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 J Miller,
Thank you for continuing to update all of us at Isaac Brock. I agree with others, the best thing would be if we could get a formal statement from the IRS. Many of us are stressed to the limit just trying to deal with DOS and obtain a back-dated CLN; it sure would be nice if we did not also need to be stressed that the IRS would be after us for taxes and penalties.
@ Schubert & Pacifica
Me too — haven’t crossed the border in over 15 years and never will in the future. I still do not have a stamped I-407 which I sent away in May but on it I indicated that I actually abandoned my kryptonite card over 15 years ago. I just didn’t know there was a form to do it. I had been told (or read somewhere) that the card was null and void and if I ever wanted to live in the USA again I would have to reapply.
*@Michael Miller
As you can see, we are absolutely still following this thread! I want to add my thanks for your kindness in following up on this issue – I can’t begin to tell you how much that means. Even the possibility that the IRS might sometime in the future clarify that long ago relinquishers of citizenship would be exempt from present tax issues is an early Christmas present.
@Pacifica, Don’t expect an official statement and be happy with the ambiguity. That is not their M.O. The MO of the IRS is threats, intimidation, ambiguity and fear. Heck an official statement may mean that some poor sucker won’t even enter the OVDI! So they will never make a statement. That might mean lost revenues. And they can’t afford any lost revenues at this point.
Just forget about it. Don’t let the US ruin your holiday. Stand up for your self. Be strong and courageous. Because if they want a damn thing from you they are going to have to fight and they still won’t get anything. You have to get used to the lack of tied up loose ends. This is not a neat and tidy world we live in, but one where evil lurks and is ready to pounce on and kill those who have sensitive spirits.
Has anyone considered the following scenario? You naturalize in another country with the intent to relinquish before 6/3/2004. You cause a “notice event” at the embassy/consulate by telling them you did an expatriating act after that date and they give you a CLN after 6/3/2004 saying you expatriated before 6/3/2004.
Then what is your 8854 reporting requirements? This is a gray area…The newer 8854 says the date you expatriate is the date you give notice to the embassy/consulate. The older 8854 (I looked at the 2002 8854 instructions) say the date of expatriation you put on the form is the date you actually naturalized (or did another expatriating event) in the other country…but is says you aren’t obligated to file the 8854 until you go to the embassy/consulate and receive CLN.
So it seems the “grandfather clause” is in effect since as I understand it, the date the IRS recognizes expatriation in 2007 and earlier is the date you performed the expatriating act (not the date you go to the embassy to inform them and get a CLN).
(Although the people who did their expatriating acts (not give notice for CLN) June 3 2004- June 16 2007 would have to fill out the original and the ongoing 8854s
People who perform an “expatriating act” after 1/1/2008 (although theoretically it should be 6/16/2012 since this is when the rule changed—but the 2008 instructions recognize the date by the newer standard so that is the gray zone) would have their expatriating date recognized by the IRS as the date they go to the embassy/consulate and create a “notice event” and apply for their CLN.
It would also seem, that people that relinquish with intent but don’t yet have a CLN before 6/17/2008 would need to file the 8854 for the year they expatriated…so if someone in the top paragraph naturalized in 2002 and gave notice in 2013, they’d fill the 2002 8854 form.
OTHO, for example, someone who does an expatriating act after 1/1/2008 (say they naturalize in a foreign country in 2009) but didn’t get their CLN till 2013 would need to fill out the 2013 8854 (more complex reporting requirements) since their notice event was then.
Or in short for relinquishers who do an expatrating act (not renouncers):
* ~1996ish? to June 3 2004 – Fill 1 8854 corresponding to the year you relinquish
*June 3 2004 to June 16 2008 – Fill out the 8854 for the year you relinqush and ongoing for 10 years after)
*June 17 2008 – fill out 8854 for the tax year you give notice to the embasssy/consulate and apply/receive CLN only.
This makes a big difference for those who naturalized and had intent to relinquish in another country before 2004 who want to give notice (not renounce!) that they had intent to relinquish insofar as the expatriation tax is concerned.
Correction: People who perform an “expatriating act” after 1/1/2008 (although theoretically it should be 6/16/2012 since this is when the rule changed—but the 2008 instructions recognize the date by the newer standard so that is the gray zone) should read 6/16/2008
@Tom, you lost me. I have to say that this post is rather cut and dry. If you relinquished on or before June 2, 2008, it would seem that there was no notice event requirement according to Michael Miller.
This is confirmed by the instructions from FORM 8854 that I cited above. If you have a earlier CLN date than that, where the expatriation is reconized as on or before June 2, 2004, then there are no actual instructions on the 8854. This is your get out of jail free card.
If you want to pay to get out of jail, pay back taxes, or second guess this post, and file five years of 1040s and 8854, as some people have done, then the IRS will be glad to receive your money. But why not save yourself and your family such hassles?
Or have I completely misunderstood your question?
*Petros, I believe that you and Michael Miller are right about the 2004 date, but the IRS has made it very unclear with its continuing revision of the baffling, notorious form 8854. (By mistake I just typed “form **%$” with the shift key down. Maybe that’s what we should call it.) So I can fully understand Tom Benedict’s confusion over it. And because the IRS still refuses to clarify the situation, I can only assume that, as you suggest, they are hoping people who expatriated before 2004 will still pay them money they don’t owe, out of fear and ignorance. Shame on the IRS!
Re application of 8854 – I don’t think I’ve tossed this “technical article with 51 footnotes by a tax lawyer” into this voracious discussion hopper before: An “exit tax” enters the U.S. tax lexicon — §877A and guidance under Notice 2009-85 Hard enough to find this junk without remembering what you’ve done with it afterward. Analyzer wonks, have a go!
@Petros. Look a the older 8854’s and their corresponding instructions. They have 8854s from 1996-2003 on the old system. They say you have to file them with the consulate/embassy when you give an expatriating statement for a CLN. They threaten a $10,000 penalty for failure to file in those years. The only purpose on the older 8854s was to determine if you expatriated for tax avoidance purposes. If you were under the threshold (or applied and receive an exemption if over), you did not had to file tax returns for 10 years after the expatriation date.
The main difference you will notice in the instructions that until you give notice to the embassy/consulate of your expatriating event…i.e. apply for a CLN then they aren’t due. In theory, if you never apply for a CLN, you never have to fill it out..but once you go to the embassy to formalize a relinquishment, the instructions say you have to turn it into the consulate/embassy at the time of the notice event.
The good news for the non-wealthy as stated earlier is they consider you to have expatriated the day you natualized with intent to relinquish, etc so if you Naturalized in 2002 and ask for a CLN in 2013, you were out of the system in 2002, but are still responsible for filing a 2002 8854 when you go to the embassy.
If you fail the wealth test, they would have expected you to file 2002-2012 tax returns even though—so this detail could make it important not to apply for a CLN if that happens.
Here’s an example for 2002:
Instructions: http://www.irs.gov/pub/irs-prior/i8854–2002.pdf
FORM: http://www.irs.gov/pub/irs-prior/f8854–2002.pdf
@Tom Other research I and others have posted elsewhere on the website indicate that persons who expatriated prior to 1994 (I forget the date and month) have no 8854 filing requirements at all, and from 1994-1995 the wording of the IRS bulletin (issued in 1997) is a little confusing, there were some “interim” requirements. But 8854 didn’t exist legally prior to 1994 at the earliest, and anyone whose expatriation occurred prior to that year clearly has no such filing requirements. At least that’s my interpretation and understanding of the directives and bulletins, turgid though the wording is. (I’m not a lawyer, and this is not legal advice.)
For persons with expatriations 1995-2004 I think it would be a good idea to speak with a knowledgeable lawyer about requirements, or not, before filing anything.
@Tom, thanks for the clarification. I think this helps to make your question clearer.
I would look at this potentially two different ways: (1) since the form that you’ve dug up is no longer current, it would seem that the IRS doesn’t care anymore if people before 2004 file the current 8854. This seems to be corroborated by the Miller’s correspondence with IRS officials. OR (2) if your expatriation was between February 6, 1995 and June 2, 2008, then you fill out the old Form 8854 in order to satisfy the requirement of proving that you did not expatriate for tax purposes. But the instructions for the current form 8854 offer no advice at all as to what to do if the expatriation was before June 2, 2008. So it would seem that the IRS is not suggesting that one use the old form or do anything at all. This would be volunteer work, in my opinion, and that is usually a bad idea.
But if you still choose (2) then let me ask this: what is the IRS going to do if it indeed determines that you expatriated for tax purposes? Are they going to make you file back taxes and 8854 for each year between 1994-2008? I think that it is better to follow this course: Don’t do a damn thing and wait for the IRS to figure out what they are going to do with you. If they charge you a $10,000 fine, refuse to pay it. They can’t collect it in any case, unless you have assets in the United States.
Or rather than ask the Isaac Brock Society (because none of us actually know), why don’t you call up the IRS and ask them what you are supposed to do? Then come back and let us know what they said. Miller says he did ask them, and he says that they don’t think you have to do anything if your expatriation was before 2004.
@anyone reading these recent comments
Petros and I were replying at the same time, and I didn’t see his reply until after I posted mine.
Notwithstanding everything I said about 1994-2004 (or 1995-2004 or whenever the kick-in date really was), I agree completely with Petros re “don’t do a damn thing” if you expatriated before 2004, and wait and see if anyone contacts you, then deal with it (getting some advice of course). While one hates to rely completely on second-hand advice (re Miller), it makes sense, we’ve heard similar things from others (Mopsick when he still was posting on this website, said essentially the same though not in specific words). If in fact the consulates do forward decades-ago relinquishment CLN copies to IRS (that isn’t clear yet, I haven’t heard of one so far) as well as the more recent ones, wait and see if IRS ever bothers to contact you. If they do, deal with it then, as you think appropriate. And do note that, as Petros points out, none of these filing requirements or fines are enforceable on the Canadian side of the border, under the current Canada-US tax treaty, if you were a Canadian citizen at the time the alleged requirements or fines supposedly apply. And our Finance Minister has said that, repeatedly, in various public and letter communications we’ve seen.
In fact, the 2007 amendment to the treaty (which is the most recent change AFAIK) “grandfathers” that protection going back to the beginning of time, if you became a citizen of Canda in or before 1998, I think November 7 or something like that (no idea why that year or date, but they picked it) –and that’s reciprocal of course (i.e., US residents who became US citizens 1998 or earlier are also protected in the US from any Canadian tax liability or filing claims). So realistically none of this 8854 penalty and filing stuff is enforceable in Canada against Canadian citizens going back before 1998, and I have trouble imagining the IRS would actually try to waste time and resources chasing anyone in that situation for something that far back. I’m not convinced people who expatriated 1998-2004 have any real worries either. It’s the folks who checked out after 2004 that are between a rock and a hard place.
@Petros…at least we can agree for 1995-2004 people, there is a gray, fuzzy area regarding filing requirements. In theory you are supposed to file old returns or the civil SOL never runs out. In practice, we know that except in rare circumstances, the IRS never goes back more than 6 years when expecting compliance. Given that the latest possible expatriation date on these returns is June 2, 2004, which is over six years, I doubt the IRS really cares about forms that old.
BTW, if you look at the IRS form site, you’ll notice a tax return for 1913. Maybe they are hoping a grandpa will file his delinquent tax form–just in case…
http://www.irs.gov/pub/irs-prior/f1040–1913.pdf
@Petros..I think you are right. Since the 2012 8854 instructions give no guidance for people who expatriate before June 3, 2004, it seems perfectly reasonable, in the unlikely event that the IRS contacts you, that you could say the 2012 8854 instructions only mentions people who expatriate after that date, and since the $10,000 penalty is can be waived for “reasonable cause” in any event, I’d think there is little reason to file it for the pre 6/3/2004 expatriates.
Dear All,
I’m sorry (though not surprised) to hear that more and more of you are losing sleep over this issue. I’m hoping to move forward shortly with a Bar report that will (I hope) encourage the IRS to issue something in writing to provide comfort to individuals who expatriated many years (before the date of the 2004 legislation). I don’t know if we’ll succeed, but I do aim to try.
I’m also working on an article with one of my partners, for submission in a little over a week, addressing this issue. The working title is “Expats Fear Malevolent Time Machine.”
Excellent, Michael! Your work on this issue is really appreciated!
@Michael J. Miller,
As one of those ‘relinquishers’ of long ago (40+ years), I thank you for your work and effort in trying to get a definitive answer to the question. Unfortunately, alot of sleep is being ‘lost’ and much ageing is occurring in trying to 2nd guess the U.S. government.
@Michael Let me add my thanks for your efforts on this.
As others can attest, this whole time machine nonsense has been both frightening and utterly surreal for people who know they gave up their US citizenship decades ago, also for their non-US spouses and families. The IRS’s silence on these matters to date, not to mention the utterly confusing, unclear and sometimes contradictory wording in various parts of their 8854 instructions and tax code, haven’t helped at all. But then, from bits what I’ve seen of it, their whole 73,000 page tax code is replete with these problems, all over the place. As we all know and have seen, this sort of thing further erodes any respect (never mind loyalty or allegiance) anyone can have for a government or country that acts this way, even among those who remain or until recently remained citizens of that country. Providing clarity and sanity on this issue might alleviate some of those feelings, quite apart from being the proper and decent way for a public agency in a civilized democracy to behave.
*For the people who relinquished Before June 3, 2004.
Is it worth it to get a CLN?
The only advantages I see is
1. It create positive proof that you relinquished.
2. The CBP won’t question you if your foreign passport lists your US birthplace if you have it.
3. You have proof for the bank that you are no longer a U.S. citizen. I realize that they can also accept a “reasonable” explanation, but we’ve seen some of these banks be anything but reasonable over FATCA paranoia.
4. What i think is the most important: We’ve seen them retroactively apply the rules to people from 2004-2008 who thought they could have relinquished without a CLN but didn’t have apply for a CLN yet. Who is to say, as the situation changes, that they won’t make the rules change again retroactively to include people before 2004?—considering their desperation to find additional funds under the current fiscal situation
The only disadvantage of getting it, is that for Feb 5 1996 to June 3 2004 relinquishes is that it creates an 8854 filing obligation per the old rules.
It seems also, that if you failed the wealth test, you would have been required to report for 10 years regardless of a CLN or not.
*One more point…If you don’t have a CLN and then decide to try to get one 30 years down the line, and the DOS rejects it, you’d be retroactively liable for all taxes and reporting requirements until you actually renounce and do whatever iteration of 8854 they invented down the road. Seems risky not to have certainty.
It seems if you want the advantages of a CLN, do it now, don’t wait for potential bad news down the line when you could have growing liabilities– the longer you wait, the greater the risk. As Phillip Hodgen basically said, get out now while the gettin’ is less bad. It may be wise for someone who did, many many years ago, what they believe was an expatriating act, *not* to give notice or apply for a CLN.
Sometimes I wish I didnt read other threads. The moment I think I understand my circumstance I read some more and see my life being talked about and a course I plan to take still leaves me liable. Though I am under the wire for the wealth thing, I may be penalized or I may have to grovel to the IRS? I want to straight forwardly relinquish (naturalization 1981), but I unfortunately got a US passport in 2011 under duress. What a headache. Who was it that said it might be better to NOT apply for a CLN? And/or not do anything? Though “doing nothing” and traveling on my Cdn passport has always been my choice of action, I thought doing nothing was no longer a choice anymore? Certainly now that my relinquishment case to get a back dated CLN is more complicated with a recently acquired US passport, I would still prefer to do nothing rather than entangle myself with the IRS. Somehow I still think the IRS doesnt have the balls (or resources) to do anything against out and out refusal to submit (even if they have you in their clutches inside the USofA).
Maybe the idea of just surrendering my US passport and simply returning to use my Cdn passport is the best option. At least if they arrest me I can demand Cdn protection. That might not mean much but creating an intl incident and communicating it to the press wouldnt hurt “for the cause”. Does the IRS have its own jails? How’s the food?
Since you seem to be a lawyer, Michael, where do you think I stand?
A clarification: what does DOS stand for? Even better is there a glossary of terms I could peruse?