Below from a commenter on Victoria’s blog:
Reading this post reminds me of a few years back when the Western Hemisphere Travel Initiative was created by the United States requiring passports to cross the border. Many border babies, Canadians who were born in the United States because the nearest hospital was in a border states like Michigan, Maine, or North Dakota were in for a rude awakening. In some cases mom and dad were also border babies (there are whole towns in Canada that are physically on the border), and some found that they were not Canadian Citizens, even though they had lived in Canada, and even voted for decades.
I work at H&R Block in Canada and I suppose I am a bit like bankers will soon be. As soon as someone shows me a US passport, or a document that shows their birthplace in the United States I have to stop preparing their tax return and send it over to the US Tax Specialists, who charge an extra 2-3 hundred dollars, even when these people owe nothing in taxes. I have occasionally had people swear they will renounce before they will file, and I tell them they can’t renounce until after they have filled.
In Canada the conservative government recently changed our citizenship law so that the second generation born abroad are not Canadian Citizens, but this has problems too. Many Canadians were born elsewhere but grew up in Canada. There are examples of people who were born abroad to Canadian parents, came to live in Canada when they were a year old and happen to be living in Belgium when they have a child. In some cases these people’s children are now born stateless. These are the cases where some show of attachment should come into play. Its a nightmare for these parents. While the new law allows for easy naturalization of these babies, they first have to physically arrive in Canada which is difficult when the child is stateless and qualified for no national passport. Then these parents have to wait for their children’s files to be procsses. Currently there is an enormous backlog and it can take anywhere from 6 months to 2 years to process a citizenship request.
I responded back saying what H&R Block Canada is doing completely outrageous and the CEO and Senior Management of H&R Block Canada should be less worried about spending time in US Club Fed and instead be worried about spending hard time at the Kingston Ontario Penetentary for violations of the Canadian Foreign Extraterritorial Measures Act.
*For non Canadians who wish to know more about the Kingston penitentiary. From Wikipedia
Kingston Penitentiary (known locally as KP and Kingston Pen) is a maximum security prison located in Kingston, Ontario between King Street West and Lake Ontario.
Kingston Penitentiary has been home to many of Canada’s most dangerous and notorious criminals. James Donnelly, patriarch of the infamous Black Donnellys, was sentenced to be hanged on September 17, 1859, for the murder of Patrick Farrell. A petition for clemency started by his wife Johannah saw his sentence reduced to seven years in Kingston Penitentiary.
Other notable inmates include Russell Williams, Paul Bernardo, Clifford Olson, Roger Caron and Grace Marks. Wayne Boden, the Canadian “Vampire Rapist” died there in March 2006. Tim Buck, leader of the Communist Party, was a prisoner at Kingston convicted under Section 98 of the Criminal Code during the early 1930s. Marie-Anne Houde, formerly convicted for the murder of her stepdaughter Aurore Gagnon, was sentenced to life in Kingston Penitentiary, following the appeal to commute her sentence to death citing health reasons. She was released on June 29, 1935. Mohammad and Hamed Shafia were imprisoned in the penitentiary after being convicted of killing Mohammad`s three daughters and first wife. Michael Rafferty is currently serving a life sentence for his role in the kidnapping and murder of 8 year old Victoria Stafford of Woodstock
*Sounds as those who would close their eyes to allowing the US to trample Canadian sovereignty with FATCA will be housed with others of the same “kind” if they end up in Kingston. Birds of a feather, as they say.
the flophouse shows up here. It shows up with a .se here.
My father works at H&R block. Somehow his training books yielded the OVDP for him (not instructions on how to properly fill out an FBAR), which he gave to me and started me on that wild internet search for information which lands so many people here.
A guy from HR Block doesn’t know that it is not necessary to file with the IRS in order to renounce or relinquish your citizenship. Idiot.
FILING IS NOT A PREREQUISITE FOR RENOUNCING. The right to change your citizenship is a fundamental right. If a state puts an obstacle in front of filing, it is that state that is in violation of the exercise of your fundamental right to determine your citizenship.
Petros, for what it is worth you are right “in spirit”.
But the United States government will not let you renounce unless you can certify that your taxes are current.
So in that sense you are wrong.
greenlander, You renounce at a US Consulate. The consulate can inform you about taxes but they cannot stop you from renouncing if you are not in tax compliance. Furthermore, they don’t even know what your compliance status is. I know. I have relinquished my citizenship. There is nothing on the forms or in the conversation with the consulate that says that non-compliance with IRS requirements are an obstacle to renunciation or relinquishment. Please, let this incorrect notion die a quick and painless death.
Since this is my fist comment/post of the New Year let me wish all of you here at IBS (oops, I almost wrote IRS 😳 ) a very Happy and Healthy New Year!
**edit by UncleTell**
Then again I think I could include the IRS in my wishes.
They can’t ALL be “willingfully” making our expat lives this miserable ? 😕
@pertos / greenlander
I think the 2 of you have picked up on an intersting Topic.:
What are the possible consequences for not filing the exit tax after you renounce and possibly get a CLN? This might be a good Topic for it’s own post.
@UncleTell, depending on the date of your expatriation, if you are not in tax compliance, the IRS can fine a person $10,000 for failure to file 8854. If they then ignore the fine, I am not sure what the next step is. $10K is below any threshold that would stop a person at the border, as far as know, which has been suggested at 50K liability.
The IRS has no mechanism, and certainly no easy mechanism, to collect from a person who is a citizen of Canada or another country and whose assets are outside of the United States. The CRA said it will not collect a tax liability from a citizen of Canada, provided that they were a citizen when the liability was incurred. Thus, the $10,000 is assigned only after the person renounces their US citizenship. Presumably, for a Canadian, such liability is made only after the person has become a Canadian. So ultimately, all the fines and taxes which the IRS would assign to an expatriate who is living in Canada and has all his assets in Canada, are not collectable.
*@Petros, If being totally up-to-date with US tax obligations is not a requriement for renunciation, then why bother?
Does the IRS ever take a person to court in a foreign country to collect the exit tax or other unpaid US tax obligations? Or does it ever seek to trap renunciants when they enter the US with their foreign passports subsequent to renunciation?
As one person said, if you don’t file 8854 you become an automatic covered expatriate. But the main reason to not become a covered expatriate is so that one can leave money to heirs living in the United States. This is not a disincentive for most of us.
As for your other questions, Roger, I think it would be pretty unlikely nor have I heard of any cases where the IRS has taken one of its former citizens to court in the foreign country over the exit tax. LOL. That would prove how weak the position of the IRS is in the first place. As for trapping renunciants when they return, that’s an interesting question. Will covered expatriates have problems crossing the border? At very least, that is a violation of the Expatriation Act of 1868. It may come to that, but is that a legal battle that the IRS wants? Would they win? It seems unlikely to me. Better just to get people willing to pay the exit tax and not try to go after the rogues, because then you would have an international diplomatic incident on your hand and a potential constitutional challenge to boot.
Without adding to much, Petros is correct in his assessment of this.
The issue of 5 years of tax compliance is NOT a requirement to renounce/relinquish. If one does not certify 5 years of tax compliance then one becomes a “covered expatriate”. There are two consequences to this:
1. As a “covered expatriate” you are subject to the Exit tax rules (but remember that there is an exclusion, so this may NOT result in paying taxes (or it may)
2. As a “covered expatriate” you cannot make gifts or bequests to “homelanders” without the “homelander” being hit with a tax on the gift/bequest. So, it would make sense if you are renouncing to make your “homelander gifts” before you renounce.
But, after all of this, why would you want to make a gift/bequest to a “homelander” anyway?
What happens next? I don’t know. But, unless there is a suspicsion that you have assets, would the IRS really waste time with you? I don’t know.
@USCitizenAbroad: But, after all of this, why would you want to make a gift/bequest to a “homelander” anyway?
It’s not just to a “homelander”, it’s to any US citizen. Children of the “covered expatriate” who are US citizens living abroad also count. In that case, they would have to renounce too to avoid the inheritance tax.
In my opinion, this tax on gifts and inheritance from “covered expatriates” is the worst part of the entire US tax code. (The FBAR penalties are worse, but they are not part of the tax code.) The tax is the highest rate (currently 40%) on any gift or inheritance, with a ridiculous exemption of $13,000 (in 2012) per year. In comparison, the regular exemption on estate and gift taxes for citizens and residents is $5,120,000 (in 2012). And it doesn’t matter if the asset was acquired with money earned by the “covered expatriate” after renouncing, or in the case of a former permanent resident, before or after being a US resident.
Hypothetical examples, assuming the current rules remain in place:
1. A US citizen moves abroad and has children. He renounces citizenship, at the time owning $100,000 in assets, but becomes a “covered expatriate” because he doesn’t certify five years of compliance in form 8854. The children decide to remain US citizens. In the next 60 years, the “covered expatriate” works, invests, inherits from his own parents, and accumulates a wealth of $5,013,000. The children then inherit their parent’s assets, and have to pay $2,000,000 to the US government, even though almost the entire wealth was earned by their parent as a nonresident foreigner, and even though they would not have to pay anything if their parent was a US citizen.
2. A couple of foreigners immigrate to the US with their teenager children. The couple is wealthy and each owns $2,000,000 at the time. Ten years later, the children become US citizens and decide to remain in the US, but the couple decides to return to their home country. They return their green cards and become “covered expatriates” because they stayed for more than 8 years in the US and each owns $2,000,000. In the next 40 years, the couple works, invests, inherits from their own parents, and accumulates a wealth of $5,013,000 each. The children then inherit their parents’ assets, and have to pay $2,000,000 to the US government for each inheritance, even though the entire wealth
was earned by their parents as nonresident foreigners, and even though they would not have to pay anything if their parents were US residents.
One interesting detail: The tax on gifts and inheritance from “covered expatriates” was created in 2008, and in 2009 the IRS issued a notice that such gifts or inheritance should not be reported in the regular estate tax form 706 or gift tax form 709, and that it would create a new form 708 for this purpose. It’s been four years and form 708 still doesn’t exist. I wonder if they thought that this tax was so absurd that they weren’t going to enforce it.
Seriously? That is all the booga-booga amounts to about being a “covered expatriat”? A $10K fine (likely uncollectable in Canada) for not sending in an 8854? And if there is no possibility of an inheritance over $2M then why worry about the 708 which they seem to not have produced yet. Border crossing will not be a problem now for either myself (refused to go there for over 15 years, no intention of changing my mind) or for my husband who has no compelling reason to go there since his mother passed away.
@Em obviously if a person can avoid becoming a covered expatriate it is preferable than having a foreign country think that you owe them something for the rest of your life. But if it can’t be avoided, then hell with them. They can’t collect from a Canadian who has no investments in the United States and if that person has no children in the US to whom they wish to leave their estate after passing away, the IRS has little to no leverage over them.
Now if they insisted on doing unmanned drone attacks on covered expatriates, then I think concern would be warranted.
The key is “think that you owe them” (we owe no taxes). As far as I’m concerned I was never a patriot so it does not compute with me that I could be called an expatriot, covered or uncovered. That is their jargon. Today I’m in a defy kind of mood but I don’t know what mood I will be in tomorrow. Unmanned drones? Well, I know where there is a bunker. 😉 What still worries me is that Flaherty will stab us in the back. Why won’t he come out and say something? The silence is disstressing. 🙁