Just Saying No: Not Renouncing/Relinquishing Nor Complying
Some people cannot afford to renounce (or relinquish and get a CLN) and some people will not renounce or relinquish because they do not consider themselves to be US citizens.
This thread is a place for people in this situation to share information and experiences. Thanks for sharing — your stories will be very helpful to others!
As someone who was “flagged” electronically in Canada via a pre- USA clearance automated passport machine as having a US birthplace (but a Canadian passport), I expect that EVERY time I was to use that machine the results would be the same. (most large hubs use them) I cannot afford to renounce, and thus feel perpetually banned from visiting family and in particular my 2 yr. old grandchild. A truly disturbing situation with no conceivable resolution in my world.
I copied Karen’s question to the Entering the US page and moved the replies there.
That’s essentially what I have been doing. But what do I do if I get a letter from the IRS? I’m a higher income professional. I’ve got a net worth right now of about $500k, and I expect that over the next 20 years I will amass a stock portfolio worth a couple of million dollars. While that sounds like alot that is going to be my retirement savings. I don’t really want to get screwed in 15 years, but for the life of me I can’t imagine that happening (given the fact that it has not been for the last 60 years).
It is a terribly stressful situation for me. I don’t really want to spend a huge amount (likely 20%) of my net worth now just to take care of something that is grossly unfair. That being said it does not sound like there is a great deal of sympathy for people like me in government.
I didn’t know you could renounce without tax compliance?? I was told I had to file 5 years of back taxes at the time of renunciation, is this inaccurate? Are the consequences to renouncing without filing? I would happily renounce tomorrow and pay the $3000 to do so.
@Anonymous
I renounced in September last year. I have never filed a US tax return in my life, and I shan’t be doing so now. However, I have no assets or income in the USA, and I’m a financial minnow.
The Embassy will not ask you any questions about your tax status. As to whether there are any consequences, who knows? Supposedly the IRS will be sending ‘soft’ letters to those who renounced without filing. The question is, how much can they do to someone who has no US income or assets? And would they bother chasing it up?
Someone who helped me think this through was Keith Redmond. You can find him on Facebook in the group American Expatriates.
@Anon
Everyone freaks out early in this process, then they stop freaking out.
Why would you receive a letter from the IRS? How would they know who you are, or where to find you, unless you somehow volunteer that information via FATCA?
Currently, there’s no problem. You tell banks that you’re Canadian only, you file no US tax returns or FBAR forms, and all is well. In the unlikely the event that on the basis of no available information the IRS (1) somehow discovered your existence, (2) somehow determined what you earned and were worth, (3) somehow determined that you owed it money, and (4) attempted to collect that money, you would be protected by the fact that per Article 26 of the US-Canada tax treaty, CRA will provide no collection assistance to the IRS against tax debts incurred by a Canadian citizen (as long as they were citizens at the time the liability arose, which you would have been). All you’d lose is stress-free holidays south of the border.
Some future trip across the border may result in a customs person telling you that you need to obtain a US passport because you were born in the US and are therefore a US citizen, just so you know. But that has nothing to do with taxes.
All that being said, we can’t predict the future. It could be that ignoring this is the smartest course of action. It could be that spending $100k to come clean now will prevent you enjoying your retirement years locked up at Guantanamo, if it all goes very badly. Sort of depends on how rich you plan on becoming, I suppose.
You can renounce without doing anything on the tax front. Your accountant was full of shit, like most of them. The five years compliance is required to exit the US tax system. Renunciation is a citizenship matter and completely separate; all future tax obligations end the moment you renounce. However, if you renounce without any tax filings, the IRS will consider you a “tax citizen” in perpetuity. We used to say “so what?” but very recently there were some noises that the IRS is going to follow up with people who’ve renounced but filed nothing. Probably it’s still going to be “so what?” given the impossibility of collection, but you should at least be aware that the IRS realizes it has a compliance problem with former citizens.
How important is US travel for you? That may or may not be a factor to consider.
Your options, in summary:
1. Do nothing and lie to banks; good strategy now but can’t always predict what’s to come, and bank compliance may be tighter when you start building up some serious net worth. (It’s pretty easy when you only have a five-figure RRSP to your name.)
2. Do nothing and tell the truth to banks; the IRS will know you exist from FATCA reporting, but otherwise can’t do much under current law.
3. Renounce and do all the tax filings “by the book” at great cost, but at least you’re done and out.
4. Renounce and do nothing, throw away any letters you receive from the IRS and assume that won’t be a problem unless a treaty change makes it possible for the IRS to come after you in Canada.
5. Renounce and file an 8854 form with a bunch of zeroes on it – perfectly feasible if one is a stay-at-home parent with no job and all the money is in the spouse’s name – and assume that with no FATCA data the IRS isn’t in a position to dispute anything you’ve said. If it works, you’re out of the US tax system forever; if it doesn’t work they’ll want you for perjury so goodbye winters in Palm Springs.
Not an easy choice, but there you have it.
Point of clarification.
If one renounces without filing any US tax forms afterwards (five years compliance with returns and FBAR plus the 8854 and whatever else might be needed) then two things happen:
– all future US tax obligations cease
– one is still considered a US “tax citizen” by the IRS so any obligations incurred prior to renunciation would still be subject to collection, though of course that’s extremely difficult (impossible) for the IRS to achieve
@Anon
One does NOT have to be tax compliant when one renounces. It is a human right and no questions will be asked re tax compliance at the Embassy at the renunciation process.
Checking out of the US tax system is another matter and requires 5yrs of past tax compliance plus 6 yrs of fbars. However the IRS have only collection agreements with 5 countries but these agreements do not apply if one was also a citizen when the tax assessment would apply. All other countries do not have tax collection agreements with the US.
http://isaacbrocksociety.ca/2016/11/01/dual-citizens-of-sweden-france-netherlands-denmark-canada-take-note-your-country-will-not-collect-for-the-u-s/
Who knows if this will change but at the moment these rules apply.
If you decide (as others have) to renounce and ignore the back reporting, then you will be classified as a covered expatriate. There are deemed consequences to being a covered expatriate.
1. If you have any US heirs, then any inheritance they may receive from you (over approx $150,00) will be subject to a max tax rate (currently 40% ). However currently there is no provision to report this covered status on the US estate and gift tax form which your US heirs will be required to file.
2. There have been moves in the past to prevent covered expats from traveling to the US, again this has come to nothing and is considered unworkable, You will be able to travel to the US as any other visitor (120 days/year) rolling average over 3 years.
@ Anonymous for Reason,
As BirdPerson and Ron have explained, you can renounce without having filed taxes. The CLN remains valid even if a person never files taxes. Also here’s a link to an info sheet on the interactions between DoS and IRS.
Although the IRS does receive a copy of each CLN issued, for practical purposes it’d be a waste of time and resources for IRS to try to assess people whose entire income/assets is outside the US, let alone do international collection against them, as it’s complicated, costly, and close to impossible to make an assessment in the first place. In any event, in the case of a person who was a Cdn citizen at the time the tax debt arose, IRS can’t get RevCan to help them through the mutual assistance clause, so they’d have to first get a US tax court judgement and then file with Cda’s tax court to make it executable in Canada, more complicated and costly.
FWIW, I don’t think they could even get a judgement without presenting a tax assessment to the US tax court (which they can’t do if they have no knowledge of the person’s income/assets) — warning, I don’t know much about US tax law; but that’s a general principal in litigation, when you want a court to issue a judgement to force a person to pay a bill, you have to present evidence of (1) exactly how much you want to collect and (2) what you based this bill on (how the amount was arrived at), both of which factors would be lacking in this scenario.
@anon
Clarification
‘These agreements do not apply if one is also a citizen of resident country when US tax assessments are calculated ‘
@ Anonymous for Reason,
As you’re in Canada, further to Heidi’s comments, here’s a link to the Canada-US tax treaty, specifically s. XVIII(8):
https://www.fin.gc.ca/treaties-conventions/USA_-eng.asp
Posting here because comments are closed on the US passport revocation thread. Moderator, please move to wherever is appropriate.
Anecdotal story that appeared recently on Keith Redmond’s Facebook group. The lesson here being, don’t leave an IRS debt in your wake when you depart the US for several decades but only have the one passport.
@anon
If renouncing and ignoring the back filing would worry you, then why not back file 5 yrs yourself? If your net worth is below 2,000,000 then you will not be covered, Perhaps you could keep it ’simple’ ?
Anon for a Reason
Welcome to IBS where you will get some answers- some of them confusing or conflicting.
Many of us have been down this road.
Firstly, don’t panic and don’t rush. Secondly, don’t tell anyone where you were born or file any US forms unless you are good and ready
You could continue exactly as you have been doing. Your bank will ask you if you are liable for taxes in any other country when you open a new account. Just say no. If you develop a relationship with a financial advisor, you have to trust him or her before you mention your place of birth. At some point, a border guy will point out that you should have a US passport. You could answer ‘ I left as a young child, my parents never told me I was American, I don’t have any proof in order to get a passport but thanks very much for your concern and advice ‘
You could renounce your US citizenship. This might seem weird because when you ask for an appointment to do so, they ask for evidence that you are in fact a citizen. Costs about $C3000.
If you renounce, you are not obliged to file tax returns- you are meant to.
We were faced with a similar dilemma. It took 5 years to solve the problem. If you decided to back file 5 years of US taxes, it would be best if you could offset all of your income with the ‘foreign’ income exclusion or ‘foreign’ tax credits. When there is no tax owing, there are no penalties. If your tax return is complex, back filing ain’t easy. We paid an accountant about 4K to do 5 years of taxes. Did fbars and the exit tax return ourselves. Didn’t owe the IRS a nickel.
Good luck.
I second Heidi’s 1:09 pm comment. The important thing is for each person to do what is the most comfortable solution for them.
I’m very comfortable with if one has not been filing, don’t start just because you’re renouncing. I cringe when I read about people who got tricked into filing by a condor. But I feel if one does their research, thinks it over very carefully, and feels they’d sleep better if they do the IRS filing, that’s the right decision for them. There’s no rush to do anything, though. If one wishes to follow the IRS expatriation procedure, one has until 15 June of the year following the renunciation to file the 8854 and five previous tax years.
Crucial point – this is a general statement about US persons outside the US who have not been filing US taxes, including, but not limited to, those who are expatriating – *never* start to file without doing one’s research and thinking it over very carefully. There are fact sets and personal reasons where filing is the better option, but *never* rush into it. Especially right after OMG day, when one’s head is spinning in abject panic, it can take a while to calm down and research and think clearly.
Small point of clarification:
As US birth certificate is generally all the proof that’s needed, unless one tries the “my parents were diplomats” excuse.
@Anon…..
Lots of good advice here, but I have a comment about the option of renouncing without filing anything. Heidi mentioned that doing so will cause the IRS to classify you as a “covered expat”. I’m not convinced that actually happens because the information you supply on a Form 8854 is what the IRS needs to make the determination. Its more likely you just wind up in a sort of limbo, perpetually unclassified. (Curiously, the IRS has a deadline for filing Form 8854 but there is no prescribed penalty for filing it late. “Never” is a sub-category of late!)
So if you renounce and file nothing, the State Department will notify the IRS you renounced but that’s all the IRS will know and its essentially useless information. Theoretically, some diligent IRS employee could do some research and if you were fabulously wealthy they could possibly conclude you owe them something, but overworked, underpaid, low level government employees have never been known for their initiative. I have never heard a report of this actually happening.
So is there risk in this approach? Sure there is. But there is also risk in back-filing 5 years along with a Form 8854. My rule of thumb is this: Never tell the IRS anything they don’t already know. In your case, they don’t know anything. I suggest you keep it that way. Personally, I see Form 8854 as nothing more than supplying the IRS with a shopping list of your assets so they can take a shot at charging you “exit” tax on assets that were never in their country in the first place.
We’ve seen repeatedly that its those who try to follow the rules that are the ones who wind up having trouble with the IRS…My $.02.
AFAIK, Anon for a reason didn’t tell us whether or not he has a US birth certificate. He doesn’t have a SS number.
Renouncing, and not filing is certainly a viable option. State will inform IRS. Without a social security number or TIN , IRS is virtually blind.
@maz57
There was recent news to the effect that the IRS might begin sending “soft letters” – whatever that means – to anyone who renounced but who had not come into tax compliance. Literally that’s all the information we have. I don’t think this is particularly scary, nor does it invalidate any of the points you made above, but it suggests that someone at the IRS is at least now aware that some renunciants ignore the tax side of things.
@Anon
I agree that the 8854 can be an IRS shopping list of your assets, but if those assets are below the $2,000,000 mark then no exit tax is due and even if you are above that level an exit tax of 15% is only charged on unrealized gains above aprox $700,000.
So you could be covered (having over 2 million) yet still not owe an exit tax if you haven’t made gains over $700,000.
I also want to add that IRS officials may be underpaid but I expect they are on a bonus or commission in which case there would be an incentive to look for high net worth renunciants!
Stay calm Anon, consider your opinions carefully, as Pacifica says, you have plenty of time to decide.
If you decide to renounce this year then you have until June 2020, renounce next year, then you have until 2021, to file .
It’s more complicated to file because I currently have a corporation and have for the past number of years. My understanding is that due to corporate tax law in the USA I will be taxed at a higher rate? Is this not accurate?
I don’t care if it costs under 10 grand; my peace of mind is worth that to me. But I don’t want to pay 40-50 (obviously). But I don’t have a SSN, and so would need to apply for one before I could do anything. It just seems not worth it to me, but every few months I lose sleep about it. If I could know my total tax burden and how much it would cost it would be much easier to quantify what I want to do.
@anon
Having a corporation does muddy the waters especially with the transition tax, it is not simple.
Right now the IRS do not know you exist, let alone your corporation or net worth, I would keep it that way, renounce but don’t open a pandora’s box.
You might want to get an expert opinion on your potential cost of compliance, with the corporation and all. You probably want to have a lawyer act as cutout between you and the accountant, for reasons of privacy.
You could forget about the corporation and send them a “simplified” version of 5 tax returns and 8854, but then that opens to door to possible perjury charges. The transition tax requires you to send them a portion of your retained earnings inside the corporation (i.e. your retirement savings or cash you planned to use to grow the company). Its not just the cash up front, its the potential earnings of that money going forward forever. Plus its a deemed distribution so you don’t get a corresponding Canadian tax credit. Instead you wind up also paying Canadian tax on that money when there is a real distribution. Its a can of worms and you don’t want to let it happen to you. There are a few here on Brock who are struggling with this as we speak. Another example of those who try to comply are the ones who get hurt the most.
Right now you can legitimately argue: “I had no idea I had to file US returns. Who could ever imagine such an outlandish thing?”. The good news is you have plenty of time to research all the options because they don’t even know you exist. Really, you hold all the cards here, unless you make a grave error (like getting tangled up with a compliance condor). Did I mention don’t ever tell the IRS anything they don’t already know?
We did as Ron suggests. Hired a lawyer who hired the accountant. It turned out to be way too expensive and risky to comply via OVDI. ( at that time it was considered a no no to do a so called quiet disclosure.). It was costly but worth it.
@Anonymous For Reason – @Ron Henderson ande @Portland are giving you good advice – to repeat:
You would not want to enter the U.S. tax system without a very clear understanding of what it would cost in terms of taxes, possible penalties and professional fees. You will NOT find this kind of technical information in one organized place on Brock or any other site.