When it comes to compliance there is a lot of confusion as to:
- what day does loss of citizenship occur and
- what roles do f8854 and a
- Certificate of Loss of Nationality play?
The filing requirements are explored in two posts by John Richardson.
BRIEF SYNOPSIS
Before June 3, 2004 (before the creation of the “Tax Citizen”)
The date of your “expatriation”was determined solely by the provisions of the Immigration and Nationality Act.
June 3, 2004 – June 16, 2008 (after the creation of the “Tax Citizen”)
You continued to be treated as a “U.S. person” for tax purposes UNDER THE INTERNAL REVENUE CODE until you gave “notice” of your “relinquishment” to a government agency. For this period part of the “notice” was filing Form 8854 with the Internal Revenue Service. In other words, there was no way to cease to be a “U.S. person” for tax purposes until you had notified the IRS.
After June 16, 2008 –
A.The issuance of a CLN is confirmation that the State Department has agreed that you have relinquished U.S. citizenship. A CLN is a confirmation that you have met the “notice requirement” under the Internal Revenue Code.
B. The CLN is one way (a self-certification is also possible) to satisfy “foreign banks” that you are NOT a U.S. person for tax purposes under the Internal Revenue Code. (In other words, a CLN is a “sufficient” but not a “necessary condition” to prove non-USness.
Read more HERE
*****
1. Is the loss of U.S. citizenship for nationality purposes dependent on having a Certificate of Loss of Nationality (“CLN”)?
The answer is absolutely not.
349(a) of the Immigration and Nationality Act specifies conditions under which one relinquishes U.S citizenship.
2. Is the loss of U.S. citizenship for tax purposes dependent on having a Certificate of Loss of Nationality (“CLN”)?
Prior to June 3, 2004 – NO for either immigration or tax purposes
June 3, 2004 – June 16, 2008 – NO for either immigration or tax purposes.
After June 16, 2008 – No for immigration purposes – It is necessary as a confirmation of having met the “notice requirement” to end U.S. citizenship for tax purposes
3. What is the role of a Certificate of Loss of Nationality (“CLN”)?
For Immigration and Nationality Purposes – no relevance whatsoever
For Tax Purposes – The Internal Revenue Code
The accusation of U.S. citizenship is triggered by various indicia (U.S. place of birth, U.S. residence, U.S. phone number, etc.). The U.S. “place of birth” is the most dangerous indicia. Those with a U.S. place of birth can rebut the accusation of U.S. citizenship with either:
A. The CLN; or
B. A “Self Certification” (that must meet specific requirements) documenting why:
– the person has relinquished U.S. citizenship; and
– does NOT have a CLN.
A denial of U.S. citizenship will generally require proof.
In general, those who have relinquished U.S. citizenship under the Immigration laws of the United States prior to June 3, 2004 are more likely to be able to “self certify” that they are NOT U.S. citizens even though they do NOT have a CLN. This position is consistent with the August 2015
4. Why is the Certificate of Loss of Nationality (“CLN”) of value?
It’s simple. Unless you live in the United States, life as a U.S. citizen abroad, in a FATCA, FBAR and CBT world, will be an endless source of anxiety and difficulty. A Certificate of Loss of U.S. Nationality is becoming one of the most sought after documents in the world today.
5. What is the role of a Certificate of Loss of Nationality (“CLN”) in a FATCA inquisition?
June 16, 2008 – Present
IF (you relinquish U.S. citizenship under the Immigration and Nationality Act) THEN
You continue to be treated as a “U.S. person” for tax purposes UNDER THE INTERNAL REVENUE CODE until you give “notice” of your “relinquishment” to a government agency. The “notice” requirement is NOT to the IRS, but to the State Department. (See S. 877A(g)(3) and S. 877A(g)(4) of the Internal Revenue Code.) Once “appropriate” notice is given to the State Department you cease to be a U.S. taxpayer from the date the notice is given (on a prospective basis).
Read more HERE
Supplementary question: would it be illegal for the US-born person not to file a 1040 reporting the gain on the sale of the non-US home if the home had not been sold?
Supplementary question no. 2:
Would it be illegal for the person born in the US but not living in the US not to report to the US the sale of his/her non-US home if s/he gave the US Department of State $2350?
Would it be illegal for the person born in the US but not living in the US not to report to the US the sale of his/her non-US home if the home was not sold and s/he gave the US Department of State $2350?
My answer: none of these things would be illegal because the person does not live in the US.
However, if s/he gave the US Department of State $2350 and subsequently visited the US and the US found out that s/he had not reported to the US the sale of the unsold non-US home, there could be trouble. In much the same way there could be trouble if a US resident visited, say, Switzerland, carrying diamonds in a toothpaste tube.
Context is all.
Context is all indeed. It also matters whether they decide you are someone they want to spend resources on. If Robert Mueller is after you, and you have been resisting a plea bargain, he’ll find every form you never new existed that you forgot to file, or filed wrong. He’ll find every unfiled year, and throw the book at you. On the other hand if you’re just a low value anonymous filer, they simply CANNOT go after more than a tiny fraction of people. It’s a safe bet that they won’t go after a low-value foreign-based US person.
“It’s a safe bet that they won’t go after a low-value foreign-based US person.”
Absolutely. But the impotence of the IRS isn’t the point I was thinking out loud about. The rights of persons born in the US but not living in the US, that’s what I was trying to get at.
And my conclusion is that we have the same rights as other residents of our country of residence, while we’re in our country. But if we visit the US, we don’t have those rights.
If we visit the US after renouncing, we have right of consular assistance, but there’s a limit to what consular assistance can do.
It’s not likely the US would actually do anything – even interrogate – nevertheless renunciants with a US birthplace would be sensible to bear in mind that when on US territory they become once again subject to US law and rationality flies out the window.
“Question for consideration: is it illegal for a person born in the US but not living in the US, not to report the sale of his/her non-US home to the IRS on a 1040? (Hypothesising a significant gain untaxed by the country of residence.)” (Plus all the supplementary questions.)
Failure to file a return, failure to report income, or failure to pay US tax to the IRS may be illegal under US law but none of those things are illegal under the law of any other country to the best of my knowledge. (The condors, of course, have an extensive, totally self-serving, scaremongering campaign which tries to convince us otherwise.)
My position has hardened over the years; I now believe that filing nothing is the best course of action for a US born non-US resident person (unless that person believes that someday they may want to return to the US to live, not just to visit). By filing nothing, the IRS has essentially zilch to go on, even when notified by the State Dept. that they have issued a CLN.
If the IRS doesn’t even start an investigation because they know its a hopeless wild goose chase to go after a former citizen who lives in another country, then by what stretch of the imagination could they go after that person when they dropped in for a temporary visit on a non-US passport? Believe me, if the IRS ever started an investigation, that person would definitely know about it and could act accordingly.
.
I agree.
I agree.
A former citizen sticks out like a sore thumb because they’re US-born and travelling on a non-US passport. So if they visit the US, they might want to be prepared for unwanted attention, and have the Consulate contact details handy. Especially if travelling with their children. More than likely there’ll be no trouble, and if trouble did happen it would probably be more about entry than tax. But after thinking it through as a result of tdott’s thought experiment, I would say that if a renunciant expects to visit the US, they might want to file the 8854 to certify five years compliance (with zero US tax liability), a few hundred dollars net worth, no assets except a checking account with a few hundred dollars balance.
Not in my case – I’m not going to be visiting America. But if I was, and was deciding about the 8854, I think that’s what I’d do. Not in order to “exit the US tax system cleanly” (I agree there’s no such thing), but to make double sure they’d have no grounds for taking an interest, should I have to set foot on their territory.
At least some of those things would be considered tax evasion if willfully done, and thus would be considered illegal by the US. As far as the US is concerned it matters not a flying fig that the person does not live in the US – just like the previously mentioned hypothetical Canadian citizen John Pedo who breaks Canadian law by having sex with underage children while in Thailand.
A sovereign country can make whatever laws it wants. So if the US says it’s illegal for US citizens to evade taxes while living outside the US, it’s illegal w.r.t. US law – there can be no question of that. The morality, etc of any given law may be questionable (and in the case of CBT, very much is), but that’s an entirely different matter.
You may want to make it a bit more realistic 🙂 Depending on one’s age and income reported on those 1040s, a net worth of a few hundred dollars may raise a red flag.
“Failure to file a return, failure to report income, or failure to pay US tax to the IRS may be illegal under US law but none of those things are illegal under the law of any other country to the best of my knowledge.”
A treaty with a savings clause makes the failure to pay US tax illegal under the laws of all countries that ratify the treaty. Failure to file and failure to report seem less clear, but then look at CRA assisting collection of penalties for failing to file particular forms. If the US moved FBAR from Title 31 to Title 26 US Code, maybe CRA would even assist collection of FBAR penalties.
“I now believe that filing nothing is the best course of action for a US born non-US resident person (unless that person believes that someday they may want to return to the US to live, not just to visit).”
Yes, because attempts to comply bring punishment (and attempts to comply bring punishment even if the person believes that someday they may want to return to the US to live).
“Believe me, if the IRS ever started an investigation, that person would definitely know about it and could act accordingly.”
Nope, sorry. The IRS can start an investigation without informing the person. Even if the person has informed the IRS of their address, the IRS doesn’t have to inform the person of the investigation.
“You may want to make it a bit more realistic 🙂 Depending on one’s age and income reported on those 1040s, a net worth of a few hundred dollars may raise a red flag.”
Doesn’t matter. They might (or might not) be able to cause inconvenience over CE status, but they certainly wouldn’t be in a position to quiz me about my finances.
“At least some of those things would be considered tax evasion if willfully done, and thus would be considered illegal by the US.”
It doesn’t matter at all what the US thinks, since I don’t live under US law.
“A treaty with a savings clause makes the failure to pay US tax illegal under the laws of all countries that ratify the treaty. ”
No. The savings clause lets the US off the hook for double taxing, that’s all.
“look at CRA assisting collection of penalties for failing to file particular forms. ”
Dewees volunteered.
“A former citizen sticks out like a sore thumb because they’re US-born and travelling on a non-US passport. So if they visit the US, they might want to be prepared for unwanted attention, and have the Consulate contact details handy. Especially if travelling with their children. More than likely there’ll be no trouble, and if trouble did happen it would probably be more about entry than tax. But after thinking it through as a result of tdott’s thought experiment, I would say that if a renunciant expects to visit the US, they might want to file the 8854 to certify five years compliance (with zero US tax liability), a few hundred dollars net worth, no assets except a checking account with a few hundred dollars balance.
Not in my case – I’m not going to be visiting America. But if I was, and was deciding about the 8854, I think that’s what I’d do. Not in order to “exit the US tax system cleanly” (I agree there’s no such thing), but to make double sure they’d have no grounds for taking an interest, should I have to set foot on their territory.”
It does present a bit of a conundrum. I travel regularly (x-border shopping); the US birthplace on my Canadian passport is occasionally noted but in a conversational rather than adversarial manner. The local guys don’t really seem to care. They have never mentioned taxes.
So what do they know about me when I produce that passport? Name, DOB, birthplace (town but no state??) and not much else unless there is additional info imprinted in the RFID chip that I don’t know about. (Note to self….check what info the Canadian government gathers to process a passport application.) They also know, by deduction, that I committed at least one expatriating act (if they even know what that is) because I’m carrying a Canadian passport, but they don’t know whether I’m an ex-US citizen or a dual. There is no info about a CLN because I’m a self-relinquisher and don’t have one. Who knows whether they receive any training at all on US expatriation law but I doubt it because ex-US citizens are still a relative rarity.
I suppose one could file a cursory 8854 and call it done and dusted. I wonder if the IRS even looks at those things. So looking at the latest version on the IRS website, I noticed something very strange in Part 1.
“June 17, 2008 – December 31, 2016. Complete Part III if:
• You made an election to defer the payment of tax on a prior year Form 8854,
• You have an item of eligible deferred compensation, or
• You have an interest in a nongrantor trust.
Otherwise, you don’t need to file Form 8854.”
Personally, because none of those 3 listed conditions apply, I’m inclined to follow the instruction at the very bottom! What the hell??? I’m not making this up.
Cut and paste error maybe? It should logically read “Otherwise, you don’t need to complete Part III.”
Anyway, it doesn’t matter what the instructions tell people to do about filing. The best thing for them to do is the thing that they consider to be in their own best interests. Not let the IRS make that decision for them. IMO.
It’s because if you renounced during those dates you shouldn’t be filing 8854 for the year 2017 unless you meet one of those three conditions. You should’ve filed the form for the year you renounced, and never filed 8854 again.
Typical IRS mess of trying to make one form serve completely different purposes.
I guess it never occurred to them that somebody might file the form late. Its a temptation to file one (only section 1) just to screw up their system. It wouldn’t be the first time a mere mortal misunderstood their instructions.
It’s another of their rules – if you file a form late you’re supposed to use the form for the year you should’ve filed in.
“It wouldn’t be the first time a mere mortal misunderstood their instructions.”
It’s a job creation program – creating jobs for condors.
Originally you said “none of these things would be illegal because the person does not live in the US.” That is what I responded to, and it is clearly incorrect because like it or not, US law is what the US says it is.
The only reason I’m harping on this is that I would not want some newbie to come away thinking that it is in fact legal to perform one of these actions (e.g. not report gain on the sale of a principal residence).
Now I couldn’t give a flying peanut whether a USC, or former USC, complies or not with US tax law. None of my business, don’t care. But I do very much think that said person should know what the actual facts are (e.g., you are evading taxes if you don’t report gains over $250K when you sell your principal residence), so that they can make decisions that are based on the reality of the situation.
“Originally you said “none of these things would be illegal because the person does not live in the US.” That is what I responded to, and it is clearly incorrect because like it or not, US law is what the US says it is.”
Not where I live.
“The only reason I’m harping on this is that I would not want some newbie to come away thinking that it is in fact legal to perform one of these actions (e.g. not report gain on the sale of a principal residence).”
Whereas I’m keen for USCs living outside the US to be aware that it’s absolutely legal for them to sell their house, save for their retirement, and invest in their country without paying America for the privilege.
To elaborate on the subject:
In a liberal democracy (e.g. Canada, Australia, France, Germany, the UK etc) if the government wants to impose a legal requirement on residents it’s necessary to legislate. None of the above-mentioned countries has brought in legislation making it a legal duty for residents with US citizenship to file US tax forms, or pay the US capital gains tax on the sale of their home, or pay US income tax out of their pension income. So USCs don’t have a legal obligation to do those things – though obviously they can if they choose. (And quite a few do choose, perhaps because it works out better for them or perhaps because they want to keep the right of entry or perhaps just to keep the identity.)
Do what works best for you – not what works best for the IRS. That’s my advice.
@tdott and plaxy
I’ve got to thank both of you for the great thought provoking discussion which makes at least somewhat of a case for filing Form 8854. After the dog took me for a nice walk this afternoon, the bare bones of a plan started to form in my devious refusnik mind.
I became a Canadian in late 2012 which means that if I were to file Form 8854 I would file the 2012 version of the form. My basic objection to Form 8854 (besides the fundamental obnoxiousness) has always been about giving the IRS a shopping list of my assets.
Now here’s the fun part:
I tell them all about the assets I owned on the date I expatriated back in 2012. I don’t have a problem with that because I no longer own most of them. Check.
I have no problem with certifying 5 years of compliance because although I had considerable income, the lion’s share was mostly government pensions which under the terms of the treaty are US tax exempt. Because the remaining non-exempt income didn’t put me over the filing threshold I was not obligated to file returns for those years. Conclusion? I was US tax compliant. Check.
No problem writing a zero for tax owed in each of those 5 years because I owed nothing. Check.
No problem with the net worth test because I was (still am) well under the 2 million. Check.
So that’s it: do the 3 part certification, give ’em a nice list of assets that I no longer own, sign it, and send it in. Done and dusted. If you believe Hodgen (which I do), the $10,000 penalty for late filing doesn’t apply because it only applies to covered expats. His advice for those who haven’t yet filed the form is to go ahead, file it, and take advantage of a curious void in the law before somebody notices and closes the loophole.
Not bad for a dog walk.
maz – Interesting plan. I thought you relinquished before 2004? If so, surely you don’t need to file 8854?(https://isaacbrocksociety.ca/2012/06/19/if-your-expatriation-date-is-before-2004-the-rules-are-different/)
“although I had considerable income, the lion’s share was mostly government pensions which under the terms of the treaty are US tax exempt.”
And also, reporting treaty positions on pension income is waived; so form 8833 would not have been required. You were indeed compliant.
“I tell them all about the assets I owned on the date I expatriated back in 2012. I don’t have a problem with that because I no longer own most of them.”
Personally I adhere to the old maxim, never tell them anything they don’t already know, and don’t join in the deeming games. It may serve your interests to certify compliance; it definitely doesn’t serve your interests to give them a list of your assets.
I’d suggest – either stick to your position (pre-2004 relinquishment, therefore neither a CLN nor 8854 is applicable), or if you want to prevent them from having any power to inconvenience you when you visit America, shift to the alternative position and do both – renounce to get the CLN and file the minimalist 8854, certifying compliance and no tax liability, and giving a nominal “net worth” figure and matching cash balance in Section V. Just my suggestion, YMMV obviously.
I said:
“I’d suggest – either stick to your position (pre-2004 relinquishment, therefore neither a CLN nor 8854 is applicable), or … shift to the alternative position and do both – renounce to get the CLN and file the minimalist 8854,”
Or a third option – rather than renounce to get the CLN, you could buy a CLN to document your pre-2004 relinquishment. No need to file 8854 and they’d have no grounds for causing you any problems on entry.