to the date of expatriation, then you are a covered expatriate.
Okay, you are a covered expatriate – now what? Well it means that you are treated as having disposed of your assets on the day prior to the day of expatriation. So, what does this mean? According to Mr. Hodgen:
If you’re a covered expatriate, here’s how you calculate your exit tax. Pretend all of your IRAs, HSAs, and similar tax-deferred accounts distributed everything to you on the day before your appointment at the Embassy. It’s all taxable income. There is no early distribution penalty.
Some pensions are treated as your entire pension benefit is distributed to you as a lump sum. You pay U.S. income tax on this make-pretend distribution although you might be decades away from retirement. If you are a beneficiary of a trust, generally you will be taxed as taxable distributions are made.
As for everything else, pretend that you sold it the day before your appointment at the Embassy. In investment jargon, your assets are marked-to-market. Calculate the capital gain, deduct the exemption amount ($651,000 in 2012), and pay tax on the rest at the normal tax rates. If it is long term capital gain, pay tax at 15%. If it is short term capital gain, pay at those rates. If it is depreciation recapture, ordinary income, whatever–apply the relevant tax treatment to it.
After you have filed that final year income tax return, you have no further tax obligations to the United States, whether you are a covered expatriate or merely an expatriate. After you expatriate, you will owe income tax to the United States only if you have U.S. source income.
(Note that those with a net worth of $2,000,000 or more are “covered expatriates”. This is $2,000,000 U.S. dollars. Some things – based on comments to Phil’s post – to keep in mind:
1. General inflation can easily mean that this who are under the threshold today, could easily be at the $2,000,000 tomorrow. Think of rising house prices in Toronto or Vancouver.
2. A devaluation of the U.S. – which is very likely – can easily put somebody over the $2,000,000 mark.
3. The law could easily be changed to make everybody a “covered expatriate”.
My point? Get out now!)
Does “Compliance Going Forward” Allow One To File Just One More Return?
Much of the public discussion and many of the assumptions assume that 5 years of tax compliance is a requirement for expatriation. Is this really true?
Remember:
1. Your relinquishment of U.S. citizenship is governed by S. 349 of the INA (Immigration and Nationality Act). It does not mention the IRS or the Tax Code.
2. You are entitled to and indeed people are receiving the CLN based on the loss of U.S. citizenship and not based on tax compliance
3. The relinquishment of U.S. citizenship will end future tax obligations to the U.S. (The ExPatriot Act is not yet law and even if it becomes law it would only apply to U.S. source income)
4. The relinquishment of U.S. citizenship will NOT solve past tax compliance problems.
5. The inability to certify that you have been tax compliant for the five years prior to expatriation means that you will be a “covered expatriate”
6. As a “covered expatriate” you may or may not have to pay an Exit Tax . I suspect that many will NOT.
7. Who knows what the IRS might or might do in relation to past non-compliance? You need advice from a good lawyer on this point. I suspect that the advice you receive will depend on your circumstances.
Certainly, if there is little or no tax liability, you might ask your lawyer the following question:
What happens if I expatriate without filing the past five years of tax returns? I then just file the appropriate returns in the year I expatriate. What are my risks in relation to my past non-compliance? The question is whether “compliance going forward” can also be our tax return(s).
Obviously, this is not legal advice. But, the law clearly states that the effect of past non-compliance (for the previous 5 years) makes one a “covered expatriate”. Being a “covered expatriate” does NOT guarantee that tax will be owed.
Conclusion: If you are too poor to bring yourself into tax compliance for the previous five years. Perhaps you just say: okay, I guess I am a “covered expatriate”. Now we will see whether you owe any tax. My hunch is that if one cannot afford to do the past five years of tax filings, that one is unlikely to owe an “Exit Tax”.
A Friendly Reminder: this does NOT mean that any past compliance issues will go away. It’s just a question of what the IRS will do about it. (On this point, it is obvious that everybody should pay their taxes. But, there are people who live very simple lives (my preferred way of living) and therefore do not owe taxes.)
I would be interested in the comments of our resident lawyers with respect to this possible approach.
As Phil Hodgen notes:
Federal politicians don’t care about you, since (a) you are overseas; and (b) you’re going to stop voting anyway. So they can use you as a political punching bag and I think you should expect this. The IRS will do what it always does–write rules and regulations–which are invariably bad for carbon-based life forms. For every regulation written to “answer a question” the IRS creates four more questions, each an order of magnitude more difficult than the one that was “solved.” Get out while the getting is semi-good. Don’t wait for more time. More time means more laws.
Many thanks for the kind words.
That post had been rattling around in my head for months, and I had 16 hours on a plane, and it all dumped out. The trip I was on (Switzerland, Lebanon, UAE) was filled with meetings with people who were considering expatriation. Those meetings also helped focus my thinking. Almost to a person the general feeling was sadness–a genuine fondness for the United States but a feeling that they were being driven away by senseless government policies.
Periodically the mainstream media wakes up and sees the giant multinational corporations with their international tax savings. Yelling ensues, until the reporters move on to the next Shiny Object to yell about. Google and Apple were recent victims of drive-by reporting like this.
The bigger point is that these corporations have become so big and sophisticated that they almost float above governments. As much as one country or another would like to tag Google for tax revenues, it is impossible. The corporations’ massive revenues and balance sheets give them the ability to avoid taxation, either by manoeuvre or by lobbying (polite word) for a specific tax break from a country.
In a weird way I see people who expatriate as the leading edge of human beings doing the same thing. Humans will perceive a government as dangerous and float away to somewhere else. And the Internal Revenue Service has put the dangerous face on the United States for many people. (Immigration, too–you’d be horrified to hear the type of treatment visitors receive upon arrival in the Land of the Free).
(Aside: a Canadian lawyer friend of mine gently mocked me for this “Land of the Free” stuff. “Name any facet of your life that is not infused with governmental regulation.” Hmmm. He’s right. Even the most basic of biological activities is touched in some way by government regulation in the United States. Maybe you can think of something that isn’t. I couldn’t.)
This is why second passports are essential. At the moment the group of people who pursue expatriation/second passport strategies is small. More and more people will pursue these strategies. Expect more yelling from the uninformed media. Ignore them and carry on.
Money interprets taxation as damage and routes around it.
@Renounce great post.
@Phil You can quote me on this: People who say I should pay US tax claim that I benefit from the “protection” of the United States. My response is: Yeah, but who is going to protect me FROM the United States. The last couple of years have taught me that the United States government is the biggest threat to my financial well being, my happiness, and the well-being of my family. I don’t need the protection of the United States, I need protection from the threat of the United States.
*@Phil
Very interesting comment you make:
“The bigger point is that these corporations have become so big and
sophisticated that they almost float above governments. As much as one
country or another would like to tag Google for tax revenues, it is
impossible. The corporations’ massive revenues and balance sheets give
them the ability to avoid taxation, either by manoeuvre or by lobbying
(polite word) for a specific tax break from a country.
In a weird way I see people who expatriate as the leading edge of
human beings doing the same thing. Humans will perceive a government as
dangerous and float away to somewhere else. And the Internal Revenue
Service has put the dangerous face on the United States for many
people. (Immigration, too–you’d be horrified to hear the type of
treatment visitors receive upon arrival in the Land of the Free).”
This is not the first time that I have heard people say that corporations are above government. Reminds me also of a movie I saw (in the early 70s called “Rollerball” (early James Caan movie.
Also your comments about people are completely consistent with James Dale Davidson’s book “The Sovereign Individual”. Writing in 1997, he predicted the problems of the Exit Tax and that people would “float” to the most friendly places (which the U.S. surely is not).
@Petros
There is no question that the world needs protection from the U.S. government.
Check out the trailer from the movie:http://www.youtube.com/watch?v=CtkvGfJbmQA&feature=youtu.be
*Get your alternate passport before US persons are banned by other countries.
*
@Petros
This comment reminds me of one of the characters (Aunt Lydia) in The Handmaid’s Tale by Margaret Atwood, a great dystopian novel. The character says, “There is more than one kind of freedom. Freedom to and freedom from. In the days of anarchy, it was freedom to. Now you are being given freedom from. Don’t underrate it.” Atwood, of course, was being totally ironic. Sadly, you are not…
*Has anyone seen this comment from Michael Miller on Phil Hodgen’s blog:
“I have a great deal of trouble believing that 877A was intended to apply to persons who gave up their citizenship many years ago. Keep in mind that the predecessor provision, 7701(n), came into the Code in 2004 and was expressly made applicable solely to persons who expatriated after the date of enactment of the so-called American Jobs Creation Act of 1984. So, if the 2004 predecessor provision was clearly limited to prospective application, it really doesn’t make sense that the 877A rules would have been intended to go back in time to “recapture” individuals who were in effect “grandfathered” in 2004.”
Sounds encouraging for some of us, but I couldn’t find any reference online to 7701(n) that I could understand – not that that’s surprising.
@ Hijacked,
7701(n) was caused by the American Jobs Creation Act, 2004. AJCA caused a change to the US Tax Code, which was article 7701(n) in the Tax Code. As I understand it, 7701(n) was later replaced by 877a in 2008, which is currently in effect.
Someone else will probably come along to explain it better because I’m kinda fuzzy on this.
SEC. 804. REVISION OF TAX RULES ON EXPATRIATION OF INDIVIDUALS.
FROM THE AMERICAN JOBS CREATION ACT OF 2004, P.L. 108-357.
§804(b), adding new Code section 7701(n), and §804(f), which sets forth the effective date.
(b) Special Rules for Determining When an Individual Is No Longer a
United States Citizen or Long-Term Resident.–Section 7701 (relating to
definitions) is amended by redesignating subsection (n) as subsection
(o) and by inserting after subsection (m) the following new subsection:
“(n) Special Rules for Determining When an Individual Is No Longer
a United States Citizen or Long-Term Resident.–An individual who would
(but for this subsection) cease to be treated as a citizen or resident
of the United States shall continue to be treated as a citizen or
resident of the United States, as the case may be, until such
individual–
“(1) gives notice of an expatriating act or termination of
residency (with the requisite intent to relinquish citizenship
or terminate residency) to the Secretary of State or the
Secretary of Homeland Security, and
“(2) provides a statement in accordance with section
6039G.”
Here’s a link to an IRS document about it, too.
@hijacked 2012
‘I have a great deal believing that 877A was intended to apply to individuals who gave up their citizenship many years ago’.
Nice to hear a tax attorney say those words. Remember that Steven Mopsick also said that any one of us who gave up our citizenship ‘decades ago’, would ‘make the day of the IRS’ to start to file tax returns.
Words like this are why I choose to believe that when/if we apply for our backdated CLN (and we now know that DOS does back date the CLN), we can/should ignore any filing of tax forms with the IRS or any other US government department.
So, as the FATCA train rolls on, I see that the International Revenue Service has come out with its latest 25 page form for FATCA compliance for Non US entities beneficial owners. W-8BEN-E The IRS is reaching out on such a Global scale, and you have to wonder if renouncing your citizenship will ever get you totally away from its tentacles if you plan to have any financial life anywhere in the world. There may still be some IRS form you have to file or complete, unless you revert to the most simple of life forms, like a peasant farmer in the Chinese hinterland. There may be space now, as they are all moving to the Cities.
*@ tiger
Like you, I am very wary of going to a consulate to relinquish, although Dave’s success in getting his CLN going through the Calgary consulate was certainly encouraging. My information is almost identical to his – came to Canada as a young child, took Canadian citizenship in 1967 at the age of 20 with no further contact with the US in the intervening years. I live in eastern BC, just about equidistant from Calgary and Vancouver so when and if I go it will definitely be Calgary given the reports out of Vancouver. However I have trouble accepting that the IRS will say “go in peace” and not stalk us until the end of our days. I’m lucky in that my children should not be affected by this because I didn’t live in the US long enough to make them dual, and I also have no real need to go to the US again. I wish I had the courge of others to just forge ahead.
@Hijacked2012
‘I wish I had the courage of others to just forge ahead’. I know exactly what you mean. I vacillate between wanting to book the appointment at the consulate and hyperventilating at the thought of booking the appointment. I have found the words of Schubert, calgary, pacifica and many others give me courage.
On the weekend I went to the Sunshine Coast to visit my oldest son and his family. My daughter-in-law (who is as timid as I am) said to me “Mom, I really believe the only way you will be able to finally put this all to rest, is to file for your CLN”. My son, who has been doing his best to support me (but I sense is getting a tad tired of the whole thing) added that it might be possible that waiting too long to apply for the CLN could result in the Americans changing their minds and perhaps no longer back-dating the CLN.
Both of them made valid points. On the ferry coming home last evening, I thought about it and I am now leaning toward ‘biting the bullet’ and making the appointment at the consulate. Mind you, I could change my mind by tomorrow. That is after all ‘a woman’s perogative’.
*Lay low, live your life in Canada or elsewhere, avoid the USA and AVOID TELLING THEM WHO AND WHERE YOU ARE.
They cannot touch you unless you make yourself a target!
Do you think a CLN will let you pass to and fro from the USA easily? Get ready for repeated and ongoing strip searches!
And what assures you that they won’t change the regulations and laws retroactively and apply them to you once they know where you are?
@tiger,
And, you can change your mind even after you have made the appointment if you’re not ready. But you will be in some kind of a queue.
What a predicament because your kids are likely right and the US laws could change (have we not seen evidence of that over and over?) — damned if we do and could be damned if we don’t.
Good luck, tiger!
*I’m with you on this one Joe. I’m not going anywhere near a US Consulate to apply for a CLN. I’m hoping to stay completely off their radar.
Tiger says it’s a woman’s perogative to change her mind. That may be, but it seems no one changes its mind and policies more than the U.S. does. How they can change their mind retroactively about something as basic and fundamental as citizenship blows my mind.
Even if FATCA proceeds as planned (which I’m still very skeptical can happen in Canada), the draft regulations provide an alternative to a CLN: A non-US passport or other proof of non-US citizenship with a “reasonable explanation” of renunciation of US citizenship. My Canadian citizenship oath included renouncing any former citizenship. Tiger and I have signed and witnessed copies of that oath. I don’t see how any Canadian bank could refuse to accept that as “reasonable explanation.” (after, of course, I strongly challenge them on even their right to ask).
However, I recognize different people need to do whatever they need to do to feel safe and certainly won’t judge any one makes a different decision.
*My credit union has confirmed that I am a Canadian citizen. Electronic search until $1,000,000 and even then not much can or will happen at levels above that (see below).
Barbecue with a lawyer last evening confirmed my belief that there is no way that a Canadian bank will ever be allowed to forward the bank records of a Canadian citizen to a foreign entity. THIS WILL NOT HAPPEN! There are close to a million people in this same situation in Canada.On the other hand I do not intend to be the first one that the USA makes an example of by crossing the border ever again!
@Joe,
We’re making ourselves willing HOSTAGES. I don’t like that one little bit.
@Joe Smith
‘On the other hand I do not intend to be the first one that the USA makes an example of by crossing the border ever again!’
We need to remember that for some people, it is necessary that they be allowed to cross the border. It could be for family reasons, business reasons or other reasons. But the option needs to remain open for some people. For myself, having siblings south of the border is an incentive to be able to cross that border. Three of my siblings are able to travel north to visit me. One of my siblings is both mentally and physically disabled. His health is definitely failing. His visiting me would be an impossibility. I personally would detest being denied the right to visit him.
@Tiger: Do you think waving a CLN at a belligerent border guard will help you get across the border with minimal problems and hassles?
Some of us (myself included) have crossed recently on our Canadian passport with US place of birth with absolutely no problem. Only once in 45 years of crossing have I been told I “should” get a U.S. passport. On the next trip, there was no problem and no mention of a U.S. passport.
I would be interesting to have a thread on who has and hasn’t had a problem crossing.
I know Calgary’s nightmare began when she got a U.S. passport after being told she should. I think Canuck Doc may also have been told she needed a U.S. passport (although I’m not certain of that).
Someone was told he would stop being a U.S. citizen when U.S. told him he was no longer a U.S. citizen.
Other than that, I think most crossings (by both land and air) have been pretty uneventful. That’s not to say things won’t change, but–for those of us who for family, personal or business reasons need to go to U.S.–I think it’s important to know what the actual numbers and experiences are before we panic too much.
@Blaze
I do understand what you mean. I crossed the border 11 days ago with absolutely no problem at all.
However, I also seem unable to put all of this behind me. And my concern is that where they (DOS) at the present time are backdating the CLNs to date of expatriating act, I honestly don’t trust that at some time in the future they don’t change their mind and throw some new rule at us. As calgary said we ‘could be damned if we do and damned if we don’t’.
When my daughter-in-law said those words to me this weekend, I realized two things about myself and her relationship with me. She knows me too well. She knows that things ‘eat away’ at me and she also sees this whole thing is taking its toll on my health. Now I have no way of knowing if applying for my CLN will give me any peace of mind. My guess is not until I actually receive the piece of paper. However, going on, waiting to find out what they will do next, is also not acceptable to me.
As I said earlier, I might change my mind by tomorrow. What I firmly believe is that the US will not change its’ mind about FATCA. Some form of FATCA will exist and I do not believe that Canada will thumb their nose at the US and have all of its banks pull out of the US. Although, I believe that the US could be headed toward implosion, unfortunately, the commerce of the world still wants to be in bed with them.
*@Tiger: You need to do whatever will give you the most peace of mind.
@Blaze,
I know. But as this ‘worry wart’ frets and stresses, I keep changing my mind on what will give me the most peace of mind.
@Tiger: “Worry is the interest paid by those who borrow trouble.”
(George Washington)
“Worry is contagious.”
(Blaze, 2012)
*@Blaze,@Tiger, Yes,”Worry is Contagious”
@Blaze
You amaze me. All the quotes! How on earth to you remember them?
*@Tiger, That Blaze is amazing women!! She is a Jewel!!
Don’t mess with Blaze, she carries the sword for all Brockers!!