cross-posted from Quora
John Richardson
Toronto lawyer: FATCA U.S. tax + renunciation of citizenship
CitizenshipSolutions
John Richardson, Lawyer (1982-present)
Answered Mon
What if Meghan Markle’s child is born a U.S. citizen? Would the child have any immediate tax and information reporting requirements to the IRS?
I note that the question (1) assumes that Ms. Markle’s child is a U.S. citizen and (2) the question focuses on BOTH tax and reporting requirements.
Would Meghan Markle’s children be U.S. citizens?
The majority view is “YES” her children would automatically be U.S. citizens. My minority view is “NO” – they would have the right to be U.S. citizens but not the obligation to be U.S. citizens. I have previously explained my reasoning on Quora here:
John Richardson’s answer to Could Meghan Markle’s children apply for US citizenship?
But, assuming that her child will be born a U.S. citizen, then
To be perfectly clear:
With the exception of gifts/bequests received from a “covered expatriate” the recipient of a gift is NOT required to pay tax on the value of the gift.
The recipient of a gift or bequest may be subject to penalty laden reporting requirements. These reporting requirements apply even though the value of the gift is NOT subject to tax.
Furthermore, this answer is really a “thought experiment” which explores the absurdity of certain aspects of the Internal Revenue Code apply to the lives of Americans abroad.
Here we go …
Tax Requirements …
The obligation to file a tax return would depend on the amount of taxable income the child received and whether that income met the thresholds for filing. It is unlikely (but not impossible) that the child could meet the income thresholds. For information on thresholds (which also depend on filing category) see:
Do I Need to File a Tax Return?
Reporting Requirements (which may exist independently of the obligation to file a tax return)…
The reporting requirements can exist independently of whether a tax return is required to be filed. It depends on whether there are sufficient facts to trigger the basic reporting requirements.
The child is a recipient of support from Harry
The child is probably going to live life as a normal baby and will be both supported and cared for by his/her parents. It is reasonable to assume that the child will receive financial support from the Harry (the father) who is (from a U.S. perspective) an “alien” or at least a foreign person.
Should the food, housing, medical care, toys, etc. received from Harry be considered to be a “gift” from a “foreign person”? If the answer is YES and the value of the support exceeds $100,000.00 USD then the child has a reporting obligation to the IRS (whether the child files a tax return or not). This is made very clear by Section 6039F of the Bible Of American Life – The Internal Revenue Code. It reads:
26 U.S. Code § 6039F – Notice of large gifts received from foreign persons
26 U.S. Code § 6039F – Notice of large gifts received from foreign persons
(a) In general
If the value of the aggregate foreign gifts received by a United States person (other than an organization described in section 501(c) and exempt from tax under section 501(a)) during any taxable year exceeds $10,000, such United States person shall furnish (at such time and in such manner as the Secretary shall prescribe) such information as the Secretary may prescribe regarding each foreign gift received during such year.
(b) Foreign gift
For purposes of this section, the term “foreign gift” means any amount received from a person other than a United States person which the recipient treats as a gift or bequest. Such term shall not include any qualified transfer (within the meaning of section 2503(e)(2)) or any distribution properly disclosed in a return under section 6048(c).
(c) Penalty for failure to file information
(1) In generalIf a United States person fails to furnish the information required by subsection (a) with respect to any foreign gift within the time prescribed therefor (including extensions)—
(A)
the tax consequences of the receipt of such gift shall be determined by the Secretary, and
(B)
such United States person shall pay (upon notice and demand by the Secretary and in the same manner as tax) an amount equal to 5 percent of the amount of such foreign gift for each month for which the failure continues (not to exceed 25 percent of such amount in the aggregate).
(2) Reasonable cause exception
Paragraph (1) shall not apply to any failure to report a foreign gift if the United States person shows that the failure is due to reasonable cause and not due to willful neglect.
(d) Cost-of-living adjustment
In the case of any taxable year beginning after December 31, 1996, the $10,000 amount under subsection (a) shall be increased by an amount equal to the product of such amount and the cost-of-living adjustment for such taxable year under section 1(f)(3), except that subparagraph (A)(ii) thereof shall be applied by substituting “1995” for “2016”.
(e) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.
Note that the “cost of living adjustment” makes it clear that the threshold for reporting is now $100,000.00 USD.
The application of this rule is explained by the IRS here.
Gifts from Foreign Person
Further comments on the “foreign gift” rule …
Please note that to the extent that Meghan is the recipient of support from Harry and the Royal Family she is also required to report this support on Form 3520 (the information return where the gift is reported).
With respect to the Child – it might be better if Meghan (as a U.S. citizen) were to provide the support or if Harry never contributed more than $100,000.00 of support.
In any event, as in all “FBAR Marriages”, it would be wise for Harry and Meghan to keep VERY DETAILED records of the (1) the costs paid to support the child and (2) how much of that support comes from Harry (“the foreign person”).
No homeland American would have to worry about keeping records of the amount required to support their child because of IRS reporting requirements. But, if a U.S. citizen marries a “foreign person” (creating an “FBAR Marriage”), then there is a possibility of increased IRS reporting requirements.
Are the “foreign gifts” taxable as income to the child?
Generally no. Gifts are not generally taxable to the recipient.
But, there could be a problem if Meghan were to renounce U.S. citizenship as a “covered expatriate” and after renunciation provide financial support to the child. (If Meghan’s net worth exceeded $2 million USD when she renounced she would be a “covered expatriate”.)
S. 2801 of the Internal Revenue Code makes it clear that if the child were to receive gifts/bequests from a “covered expatriate” then the gift/bequest/support becomes taxable TO THE CHILD. This is explained in the following blog post:
Part 11 – S. 2801 of the Internal Revenue Code is NOT a S. 877A “Exit Tax”, but a punishment for the “sins of the father”
Therefore, it is important that IF Meghan renounces U.S. citizenship AND wants to provide support to her child that she first (prior to renunciation) give away enough of her assets so that she is no longer a “covered expatriate” (her net worth would need to be less than 2 million USD). Perhaps she could give the assets to the child in advance of renouncing U.S. citizenship. (Note that because the gifts came from Megan while she was still a U.S. citizen the gifts would not be from a “foreign person”.) But if she gives assets to the child in advance, she must be careful about creating a trust for the child which could conceivably generate more reporting requirements
Additional Reporting Requirements …
Trusts …
Internal Revenue Code Section 6048 imposes reporting requirements on the U.S. persons who receive property from “foreign trusts”.
26 U.S. Code § 6048 – Information with respect to certain foreign trusts
Note that IRS Form 3520 is used to provide the reporting in relation to both the “Foreign Gifts” and the “Foreign Trusts”.
Foreign Financial Assets …
Internal Revenue Code Section 6038D obliges U.S. persons to file reports on their foreign financial assets. See:
26 U.S. Code § 6038D – Information with respect to foreign financial assets
Basically if the child has “foreign financial assets” that exceed $200,000 USD AND the child is otherwise required to file a 1040 then the Form 8938 must be filed. Of course, the failure to file the Form 8938 will subject the child to more penalties. The instructions to Form 8938 are here:
https://www.irs.gov/pub/irs-pdf/…
Let’s not forget about Mr. FBAR …
Should the child have non-U.S. bank accounts, mutual funds or other investments that exceed $10,000 in value there may be an obligation to file an FBAR. In recent years, the IRS has made it very clear that – generally a child has the obligation to file his own FBAR!!! See the video in the following link.
Looking for Mr. FBAR? He’s Due October 15th! Learn the Latest…
And about “mutual funds” – let’s not forget Form 8621 (to report ownership of a PFIC”)
PFIC taxation and Americans abroad
Note that Form 8621 is required whether or not a 1040 is required.
In Conclusion …
It is essential that nobody rely on this as legal advice because I have not discussed a number of other possible reporting requirements.
A summary in the “form” (no pun intended) of Q and A …
Q. Will the IRS enforce these rules against Ms. Markle’s child?
A. Of course not. Babies (even U.S. citizen babies) are not born tax evaders.
Q. So, why I am providing such a detailed answer if the IRS wouldn’t enforce these rules against Ms. Markle’s baby?
A. To show you how insane the rules are that apply to U.S. citizens living outside the United States or who marry somebody who is not a U.S. citizen.
Q. What should U.S. citizens living outside the United States do?
A. Get rid of U.S. citizenship “quick time”.
Q. What should U.S. citizens who do NOT renounce U.S. citizenship do?
A. Report early! Report often! Report everything! – It’s the American way.
Q. Why are people getting rid of their US citizenship? A. It's because of the "10 Commandments of U.S. Citizenship" in a #FATCA and #FBAR world by John Richardson https://t.co/cbjEJ91Ijw
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) January 3, 2018
The IRS won’t enforce the rules against Meghan Markle and her child. But, they might enforce them against you.
Further reading (if you can stand the horror) …
IRS Form 3520, Penalties, and Whether to Make a Protective Filing – The CPA Journal
Japan T:
“all accounts held by US persons … are being reported to “U. S. tax authorities”.
Yep. The threshold is for the banks’ to apply if they opt to do so. They can report only high-value USP accounts or all USP accounts. Many, maybe most, probably don’t bother applying the threshold.
“Japan T:
“all accounts held by US persons … are being reported to “U. S. tax authorities”.
Yep. The threshold is for the banks’ to apply if they opt to do so. They can report only high-value USP accounts or all USP accounts. Many, maybe most, probably don’t bother applying the threshold.”
Exactly. More expensive and opens them up to costly errors to have yet more divisions in their data banks So, the IRS get to know about just about everyone regardless of wealth. But remember, they are only looking for the fat cats, the whales.
“the IRS get to know about just about everyone regardless of wealth.”
Correct.
Which, by the way, is why looking only at IGS will not tell you the whole story and is why I keep calling you out for statements about what is is or is not in an IGA. What is actually being done is what is important to know, not what is supposed to happen.
Oh, one more thing before going to bed, it is 2 am here. Having the FATCA letter before me, there is this at the bottom, “If you have any questions regarding the application of FATCA or its tax implications, please consult with U. S. tax specialist such ad attorneys, certified tac accountants, etc.”
Indeed – you (generic you) also need to read the implementing legislation.
““the IRS get to know about just about everyone regardless of wealth.”
Correct.”
What could possibly go wrong?
I said (at http://isaacbrocksociety.ca/2018/11/21/what-if-meghan-markles-child-is-born-a-u-s-citizen-would-the-child-have-any-immediate-tax-and-information-reporting-requirements-to-the-irs/comment-page-4/#comment-8508451):
“the FBAR increase might simply be part of the general trend towards punitive penalties.”
According to “Evolution of the FBAR” (http://www.hbtlj.org/v07p1/v07p1_sheppard.pdf), the increase was one of the consequences of the PATRIOT Act:
So yes, it seems the increase was to that extent a kind of side-effect of 9/11.
I recently opened a new Investment account with one of the major Canadian Banks.
Had to complete an IRS U.S> W-8BEN form declaring that I am not a U.S. citizen.
Sort felt offensive having to do this form as I have no connection with the USA. Can you imagine if all 193 countries in the world would apply the same taxation rules as the USA. One would ( theoretically speaking) have to fill out 193X W-8WEN type forms.
@JapanT,
“I either rob a bank and pay them, find a creative way to gain Japanese citizenship or risk the loss of my passport when I have to renew it.”
Reading your posts is painful. What is the hindrance to your applying for Japanese citizenship, if thatis what you want to do? Is it only the language requirement? If so, have you spoken to the folks at your local Legal Affairs bureau and had it confirmed that your level is not up to snuff?
@Slingy
I’m a bit surprised a major bank would still use the W-8 (unless perhaps your investment account included US securities, in which case it’s needed to determine withholding on dividends – I think).
Normally banks will have their own FATCA/CRS form, or use the CRA form (though it’s just kept on file, never submitted). On this form one self-certifies US personhood and/or other tax residencies.
“@JapanT,
“I either rob a bank and pay them, find a creative way to gain Japanese citizenship or risk the loss of my passport when I have to renew it.”
Reading your posts is painful. What is the hindrance to your applying for Japanese citizenship, if thatis what you want to do? Is it only the language requirement? If so, have you spoken to the folks at your local Legal Affairs bureau and had it confirmed that your level is not up to snuff?”
Though I have not been to the legal affairs bureau, I know my Japanese language skills are not to the level required. My work requires that I use English all day everyday. What Japanese ability I had when I returned twenty years ago has aroded to the point I can no longer write even a post card nor read one. Too busy to even learn how to write my childrens’ names in their language and I can not understand what they say. Language is a big part of it.
Financial is another. I do not know the exact specifics but know I had to prove I had a minimum of $10,000 in my account in the States to get my visa to come over. My accounts balances are like the tide, High tide is one a month and for just a few hours. It all flows out the day it comes in.
A 50 year old male with no savings, working as a “freeta” and next to zero current local language ability is not the type of person countries are usually willing to accept as one of their own.
A brief summary, there is more to it but that should give a good idea.
“So yes, it seems the increase was to that extent a kind of side-effect of 9/11.”
And? What ever the reason, it still hurts.
@slingy
“I recently opened a new Investment account with one of the major Canadian Banks.
Had to complete an IRS U.S> W-8BEN form declaring that I am not a U.S. citizen.
Sort felt offensive having to do this form as I have no connection with the USA. Can you imagine if all 193 countries in the world would apply the same taxation rules as the USA. One would ( theoretically speaking) have to fill out 193X W-8WEN type forms.
Just wanting to confirm, are a former US citizen?
Either way, I’d be hoping mad that I have to sign forms for a foreign land (third party) to open an account in my own country or country of residence. The world is moving in the direction you speak of. Non USC aquaintences here in Japan are having to answer questions about their country of residence to their FIs at home and having their accounts closed due to living in Japan. Japan now has its own FATCA like system as does a couple of EU countries.
@Japan T,
I see. Well, I don’t say it will be easy, but I don’t think your hurdles are insurmountable. My impression from your posts is that you see a freight train coming down the tracks at you, possibly to hit when your passport next comes up for renewal next, so I would think the motivation is there to do anything at all to preserve your ability to continue living with your family. With that in mind, some hopefully helpful suggestions below.
“Though I have not been to the legal affairs bureau, I know my Japanese language skills are not to the level required. My work requires that I use English all day everyday. What Japanese ability I had when I returned twenty years ago has aroded to the point I can no longer write even a post card nor read one. Too busy to even learn how to write my childrens’ names in their language and I can not understand what they say. Language is a big part of it.”
The language level required for citizenship is actually pretty low, though it sounds like you would have some studying to do. One idea would be to make flash cards, and study them on the train or whenever you might have some time between activities. There are also semi-passive opportunities to learn: reading the ads on the train (dictionary in hand), watching the news on TV, talking to your in-laws, even translating your electric bill? Take a newspaper, and just work on understanding the main headline, or the weather report. I know you are extremely overworked, but even finding 10 minutes per day would go a long way towards improving your situation language-wise.
Another, off-the-wall, idea: do you have to work as an English teacher? How about working at 7-11 or something like that? It might not pay less than what you are earning now (from what you say about your finances below), and would give you an opportunity to work in a Japanese-language environment rather than an English-language one. I don’t think the Japanese required to get such a job is very high, judging from the exchange students who tend to fill such jobs that I see. They seem to be learning on the job.
“Financial is another. I do not know the exact specifics but know I had to prove I had a minimum of $10,000 in my account in the States to get my visa to come over. My accounts balances are like the tide, High tide is one a month and for just a few hours. It all flows out the day it comes in.”
This one is actually not a problem, I believe. They look at your entire household income and assets, including your wife’s. If, as a family, you are able to pay the bills and eat (and you apparently are), then you are ok on this score.
“A brief summary, there is more to it but that should give a good idea.”
I don’t know what other issues are involved, but I don’t see it as hopeless as you paint it from what you have mentioned so far. Not saying it would be easy, but not impossible either, if you want to try to go that route.
@Japan T,
Another idea: when riding the train, pay attention to the announcements. They often (especially in Tokyo) have the same announcement in both Japanese and English. Instant comprehension test. Also, station and road signs usually have both kanji and romaji together, a good way to learn place-names. One can pick up a lot just by looking and listening around.
@foo
Will read your comments in full later, just scanned them thus far. I studied Japanese in college, had over 60 credit hours of it. At one point, the language requirement was well within reach. That was twenty or more years ago. I have the paper work for JCship and a practice test for the lang. test. I can no longer even read the questions.
I have taken a correspondence course a few years ago when my workload was far lighter than it is now. Not possible with my current work load and children. Additionally, my wife is now taking business trips again. A week long one comes next week.
I am months behind at work. Am up till 2 or 3 am each night and up around 6 am on weekdays. My postings here are usually typed on the crowded trains or as today, over my morning coffee and now lunch. I have just counted the 68 x 3 pages I printed late last night that I need for tomorrow to make sure the printer didn’t skip any as seems to happen each time I don’t count them.
The time just does not exist.
Is the current Queen of England the sovereign?
As sovereign, does she not represent the UK?
As sovereign, does she not delegate her responsibilities to her children and grandchildren (and their spouses) from time to time?
As a representative of a foreign government on behalf of Queen Elizabeth II, does that not make the Duchess of Cambridge and the Duchess of Sussex both diplomats?
If so, then is this whole issue not moot? Doesn’t representing a foreign power equate to a loss of US Citizenship at some point? Or at the very least prevent a child from receiving citizenship via jus sanguini ?
@Japan T,
10 minutes per day reviewing flash cards. Given the stakes, can you not make the time?
The fact that you used to have the level needed is a good thing. It is easier to re-learn than to learn from scratch. I think you will find it goes more quickly than you may be thinking.
@foo
“10 minutes per day reviewing flash cards. Given the stakes, can you not make the time?”
On three to five hours of sleep a day, no. On the off chance I do, retention is nil. I must use 99.9% percen if my non work time thinking of you to fit 40 hours of work into a 24 hour time period.
“The fact that you used to have the level needed is a good thing. It is easier to re-learn than to learn from scratch. I think you will find it goes more quickly than you may be thinking.”
Oh, I have had to start anew several times. I know precisly what it takes from experience. Have neither the time nor the youth of my previous restarts.
But, Foo, thanks. I mean that. Thanks.
@Japan T,
By the way, the following may ease some of your anxiety:
http://www.sapporozairyu.com/外国人在留・海外業務/2019/
Summary: even if your passport expires, it doesn’t affect your visa status. Of course, you wouldn’t be able to leave the country, but neither will you get deported.
So even if your US passport gets cancelled or cannot be renewed, you can keep living in Japan with your family.
@GetMikey
I would think so, if for no other reason than to avoid the public airing of such nonsense and spur retaliation. But, if the reports are true, it does seem the IRS is going to pursuit it.
@foo,
Thanks, I will look into that. I am doubtful, however. Even with a PR visa, I must carry my residence card, which must also be renewed. As I have understood the situation, if my passport is in some way nullified, as long as I avoid dealings with the police, no problem until time to renew my residence card.
Also, my employers ask for my visa status and passport from time to time. One of them twice with in six months. That was earlier this year.
Must also provide my residence card along with my My Number card each time I take on a new job or a current job renews. I have to provide this info several times a year.
@foo
Now that is interesting. Will dig deeper. Many thanks. Do you know when this has changed? Unless my wife got it wrong (believe me, not likely), this was not the case up till a couple of years ago at least.
Man, skies are groing clearer already.
Slingy:
“Had to complete an IRS U.S> W-8BEN form declaring that I am not a U.S. citizen.”
Did you ask what it was for?
Nononymous:
“… perhaps your investment account included US securities, in which case it’s needed to determine withholding on dividends – I think”
That’s my understanding also: a US citizen investing in the US gets a higher withholding rate and can file a US tax return to claim US citizen tax breaks to refuce it.
A non-US citizen can’t file a US tax return to reclaim excess tax, so less tax is withheld. AIUI. ICBW. etc