UPDATE: Michael J. Miller made a further comment based on a conversation with an IRS employee knowledgeable about expatriation (emphasis mine):
As a follow-up to my prior posts, I spoke today with someone at the IRS who is knowledgeable in the “expatriation” area to discuss the issue of someone who renounced prior to enactment of the American Jobs Creation Act in 2004 but never obtained a CLN. While the advice I received was not a formal expression of the IRS’s position on this subject, both she and the colleague that she consulted were of the view that it would be crazy for the IRS to treat such an individual as subject to the expatriation rules. I hope that those of you for whom this is a huge issue will take some measure of comfort from this update.
In an earlier post, Michael J. Miller made the following comment (my link to IRC 877A):
For those who properly ceased to be US citizens (e.g., by naturalizing in Canada with the requisite intention to no longer be US citizens) prior to enactment of the American Jobs Creation Act of 2004, the expatriation rules should not apply (notwithstanding the very poor manner in which section 877A of the Internal Revenue Code is drafted).
2004 is when the idea was first introduced that a person who had otherwise relinquished US citizenship could nevertheless continue to be treated as a US citizen for tax purposes until some “notice event” (my own, inarticulate term) took place. This new rule was set forth in former Code section 7701(n) and it is 100% clear that it was purely prospective in application. Thus, for example, as of 12/31/07 it was perfectly clear that a person who properly relinquished US citizenship in the 1970s, 1980s, 1990s, for example, was (quite properly) “grandfathered” and not affected by section 7701(n) in any way.
In 2008, section 7701(n) was removed and the rule providing for a person relinquishing citizenship to continue to be treated as a US citizen for tax purposes, until some “notice event” occurred, was incorporated into then-new section 877A. While section 877A is worded very poorly in terms of its effective date, I (and other specialists in the area) find it inconceivable that the provision was intended to take people who relinquished US citizenship many years prior to 2004, and who were quite intentionally grandfathered by 7701(n), and convert them many years after the fact into US citizens once again.
Even for the US, that would be outlandish (and this is said fully in the context of the many other notable events of the last several years). I note in particular that, if such an outlandish thing truly had been intended, there would have been some discussion of it in the legislative history — and yet there is none. If your CLN says 1776 (or even 2003) on it, rest easy. You’re not a citizen.
I did a Google search of 7701(n) and found the following information on an IRS webpage, agreeing (I think) exactly with Michael’s point (emphasis mine):
Expatriation after June 3, 2004 and before June 16, 2008
The American Jobs Creation Act (AJCA) of 2004 amends IRC section 877, which provides for an alternative tax regime for certain, expatriated individuals. Amended IRC 877 eliminates the tax avoidance criteria for imposition of the expatriation tax on certain types of income for 10 years following expatriation, and creates objective criteria to impose the tax on individuals with an average income tax liability for the 5 prior years of $127,000 for tax year 2005 ($131,000 for 2006; $136,000 for 2007; $139,000 for 2008) or a net worth of $2,000,000 on the date of expatriation. In addition, it requires individuals to certify to the IRS that they have satisfied all federal tax requirements for the 5 years prior to expatriation and requires annual information reporting for each taxable year during which an individual is subject to the rules of IRC 877.
Further, expatriated individuals will be subject to U.S. tax on their worldwide income for any of the 10 years following expatriation in which they are present in the U.S. for more than 30 days, or 60 days in the case of individuals working in the U.S. for an unrelated employer.
Finally, even if they do not meet the monetary thresholds for imposition of the IRC 877 expatriation tax, the new law (per IRC 7701(n)) provides that individuals will continue to be treated as U.S. citizens or long-term residents for U.S. tax purposes until they have notified the Secretary of the Department of State or of Homeland Security of expatriation or termination of residency. The implementation date of this provision is retroactive and applies to expatriations occurring after June 3, 2004. The expatriation is not effective until the notification and tax satisfaction certifications are filed with the IRS and the Department of State or of Homeland Security.
However, the devil is in the details. The following requirements remain in place:
Expatriation on or before June 3, 2004
The expatriation tax provisions (prior to the AJCA amendments) apply to U.S. citizens who have renounced their citizenship and long-term residents who have ended their US residency for tax purposes, if one of the principal purposes of the action is the avoidance of U.S. taxes. You are presumed to have tax avoidance as a principle purpose if:
Your average annual net income tax for the last 5 tax years ending before the date of the action is more than $124,000, or Your net worth on the date of the action is $622,000 or more.If you meet either of the tests shown above, you may be eligible to request a ruling from the IRS that you did not expatriate to avoid U.S. taxes. You must request this ruling within one year from the date of expatriation. For information that must be included in your ruling request, see Section IV of Notice 97-19. If you receive this ruling, the expatriation tax provisions do not apply.
The expatriation tax applies to the 10-year period following the date of the expatriation action. Individuals that renounced their US citizenship and long-term residents that terminated their US residency for tax purposes on or before June 3, 2004 must file an initial Form 8854, Initial and Annual Expatriation Information Statement. For more detailed information refer to Expatriation Tax in Publication 519, U.S. Tax Guide for Aliens.
To make this all the more clearer, Publication 519 states:
Expatriation Before June 4, 2004
If you expatriated before June 4, 2004, the expatriation rules apply if one of the principal purposes of the action is the avoidance of U.S. taxes. Unless you received a ruling from the IRS that you did not expatriate to avoid U.S. taxes, you are presumed to have tax avoidance as a principal purpose if:
- Your average annual net income tax for the last 5 tax years ending before the date of your action to relinquish your citizenship or terminate your residency was more than $100,000, or
- Your net worth on the date of your action was $500,000 or more.
The amounts above are adjusted for inflation if your expatriation action is after 1997 (see Table 4-1).
Reporting requirements. If you lost your U.S. citizenship, you should have filed Form 8854 with a consular office or a federal court at the time of loss of citizenship. If you ended your long-term residency, you should have filed Form 8854 with the Internal Revenue Service when you filed your dual-status tax return for the year your residency ended. Your U.S. residency is considered to have ended when you ceased to be a lawful permanent resident or you began to be treated as a resident of another country under a tax treaty and do not waive treaty benefits.
Penalties. If you failed to file Form 8854, you may have to pay a penalty equal to the greater of 5% of the expatriation tax or $1,000. The penalty will be assessed for each year of the 10-year period beginning on the date of expatriation during which your failure to file continues. The penalty will not be imposed if you can show that the failure is due to reasonable cause and not willful neglect.Expatriation tax. The expatriation tax applies to the 10-year period following the date of expatriation or termination of residency. It is figured in the same way as for those expatriating after June 3, 2004, and before June 17, 2008. See How To Figure the Expatriation Tax (If You Expatriated Before June 17, 2008) in the next section.
This seems to clear up whether all people who expatriated before June 3, 2004, had to file Form 8854: the current version of the form is only for people who expatriate after that date. Before that date, the so-called Reed Amendment was in effect but it was not applied systematically, and I would think that the IRS is not going to focus its ire on those who have an expatriation date on their CLN of earlier than 3 June 2004, but on those whose expatriation date is after June 16, 2008. As Miller says, those who expatriated before 3 June, 2004 (i.e., the expatriation date on the CLN) are properly grandfathered and don’t have to do a “notice event” (i.e., informing the Consulate of their expatriation). The provisions for making such people pay taxes or barring them from the United States (i.e., the Reed Amendment) were ineffective and that is why the law changed drastically in 2004. I open this to further discussion, because I myself am not an expert but am only trying to understand the requirements properly.
This post was original posted on June 15, 2012
@Michael: Thank you. Thank you. Thank you.
I think a lot of people are going to sleep easier with this information–especially seeing that it does not just apply to pre-1986 relinquishments, but to pre-2004.
I become nervous, though, when I read 100% clear. The US Consulate was 100% clear with me in 1973 that I was permanently and irrevocably relinquishing US citizenship, but IRD now seems to want to have other views.
Your comments put a lot of minds at ease.
I just want to point out that the IRS site and the very helpful comment from the Michael J. Miller seems to clear up the conundrum. If you expatriated before 2004, you didn’t need to do a “notice event”. After that date you did. Form 8854, in its current form, is only for those who expatriate after June 3, 2004. I’ve revised the text accordingly.
Fine before June 2004, and fine after June 2008. But… note that the window between June 2004 and June 2008 contains a evil trap.
Renouncing citizenship or giving up a green card alone between those dates had no effect with the IRS. For the IRS your date of “tax expatriation” between these dates is (from IRS instructions for 8854):
So you could surrender a green card in May 2008 properly using I-407, or renounce formally and correctly if a citizen, neglect to file 8854, and then still be liable for full US tax on all your earnings, estate tax and so on even though you’re now a non-resident alien — a foreigner — with no absolutely no right to reside in or enter the US. Bonkers? Yes. Contravention of accepted international law? Of course.
@Watcher, a person who had expatriated is in no wise required to do FBARs after their expatriation date on their CLN, the IRS definition of expatriation notwithstanding. FBAR requirements are not part of the Internal Revenue Code and thus not affected by its expatriation rules.
@Petros, good point. Okay, so only full income tax and estate taxes, then. Still extremely evil. Fixed prior post (nice feature, thanks!).
@Michael Miller – I echo Blaze. There are so many of us on this site, who expatriated decades ago, were always under the impression we were no longer US citizens and in the last year have become unbelieveably stressed. The input of professionals like yourself means a great deal to all of us.
@Petros: “If you expatriated before 2004, you didn’t need to do a ‘notice event’.
By notice event do you refer to applying for one’s CLN?
*Just to be clear, are we only discussing persons who formally relinquished through a consulate and later received a CLN with a date from the now distant past. Or, does this apply to everyone who became a citizen of another country with the intention of losing US citizenship (with no actions asserting US citizenship thereafter), but has not applied for a CLN. I ask this in the context of someone who became a citizen of another country in the 1980’s, but received income from the US last year in excess of $10,000 from an estate settlement and will most definitively receive a 1099 and possibly a demand from the IRS to file a 1040.
@tiger I assume that Michael J. Miller means by “notice event” the informing of the Consulate of one’s potentially expatriating act. Thus, if the event was the 1968 Canadian citizenship ceremony, and the person’s intention was to relinquish, and the person enters the Consulate in 2012 to inform them of this expatriating act, the “notice event” is the act of going into the Consulate. The “notice event” is not the expatriating act. It is the going into the Consulate and saying, “Notice this: I expatriated.”
@ Petros Thank you for your answer to Tiger which essentially answers the question I posed, Incidentally, when I asked an immigration lawyer a year ago about IRC 877, I was told quite emphatically that nothing had to be filed with the IRS after relinquishment since I ceased to be a US citizen at the time I obtained Canadian citizenship( with the intention and belief that by doing so I had given up my US citizenship).
*Petros is right about not having to do FBARs after the date on the CLN. I asked the IRS because I had no idea how to fill out the form for a partial year. If you were still a citizen up to day X, on your last FBAR you use report whatever you had between Jan. 1 and day X.
I am delighted to see a specialist coming forward and admitting that the IRS “for tax purposes” rules do NOT apply to people who relinquished prior to 2004, whether or not they knew to make a formal notification to State (or IRS) at the time of their actual expatriation. This confirms what I’ve heard from a cross-border lawyer based in Canada and what I’ve been counselling my wife and several friends in this situation. And for those who did relinquish back then and have since done NOTHING to exercise US citizenship: do NOT NOT NOT file 8554, FBAR, 1040, 1040NR or anything else to IRS. You haven’t been a USC for decades and don’t owe them anything or have to file anything. And if through some attack of greed or insanity they do come after you once you get their CLN, just don’t cross their border and make your US relatives visit you in your country and spend their US money in your economy, instead of you visiting them and spending your hard-earned money propping up a rotten US economy. Especially if you’re fortunate to live in Canada, where the tax treaty has you thoroughly covered, no way can IRS enforce any of their revenue claims (including penalties) on a Canadian citizen if those claims date after your Canadian citizenship, or ever going back to 1776 if you became Canadian before November 9, 1995 and they try to go after you for your time when you resided here but weren’t yet a Canadian citizen.
But I still think it’s a good idea to get a relinquishment CLN. It will greatly simplify your life with your banker or investment broker (assuming they or our government eventually cave in with FATCA to one extent or another), and also should avoid bullying from DHS border guards when you visit family in the US on your foreign passport that shows a US birthplace.
Simplify your life. Do nothing, avoid the USA. If your bank asks, [and currently, this asking is against Canadian law and there is no indication this will be changed] tell your bank or credit union, “I am a Canadian citizen.” End of story.
Worse possible scenario, say: “At the time I became a Canadian citizen, I relinquished my US citizenship.”
@schubert There is no requirement to this day in the INA to notify DOS of your act other than a formal renunciation. I have a question, if the INA is the act determining citizenship, and DOS administers this law, and taxation is based on citizenship, does the IRS have any legal power to have their own definition of citizenship, should they not be bound by the INA and DOS?
*@truenorth
“There is no requirement to this day in the INA to notify DOS of your act other than a formal renunciation.”
I am increasingly convinced that nothing will happen to anyone who is a “citizen and resident” of another nation. Imagining the worse case scenario — will the Canadian or Swiss, or Brazilian government allow one of its nationals to be detained for not paying US taxes? NO!
*@ Joe Smith. What you suggest makes perfect sense for someone who has no business or family need ever to visit the US again, but for those who do have those needs, I have to disagree with you. But everyone will make their own choices, and it’s easy for me to give advice since I’ve had a CLN so long there’s no way they can come after me under any remotely sane scenario.
@ True North I agree with your observation about how can IRS possibly make a “for tax purposes” argument about citizenship, but I believe that little wrinkle got passed by Congress (I believe as one of those amendments or riders to another bill that no one reads or analyzes very carefully, which is what’s wrong with the US legislative system as it’s evolved and is also what’s horribly wrong with Harper essentially playing the same stupid and profoundly undemocratic game with the current “omnibus” budget bill). The INA doesn’t say anything about having to notify State about your relinquishment for it to take effect either, the only mention in that act about a formal application process is with respect to formal renunciation para 5 of section 349 (a). Yet they still have Forms 4079 and 4081 that you have to fill out to get a relinquishment CLN, and you have to appear before a consular officer now you can’t do it by mail as I did in 1976. Maybe there’s some other legislation on this somewhere else, who knows? I long ago gave up trying to understand the US “legal” system and how courts interpret it, one of many many reasons why I left the US more than 40 years and ditched my USC as soon as I could.
@Joe Smith: I share your inclination. My thought was to do nothing and see if they would bottleneck themselves and just eventually leave me alone. I changed my mind, reluctantly, with two events: A friend was stopped entering the US with his Canadian passport indicating a US birthplace and told that it is illegal for a US citizen to enter the US on a foreign passport and because of his birthplace he was a US citizen. The other event was a call from my investment consultant (I’m a retired teacher and don’t have much but I do have some mutual funds and stuff like that) saying that they had gotten some paperwork on FATCA and were looking at what would be necessary in my account *IF* these provisions were implemented.
I still have relatives and friends in the US I want to visit and I don’t really know if or for how long Canada will hold out if other nations become FATCA compliant. My conclusion was that the CLN was my best opportunity for the border crossing thing and for keeping my bank happy. I started looking around and found the people here (well, they’re here now, it was the expat forum where I first met them) and learned about the relinquishment timeline and figured I should start ASAP.
It will be five months next week and I’m still waiting but if nothing else I feel good about doing *something* rather than the feeling that I had that everything was being done *to* me.
Everyone has to reach their own conclusions. This is just my $0.02.
@ schubert1975
“And for those who did relinquish back then and have since done NOTHING to exercise US citizenship: do NOT NOT NOT file 8554, FBAR, 1040, 1040NR or anything else to IRS.“
I was holding a kryptonite card until recently. I did not file FBARs, will not file 8854 (or 8938) but my husband and I have always filed a joint 1040. If and when I get my 15 years tardy I-407 stamped and approved (didn’t know it existed until a couple of months ago, hoping it will be back dated but don’t know yet) I will then consider myself done with the IRS. My husband will then file separately (no 1040NR from me) until he gets his Canadian citizenship and then a CLN. Does that sound like the right plan to you? If it is the right plan then I have to thank IBS for helping me mull my way through this.
I haven’t crossed the border in over 15 years and I don’t intend to in the future. I just wish we weren’t looking at perhaps 2 more years of filing for my husband while he waits for citizenship and then the CLN but so it goes I guess. If the IRS does get nastier regarding Minnows then I hope the Canadian government will see fit to speed up the citizenship process.
@ Joe Smith
“Simplify your life.”
Good advice and we have always tried to do that (only basic banking, no investments) but now we have a complication because my husband’s American mother just passed away and there is a relatively small estate (way below the estate tax threshold) so we have to figure out how to handle that. Basically my husband, sole beneficiary, is putting everything into a non-interest bearing account in the USA until we can mull through this too.
@Em I can’t really advise you on your plan, since you are (it sounds) a US citizen who has in fact been filing all along, at least the 1040s. I think you need to speak with a good cross-border lawyer or accountant about the FBARs and 8938 you haven’t filed and whether that has anything to do with 8854. If you’ve been filing 1040s all along, seems to me that you meet the five-year back filing requirement on the 8854 and if your income tax liabilities in those five years and your total assets are below the expat tax thresholds then you’ve got nothing to worry about. But as US citizens who have been filing, the only way you can get a CLN is by renouncing, and doing that now definitely will trigger an 8854 filing requirement that you aren’t going to be able to avoid if you want to continue to cross into the US afterwards without trouble, or without having IRS go after US assets or whatever. I have no idea what a form I-407 is (I haven’t filed anything to IRS since I became a Canadian in the 1970s so I’m blissfully unaware of their forms by now and intend to remain so). There are several lawyers and accountants who have been posting on Brock from time to time, you might contact one of them if you don’t have someone local you trust and think knows about these issues.
Ignoring or refusing to file an 8854 is a reasonable strategy IMO only if, as noted above in this thread, you relinquished your USC before 2004 (and certainly before 1994), but it’s not an approach I’d advise if you are renouncing now or soon and want to continue going to the US or have significant assets in the US which the IRS could go after. What you do need to look into IMO is what troubles you may get into with 8854 (or even without 8854) for not having filed FBARs and the newer form, and whether you want or can afford to risk refusing to file those forms. I can’t advise you on those things, sorry. I think you need good professional advice on these points before acting (or not acting). Like Joe Smith I have strong personal opinions about the US, the IRS, and what they can all stuff where, but that isn’t professional advice and I think the latter is what you need, not my personal emotional reactions to all this crap.
Good luck to you and your husband whatever you do. Be thankful you live in a saner country than the US, such as Canada (at least it’s saner so far, in spite of various stupid things our current government keeps doing — but I’d far rather live under the current Harper government than under the present or any foreseeable US government after November).
@Em again
sorry I’m not clear-headed on this. I just realized you really may not be able to just ignore the IRS and not cross the border. You aren’t a Canadian yet (or maybe you are, but your husband isn’t so even then what I’m about to say certainly applies to him). Canada has said it won’t collect FBAR penalties for the IRS against anyone in Canada, resident or citizen. However, revenue claims (taxes owing, interest, and civil penalites) they will have to collect for IRS if the claims pertain to a period when you were not a Canadian citizen. That’s right now, if I understand you. Whether the tax treaty definition of a revenue claim includes possible exit tax or other penalties for failing to file a form 8854 after renouncing, I don’t know and you need to contact Canada Revenue Agency about this point, either yourself or anonymously through a lawyer, to get that clarified, to be safe.
I really don’t think you can safely ignore 8854 if you are renouncing shortly after getting Canadian citizenship, because the IRS might be able to make a case against you under the tax treaty. You need legal advice on that point, or advice from CRA, and I’d want it in writing not over the phone.
Canadian residents who aren’t or who haven’t been citizens until very recently have far less protection from the IRS than do those of us who have been Canadians for a longer time. Fair or unfair, sad but true I think.
@Schubert
I believe the issue with EM is with her husband. She is a Canadian Citizen that used to be a green card holder.
@ schubert 1975
I am in no way a US citizen. I have been a Canadian all my life (born here). They just appear to have assigned “US personhood” to me because I lived in the USA for 12 years (17 years ago) and thus I had a green card which I didn’t know I had to return with an I-407 form. (I-407 is also called ALPRS — Abandonment of Lawful Permanent Resident Status.) I’ve done I-407 now and I really don’t see why I owe the IRS FBARs and 8854s and such. We paid our usually zero tax owing (always filed jointly, even sent copies of our Notices of Assessment every year) and I’ll rely on Flaherty’s pledge to not collect tax owed or FBAR fines from Canadian citizens which I have been all my life. I can’t renounce US citizenship because I never had it. My American husband is in the process of getting Canadian citizenship and will renounce as soon as he gets it. He will do all the appropriate paperwork for his assets only, not mine. Sorry if I wasn’t very clear in my comment and thank you for taking so much time to respond.
*”A friend was stopped entering the US with his Canadian passport indicating a US birthplace and told that it is illegal for a US citizen to enter the US on a foreign passport and because of his birthplace he was a US citizen.”
Many people I know are being told this and then allowed to cross. I was first told this in 2004. My solution and my own only is to say :”The hell with visiting” I’ll spend my money elsewhere.
@ Em, the beauty is that when your husband does become a Canadian, he can just tell the Consulate that he’s not an American any more. No renunciation is necessary. Do not pass “Go”. Do not collect $450.
@ Petros
I guess so. I’m a bit confused tonight. The relinquish vs. renounce issue is a year or more into the future. First we have to put the I-407 (me) and CND citizenship (him) behind us but the goal of being free of the IRS is worth it. Anyway, it feels good to be started. It feels good to be taking some steps instead of pacing in place wondering what to do. It feels good to have IBS to come to for information and commiseration when needed.
As a follow-up to my prior posts, I spoke today with someone at the IRS who is knowledgeable in the “expatriation” area to discuss the issue of someone who renounced prior to enactment of the American Jobs Creation Act in 2004 but never obtained a CLN. While the advice I received was not a formal expression of the IRS’s position on this subject, both she and the colleague that she consulted were of the view that it would be crazy for the IRS to treat such an individual as subject to the expatriation rules. I hope that those of you for whom this is a huge issue will take some measure of comfort from this update.