cross-posted from citizenshipsolutions
Update January 2018: This post has been updated with some new links and discussion
Part I is here.
Part II is here.
*****
PART III
Legal Status of Citizen vs. The Engagement Required By Citizenship
Is the “legal status” of being a citizen sufficient? Is there a difference between the “legal status” of being a citizen and the “voluntary engagement” that is required by “true citizenship”? The “legal status” of being a citizen may NOT be voluntary. But, the voluntary engagement required by “citizenship” is voluntary.
The legal status of “citizen” vs. the voluntary engagement of “citizenship”
There is a difference between the “legal status” of being a citizen and the voluntary engagement with the community that is required for meaningful “citizenship”. To put it another way: Citizenship involves more than the “legal status” of being a citizen. As President Obama said in his 2013 State Of The Union Address:
“We are citizens. It’s a word that doesn’t just describe our nationality or legal status. It describes the way we’re made. It describes what we believe. It captures the enduring idea that this country only works when we accept certain obligations to one another and to future generations; that our rights are wrapped up in the rights of others; and that well into our third century as a nation, it remains the task of us all, as citizens of these United States, to be the authors of the next great chapter in our American story”
It is clearly true that many people born in the U.S. and NOT living in the U.S., have the “legal status” of being a citizen, but have not accepted the voluntary engagement that is required for meaningful “citizenship”. The story of London Mayor Boris Johnson (who was born in the U.S.) is a case in point.
Does the “legal status” of being a citizen justify imposing taxes on a person who does NOT live in the country?
The U.S. currently takes the position that the “legal status” of being a citizen is sufficient to impose taxes on a person who does not live in the U.S. Some of those with the legal status of U.S. citizen were born in the U.S. (making them 14th amendment citizens) and some were born outside the U.S. (making them citizens by an Act of Congress). There are many categories of people born in the U.S.
Five Possible Categories of Those Deemed to be U.S. Citizens Abroad and Their U.S. Connection
Those Born In The U.S. – 14th Amendment Citizenship – Who at a young age are taken by their parents to live outside the United States
The vast majority of U.S. citizens acquired U.S. citizenship because they were born in the U.S. The U.S. is aggressively taking the position that the following types of people, born in the U.S., but residents in other countries, with no economic connection to the U.S. are required to pay taxes to the U.S.:
A. Border babies: Those who were born in the U.S. and returned to Canada within months. (If their parents were Canadian citizens those border babies (who were dual citizens from birth) can renounce their U.S. citizenship without paying an Exit Tax. If their parents were U.S. citizens (meaning the children were not a dual citizens from birth) they are NOT permitted to relinquish U.S. citizenship without being subject to the Exit Tax.)
B. Children born in the U.S. who permanently left the U.S. with their parents as children (before reaching the age of majority) and who never returned to the U.S. They have never worked in the U.S. and have no connection to the U.S.
Members of Group A or Group B do not have and have never had a “voluntary connection” to the U.S. that could convert their “legal status” of citizens to the “voluntary acceptance” of the obligations of “citizenship”. Their birth in the U.S. and their moving from the U.S. were the results of decisions made by their parents. It’s hard to see how the “legal status” of being a U.S. citizen, is sufficient to require the payment of taxes to the U.S. Surely a demonstration of a “voluntary connection” to the U.S. should be required before an obligation to pay taxes is triggered.
Those born outside the U.S. – They choose neither their parents nor where they are born
C. In certain cases, the children of U.S. citizens who are born outside the U.S. are considered to be U.S. citizens. Examples include (but are not limited to), those born in Switzerland to U.S. parents. U.S. laws for the transmission of citizenship from U.S. citizen parents to children born abroad, have a long and complicated history. In fact – “American Citizens Abroad” – was founded to facilitate the acquisition of U.S. citizenship for children born abroad to U.S. citizen parents.
It is clear that that those born outside the U.S. have no connection whatsoever to the U.S. At most they have a connection to a U.S. citizen (that may or may not have a connection to the U.S.)
Those who choose to leave the United States as Young Adults Adults
D. U.S. citizens who were “Born In The USA” but who moved to other nations as young adults (not forced to move with their families), have developed their careers outside the U.S., married, had children and raised their families outside the U.S., done their financial and retirement planning outside the U.S., never had an economic connection to the U.S., and whose lives are have become citizens of their countries of residence.
Many in this group may have left the U.S. under unclear circumstances. Some may have left the U.S. with the intention of returning, some with no thoughts on whether they would return, and some with the clear intention of never returning. Regardless of their intention when leaving the U.S., many gradually become citizens (in a legal and voluntary sense) of their new countries and gradually lost any connection to the U.S. that they may have had.
Members of this group (especially in Canada and Western Europe) fully consider themselves to be primarily citizens of their new countries and no longer U.S. citizens. Example: “You know you are Canadian when you start rooting for Canada over the U.S. in hockey.”
Adults who moved from the USA with the intention of returning to the United States
E. U.S. citizens who move outside the U.S. for short periods of time with the full expectation and understanding that they are returning to the U.S. They live outside the U.S. as Americans and typically neither become citizens of their country of residence, nor disconnect from the U.S. In other words, they are truly “U.S. citizens abroad”. Their situation is very different from those described in Categories A, B, C and D. They have more than the “legal status” of being U.S. citizens. They have a voluntary connection to the U.S.
Citizenship-based taxation and a voluntary connection to the U.S.
It is clear that many of those with the “legal status” of U.S. citizen (Categories A, B, C, and D) do NOT have the “voluntary” (or any other) connection to the U.S. that could reasonably justify U.S. taxation.
The fact that those in Category (E) have a voluntary connection to the U.S. does NOT mean that good tax policy would subject them to U.S. taxation. It does mean that (if citizenship requires a connection to the United States that this is the group which might be subject to “citizenship-based taxation”).
Therefore a “Voluntary connection” to the U.S. is a necessary but NOT a sufficient condition for the taxation of Americans abroad
Is “citizenship-based taxation” justified even with respect to Americans abroad who DO have a voluntary connection (Category E) to the U.S.? It’s hard to understand the justification. No other country imposes taxes on its citizens abroad. Americans abroad already pay taxes in their country of residence. No scholar has ever explained exactly what it is about a “voluntary” connection to the U.S. that justifies taxation. Life is full of “voluntary connections” that do NOT require the payment of taxes. What is it about a “voluntary connection” (by way of citizenship) to the U.S. that means Americans abroad should be taxed at all, or (worse yet) taxed according to the same rules as U.S. residents?
Do I understand correctly that border babies (category A), born to Canadian parents, that lived in the us for only a few months can renounce without paying an exit tax? Are they still required to submit the previous 5 years of tax returns? This is news to me if true.
@Dave
All dual citizens from birth (wherever born) are excused the exit tax as long as some criteria apply.
https://hodgen.com/dual-citizen-exit-tax/
We are no longer AMERICA. Anyone who wants to come here just slips across a porus border, Comes as a visitor and doesn’t leave at the proper time or buys a Green card ,visa #I-151 on the street,or votes when totally ineligible to vote based on citizenship being non existant.
Our money has long ago lost any solid value. We have borrowed 20 Trillion dollars, or created it out of thin air. Our dollar was once the world commerce standard, but many countries insist on the Chinese,WON.
WE have politicians who won’t balance their spending with tax income, leaving us with the creation of dollars without value, because nobody worked for them.
Over 50% of the population are not paying any Income Taxes and are drawing value cards from the Welfare authorities,using the money in Casino’s and gourmet food such as Lobster and filet’s minyon, whi as a working stiff can’t even spell. We are no longer a nation but a polyglot squating on land we don’t own.
I am sure that somewhere there is a shadow government, just waiting for Anarchy and they will use the Saul Alinsky book”Rules for Radicals” and will try and be allowed to try sociali engineering while the semblance of a government Limps into our 242 nd year with little chance of controlling borders restraining immigration and not caring if they do contro.
@wilton
I sympathize with you, but most of us here do not identify as ever being American and if we ever did, we left it behind many years ago. We live our lives in countries we are citizens of or with which we identify with and all we want is for America to leave us the hell alone.
Your fair tax may help us in some ways but it would not take away the need for fbars and extraterratorial oversight of our financial lives. I thank you for your concern but I think your message should be aimed at your home audience.
wilton You’re preaching to the wrong choir. Give it a rest.
Dave You are still supposed to certify 5 full,years of tax compliance. Whatever that means.
Dave – “Are they still required to submit the previous 5 years of tax returns? ”
If you’ve been filing, you can just renounce, and in due course you file for the year of renunciation (plus the 8854,form on which you certify dual-from-birth exemption etc). End of story.
If you’ve never filed, you can either keep it that way and just renounce
OR
you can renounce, backfile five years of forms, then in due course file for the year of renunciation plus the 8854.
Some do one, some do the other. If you expect to be visiting the US after renunciation it’s probably sensible to do the five years and final filings.
I maintained a voluntary connection with the US only because I was unaware of US taxation.
CBT would skew anyone’s perception of citizenship.
(Plaxy:) “If you’ve never filed, you can either keep it that way and just renounce…OR…you can renounce, backfile five years of forms, then in due course file for the year of renunciation plus the 8854.”
OR you can certify on the 8854 that you have met your obligations, which would not necessarily include filing returns. (Perhaps you didn’t make enough money to be required to file.)
Zla’od – yes, that’s also an option, if you weren’t required to file.
If you were required to file, and didn’t, I don’t see why you would write to the IRS and claim under penalty of perjury that you met your obligations. Why file anything?
It depends on whether you fear covered expatriate status more than perjury (or back-filing).
On the other hand, if you have no SSN, filing 8854 may either be impossible or of undependable effect.
“It depends on whether you fear covered expatriate status more than perjury (or back-filing).”
There’s nothing at all to gain from perjuring yourself unnecessarily. Better to file nothing. The IRS can’t take away your retirement without your consent.
However, it’s obviously up to the individual to decide.
As a covered expatriate (which would one be if one neglected to file 8854), one would continue to be liable for US federal income taxes every year, forever. Would anything happen? A debt to the IRS of more than USD 50,000 apparently triggers some sort of border bar, although that can only happen if you’re in the system and the IRS thinks you owe them that much. A few years ago there was an attempt in Congress to pass a law barring covered expatriates from entering the USA. (Not a problem if you have no need to go to the USA, I suppose, but some of us have relatives there.) I can imagine all kinds of implementation problems, but the trend is toward fingerprinting people at the borders, and making visa or “visa free” applicants prove various things.
Now what if you go the other route, and file a false 8854? Most likely, the IRS will pay it little attention, especially after 5 years go by. I believe the limitation would not apply to perjury; however, this has to be proven, and must be willful. In view of the number of overseas Americans who genuinely do not realize that they owe tax to the US, this seems difficult. (Alternatively, they may have known of the supposed requirement, but genuinely considered it to be unconstitutional, and/or contrary to international law.)
Unless you live in a country where the banks require having a CLN in hand in order to maintain banking privileges, doing nothing seems to be a reasonable option. If you don’t apply for a CLN (i.e. renounce) State won’t notify the IRS. If the IRS doesn’t know you exist, there are no worries about perjury or covered status. You are simply in a state of perpetual bureaucratic limbo. On the other hand, I’ve never heard of anybody who filed an 8854 (however “abbreviated”!!) who ever heard from the IRS again.
The IRS tracks people according to SSN (or TIN). Suppose someone with no SSN (or TIN) renounces. The IRS would probably have difficulty tracking them by name (which might also change, depending on the other country) and birthdate. The positive side is that declaring them to be a “covered expatriate” would be hard to enforce. The negative side is that even if they do fill out 8854, that would be hard to track as well.
I think you made a wrong turn. Are you one of Donald Trump’s business partners?
I don’t think I’m supposed to say, I signed a non-disclosure agreement. Anyway, I’m worried about owing taxes on my 130,000 USD and uh, personalized issue of Forbes.
maz57 – “If you don’t apply for a CLN (i.e. renounce) State won’t notify the IRS. If the IRS doesn’t know you exist, there are no worries about perjury or covered status. You are simply in a state of perpetual bureaucratic limbo. On the other hand, I’ve never heard of anybody who filed an 8854 (however “abbreviated”!!) who ever heard from the IRS again.”
Indeed. We’re all in pbl whatever we do. 🙂
@plaxy. Good advices. However if you don’t file 8854 and you have children in US you are in limbo. You don’t know about your covered expat status. If your family is not living in USA then it probably does not matter. Everything is per case basis only. Covered is bad for your family living or inheriting anything in USA
Harrison – you’re in limbo whatever you do. Renounce, move your assets and ignore the IRS. Die owning nothing.
@plaxy. Incorrect advice. If you have asetts anywhere going to your children after your death the children might have to pay covered gift otax. The 2008 tax laws wrote this 8854 law for US citizens children living in USA if they inherit from covered expats. Secondly if they are US citizens living anywhere again they will have to file their returns as they won’t get a US passport if needed and if they don’t need any then no need for anything.. Please read Phil Hodgens blog for more info. They made sure you are covered with the US yoke on your children. The covered expat tax on the beneficiaries is something really aweful written by a condor probably.
@plaxy. We can’t be sure of any advice as what would be there in future stored for our beneficiaries in US or anywhere. Best is not to come under a compliance condor and consult a good attorney not a condor.
Harrison – “If you have asetts anywhere going to your children after your death the children might have to pay covered gift otax.”
Die owning nothing. Dispose of everything before you kick the bucket.
@plaxy. Actually no one can do that as no one knows the exact hour of their death. You need money to survive in this world and you can’t rely on retirement benefits unfortunately. Secondly you can’t trust any children as I know personally children who wanted money so badly they wanted to kill their parents for it. I have seen way too many family disputes on tiniest inheritances and this is why it is not advisable until death comes. I am not a geezer but I have seen a lot in my 50 plus years.
@ Plaxy. Surviving like you all.