Read below the sorry situation “Caroline” finds herself in.
The tax attorney Max Reed suggests three options: 1) Obtain a CLN; 2) Do nothing; OR 3) Catch up on U.S. tax returns and renounce (i.e., NOT relinquish) citizenship. How do you suggest a tax attorney should advise Caroline?
Tax attorney Max Reed opines and three attorneys (John Richardson, Virginia La Torre Jeker, Michael Miller), PLUS Shovel AND USCitizenAbroad comment on whether a foreign (U.S.) “tax-citizenship” law that might or might not impact on Canadian Caroline is retroactive.
The case of “Caroline”:
In advisor.ca there is an article by Max Reed with commentaries about whether a foreign U.S. (At present, the U.S. is considered by the United Nations to be a country foreign to Canada) tax-citizenship law should be applied retroactively to a Canadian. Read the entire article and commentary on an issue that has often been discussed on Brock.
Max Reed cites the example of a “Caroline”, a Canadian who relinquished U.S. citizenship in 1978 and has no CLN (Certificate of Loss of Nationality). Her bank sends her a FATCA letter and says that it will report her to the IRS unless she comes up with a CLN.
“In September 2016, she goes to the U.S. State Department to get a CLN to document her loss of U.S. citizenship in 1978 [good idea?]. But what is the exact date of Caroline’s loss of U.S. citizenship for both U.S. tax and immigration purposes?”
Max Reed provides a “common sense” view in the article and also, below, what he feels is a “literal reading” of a 2008 U.S. law:
“The literal approach is based on a strict reading of the law. Since 2008, U.S. tax law has set the date that a person loses U.S. citizenship as the earlier of the date that he applies for a CLN at the Department of State or the date the CLN is issued… Under the literal approach, because Caroline never obtained a CLN, she remains a U.S. citizen until her State Department visit in September 2016. This means she would have had tax obligations to the U.S. government for the previous 38 years – despite losing her citizenship for immigration purposes in 1978…”
Virginia La Torre Jeker comments:
“The collective view of several distinguished US tax professionals is that the current version of the expatriation provisions as spelled out in Internal Revenue Code Sections 877A and 7701(a)(50) as enacted by the HEART Act must have prospective application only… If a later Congress had intended the “surprising result” of retroactivity when passing the 2008 expatriation laws, it would no doubt have spelt this out very clearly….
John Richardson:
“1. What you describe as the “literal” approach is based on reading the exact words of Internal Revenue Coce S. 877A. S. 877A(g)(4)in its opening language addresses those who are “citizens”. Not past citizens. It reads: “A citizen shall be treated as relinquishing his United States citizenship on the earliest of—”
What it means to be a U.S. “citizen” is not defined in the Internal Revenue Code. It is defined only in the Immigration and Nationality Act. Internal Revenue Code S. 877A came into force in June of 2008. Therefore, it seems reasonable to assume that if one was not a U.S. “citizen” under the Immigration and Nationality Act in June of 2008, then S. 877A(g)(4) should not apply to that person. To put it another way: the “literal approach” would/should lead to the conclusion that Caroline, who became a Canadian citizen in 1978, was not a U.S. “citizen” for tax purposes in June 2008.
2. Prior to 2004 there was no provision in the Internal Revenue Code that allowed for one to be a “tax citizen”, if one had relinquished U.S. citizenship under the nationality laws. In other words, if NOT a citizen under the nationality laws then NOT a taxpayer. This means that those who relinquished U.S. citizenship prior to 2004 under the nationality laws, were not subject to taxation under the Internal Revenue Code. The 2004 law (that created the “tax citizen”) specifically stated that the creation of the “tax citizen” under the Internal Revenue Code was prospective only. It seems unlikely that the enactment of S. 877A in 2008 would have changed what was clearly a prospective concept to a retroactive application.
Therefore, whether one takes the “literal approach” or the “common sense” approach, the notion that Caroline, who relinquished U.S. citizenship in 1978, owes U.S. taxes, is hard to justify under the law.”
Michael Miller:
“…But, just to provide a taste, it’s interesting to note that even the so-called common sense approach is very easy to square with a literal reading of the statute.
If you start with the proposition that, prior to 2004, anyone who relinquished citizenship for nationality purposes also ceased to be a citizen for tax purposes, and add in that the 2004 legislation expressly grandfathered those persons, then you have to start your consideration of the 2008 legislation (including, in particular, IRC section 7701(a)(50), with the understanding that Caroline had ceased being a citizen for tax purposes in 1978.
With this in mind, the question is what do we make of IRC section 7701(a)(50) which says, in pertinent part, that “An individual shall not cease to be treated as a United States citizen before the date on which the individual’s citizenship is treated as relinquished under section 877A(g)(4)” Well, Caroline didn’t need to cease to be treated as a citizen at any time when this statute was on the books, because she ceased to be a citizen in 1978. Therefore the common sense approach dovetails with the language of the statute once it’s understand that, by saying what’s needed for an individual to cease being a citizen for tax purposes, the statute should have no impact on someone — like Caroline — who has already ceased being a US citizen.
And, above and beyond that, it’s important to understand what the contrary interpretation would mean. Since Carolyn had long since ceased being a citizen for nationality and tax purposes when IRC sec. 7701(a)(50) was enacted, the so-called literal approach would have to affirmatively restore citizenship that had previously terminated in order for this provision to apply — which is clearly absurd. Therefore, since marketing is everything, I would choose to characterize the competing interpretations as the absurd one and the non-absurd one.”
— Shovel notes:
“Anyone who relinquished before 2004 and is thinking of filing U.S. taxes (or is being told to file as part of a current tax citizenship expatriation) needs to read these instructions from the IRS carefully.
“2015 Instructions for U.S. Form 8854″
“Initial and Annual Expatriation Statement”“Purpose of Form”
“Form 8854 is used by individuals who have expatriated on or after June 4, 2004.”
https://www.irs.gov/pub/irs-pdf/i8854.pdfThe IRS itself here plainly says that if you expatriated before June 4, 2004, Form 8854 is not for you. Throw it in the garbage. Do not read on and get yourself entangled in the mumbo-jumbo rules that apply only to those who expatriated on or after that date.
But they’re only to happy to take you and your money if you don’t know how to read.”
USCitizenAbroad:
“The question asked by Stephen Kish is how should Caroline be advised. Mr. Reed proposes two interpretations of S. 877A which he calls the “literal approach” and the “common sense” approach. One problem of reading articles written by the tax compliance community is, that by focusing on the theoretical, they minimize the “real life” consequences to the people they advise. So, what are the “real life consequences?” The “literal approach” results in the destruction of your life. The common sense approach means that you still have a life. (Which do you think is the better approach?)
Here is why.
Rather than frame the issue as “the literal approach” vs. the “common sense approach”, the issue should be framed as:
Approach 1 – Your Life Is Over: Under this “literal” interpretation of S. 877A, you poor dumb former American will have to turn your life savings over to the IRS (and pay the adviser to help you do this) because you did not go out and obtain a CLN. It doesn’t matter that a CLN was not required by law. It doesn’t matter that you didn’t know what one was. It doesn’t matter that the U.S. Government was threatening you with the loss of your U.S.citizenship if you became Canadian. It doesn’t matter that in some cases the U.S. was denying entry to the USA to those who had become Canadians. What matters is ONLY that this is what the statute says NOW!!!!!!! So, you better step right up and turn your life savings over to the IRS.
Approach 2 – It’s Your LIfe! Why don’t you keep it!: Let some “common sense” prevail. You were one of the smart ones. Because you relinquished U.S. citizenship – according to the clear laws of the USA in the 1970s – you are not affected by this new law. The only people affected by this new law are the “dumb bunnies” who decided it was a good idea to be a U.S. citizen AND were U.S. citizens when this law took effect on June 16, 2008. I don’t think you should draw attention to yourself. You might want to document the circumstances that led to your becoming a Canadian citizen in 1978. When documenting those circumstances, you probably should make it clear that you were intending to relinquish U.S. citizenship. But, either way you have to sleep. So, you might as well – Sleep well!. There is no good reason to turn your assets over to the IRS and pay your adviser to help you do it.A fair reading of the legal commentary on this issue appears to be:
One group of lawyers (including the three who commented on this article) do NOT believe that the “literal” (or as Michael Miller says, the “absurd”) approach is correct.
A second group of lawyers thinks that the “literal” approach MIGHT be correct. But, they aren’t really sure. Even though they are not sure, for reasons known only to them, they usher clients into turning their assets over to the IRS. Hmmmm, …
Given the existing commentary and lack of certainty (on the part of those who recognize the “literal approach”), what I can’t understand is:
1. How any adviser could possibly advise a client that the “literal” approach is correct (turn your assets over to the IRS). Yet, we know that a very large number of people are being advised to do just that. (Note that, since June 16, 2008 a CLN is most certainly required lose U.S. tax subjectness. But NOT before.)
2. How any client, given the existence of conflicting views, could possibly allow themselves to be guided into accepting that they should turn their assets over to the IRS. (Actually I know the answer. It’s because there is ONLY one certainty in life. If you turn over all your assets to the IRS, then you will never have tax problems again. But, you won’t have a life either and then you will have a different set of tax problems.)
This reality notwithstanding:
There is/are a large number of people who clearly relinquished U.S. citizenship many years before the current laws, who have allowed themselves to be guided into the “literal appraoch” – turning their assets over to the IRS.
Conclusion: The result that you get will be determined by your choice of adviser. Think about it!”
In any case, back to the original purpose of this post:
Caroline is a resident of Canada. I am assuming that Caroline is also a Canadian citizen. So we have a Canadian citizen resident in Canada.
It seems to me that the first thing that a Canadian lawyer (I note that the rules of B.C. Professional Conduct are included in this post) might be to say:
1. You are living in Canada. There is NO Canadian law (no matter who you are) that requires you to comply with U.S. tax laws. Canada may found it amusing. But Canadian law does not require compliance.
2. The Canada U.S. Tax Treaty means that Canada will not assist the IRS in collection on Canadian citizens
3. Neither of (1) nor (2) above affect the validity of the U.S. tax claim itself.
At a minimum, a Canadian lawyer should (I think) say the above.
Now, let’s say you are consulting a U.S. lawyer, “Foreign Legal Consultant” or “Enrolled Agent”. I suspect that (1) there is NO rule of professional conduct that would require them to advise on the above and (2) I suspect that they would just say: comply, comply, “It’s U.S. law”, comply, comply …. Did I say “It’s U.S. law”, comply, comply …
“You are living in Canada. There is NO Canadian law (no matter who you are) that requires you to comply with U.S. tax laws.”
When a country ratifies a treaty, the treaty becomes law in that country. Therefore that country can decide which parts of the treaty it will obey and which parts it won’t, the same way that country decides which parts of its other laws it will obey and which parts it won’t. (Its other laws include statutes, court rulings, and constitutions.)
If sad Caroline accepts the advice of the tax attorney and enters into IRS tax compliance through “Streamlined”, she will be required to provide a narrative to the IRS in EXTREME DETAIL explaining why she has been a bad person.
As part of Streamlined, Caroline will also be required to hunt down and turn over to IRS all of her tax attorneys and professional advisors (e.g., where they live) who gave her advice not in keeping with IRS regulations (see below).
From “IRS Certification by U.S. Person Residing Outside of the United States for Streamlined Foreign Offshore Procedures” Form 14653:
@Stephen,
Latest from Rettig on FBAR compliance mentions the IRS conduct of the Streamlined and OVD programs as well as the IRS approach in continuing to issue threatening statements which continue to add to the high mistrust of the IRS and which only serves to further discourage the ‘compliance’ they keep saying is their overarching goal;
Rettig, Charles P., Why the Ongoing Problem with FBAR Compliance? (October 20, 2016). Available at SSRN: https://ssrn.com/abstract=2856781
As a US attorney, of course the author is more concerned with how the IRS needs to appear more ‘trustworthy’ in order to increase the ‘voluntary’ compliance by those outside the US (specifically mentions those presumed to be non-compliant or recalcitrant US taxpayers residing in Mexico and Canada). Of course, for that US homeland author, coming into ‘compliance’ is unquestionably and simply the ‘right thing to do’.
Ignores ‘accidentals’, sovereignty, high cost and complexity, fairness, taxation without representation, etc.
@Stephen
Whoever wrote the IRS instructions has absolutely no conception of what it’s like to live outside of the US. It looks like they have just taken the domestic streamlined instructions and pasted them onto the foreign streamlined form.
What do they want? Twenty years of bank statements? My contact with my “foreign” account is that my pay is deposited fortnightly, I pay groceries, bills, etc. If you took this literally it would be excessively intrusive – plus the IRS would not have the personnel to actually read it (maybe that would be a good thing – drown them in paperwork).
@Karen, some of that is also reminiscent of the IRS assumptions and information demands of the 2011 OVDI. And as if everyone is a whale or a shark, not a minnow.
And given the conduct of the IRS, and the convoluted quicksands of the FBAR willful/non-wilfulness, the many information reporting forms, dates and requirements to fall afoul of, etc. it would seem to be more likely than not that to; “…….Include the whole story including favorable and unfavorable facts. Specific reasons, whether favorable or unfavorable to you, should include your personal background, financial background, and anything else you believe is relevant to your failure to report all income, pay all tax, and submit all required information returns, including FBARs…” would be fraught with extreme peril – and require the help of very expensive US tax lawyers beholden and subject to the US tax and legal system – with an inherent conflict of interest.
And of what frail use is what the ordinary person “believes” is “relevant”? Even the professionals cannot agree on much of the above. Seems like instead of the onus being on the IRS to ask its questions, it leaves the filer wide open to involuntary and inadvertent self incrimination.
Was I supposed to file in the US after I moved to Canada (sarcasm)? Every year I lived in the US, the IRS sent me a 1040 booklet with an address label attached to it. When I moved to Canada in 1993, I filed a final return with the IRS in 1994 for my partial year working in the US in 1993. After I moved to Canada, the IRS stopped sending me 1040 forms. I know they knew and know where I live from my previous US passport renewals (latest in 2010). As with the Streamlined program, perhaps the IRS commissioner can send each of us ex-pats a letter (a personal narrative) explaining why they lost touch with us– call it Reverse Streamlined. They should detail any and all conversations with their advisors, politicians, and tax lawyers, and US State Department staff as to why they failed to provide the same “service” and outreach to “expats” as they did to Homelanders. How was I to know I was supposed to file?!!
“Additionally, explain the source of funds in all of your foreign financial accounts/assets. For example, explain […], whether you opened it while residing in a foreign country, […]”
Yes they know what it’s like to be a member of the US’s diaspora. They’re doing this intentionally.
“I filed a final return with the IRS in 1994 for my partial year working in the US in 1993.”
You can only do that if you became a Non Resident Alien in 1993, such as by renunciation or abandoning a green card. I think it can also include an NRA ceasing to have substantial physical presence in the US but I’m not sure.
“After I moved to Canada, the IRS stopped sending me 1040 forms.”
How do you know? The size of envelope containing those forms is Canada Post’s favourite size for losing or stealing. They even lose mail that size going to or from the Canadian government unless it’s registered, and even one time when it was registered.
Also those were the days when the IRS was putting social security numbers on address labels, intentionally violating the Privacy Act of 1974. That was when I found one of those mailings displaying my name, address, and social security numbers to all passersby out in the street, obtained the Social Security Administration’s agreement that I was eligible for a replacement social security number, kept trying for 16 years until they reneged on their letter, and had my US withholding embezzled by IRS employees likely including Monica Hernandez.
If I were living in Canada instead of Japan, Canada Post wouldn’t have left the mail out in the street, they would have just dumped it.
“I know they knew and know where I live from my previous US passport renewals (latest in 2010).”
Do you suppose they might know an address from a person filing Form 8822 change of address notice? They’ve ignored mine. I even informed them twice that Japan Post will stop forwarding from my old address this December, and the IRS still doesn’t care.
@BC Doc
My story, exactly. Except when I called the IRS (long distance from Germany was extremely expensive back then), they told me twice in two separate calls to just file 1990 for the part of the year that was US income.
“We are not interested in foreign income”!?!?!
Forgot to add:
I gave them my current address on that form and my return was delivered there. I lived at that address for another 13 years and did not once get a letter or form from them.
The years before I was in the Army and moved about, but somehow they managed to know which unit I was currently in and sent forms to the proper address every year whether I reported the change or not (mostly not, who has time to think about taxes before April 15, 2 hours before the post closes).
‘when I called the IRS (long distance from Germany was extremely expensive back then), they told me twice in two separate calls to just file 1990 for the part of the year that was US income.
“We are not interested in foreign income”!?!?!’
Please file a request under the Freedom of Information Act to demand a copy of the NSA’s recordings of your calls to the IRS ^_^
I bet you would have got a different answer if you’d phoned the US Consulate in Frankfurt, which probably had an IRS office at the time.
@Norman Diamond and @UnforgivenToo
This was the experience of one of my ex-colleagues too. What’s so strange is that I lived here decades and have known some US citizens or dual US citizens during that time, not many but a few and not once did any of us in conversation ask if anyone was filing US taxes. It just never came up in conversation.
This ex colleague of mine I kept in touch with and asked her when all this came up. Unlike me, she lived in the USA until the 1990s and got married to a British citizen and moved. stopped filing and the IRS knew her first address for years and never once contacted her. She told me they didn’t contact her so she assumed she didn’t need to file. She is lying low now because she doesn’t have a US birthplace and no one suspects her of US taint.
The Obama administration has a lot to answer for. Taking obscure laws and unforced laws and pursuing innocent law abiding people over zero tax dollars in most cases. and extorting banks in the process to throw their own dual US citizens under the bus.
Also this is by no means advise but my streamlined statement contained a very simple short statement of facts and was accepted. However this so called statement of facts definitely was a key part of my decision to renounce. You are basically certifying to go forth and stay in compliance and sin no more. How can you sign something like that and feel confident of following the rules going forward when in a lot of cases the IRS and the accountants don’t even know the rules themselves.
also forgot to mention that another thing i learned is that people who entered the US tax system from abroad are the ones who suffered the most and are suffering still the most. And the utter lack of respect shown by the US government for other countries tax breaks and retirement plans is disgusting. the US will tax foreign pension plans as if they were a corrupt pension fund and the US will not provide any benefits in compensation.
So back to the topic at hand, why on earth would Caroline want to deal with any of this if she relinquished years ago.
@Norman Diamond
Unfortunately back then there wasn’t WWW, one used what information one could find, and in my case it was an old form (or letter, don’t really remember exactly) from the IRS with a telephone number.
And seriously, when two different people who are supposed to know on two different days say the same thing and no real other easily accessible information source, what would anyone not suffering from extreme paranoia do or think.
Knowing what I know now, I should have been as paranoid about those bastards then as I am now. Lying pack.
“Unfortunately back then there wasn’t WWW, one used what information one could find, and in my case it was an old form (or letter, don’t really remember exactly) from the IRS with a telephone number.”
In 1981 when there wasn’t WWW, somehow I knew the IRS had an office in the US consulate in Toronto. The information was probably in Form 1040 instructions, but maybe Publication 54.
“And seriously, when two different people who are supposed to know on two different days say the same thing”
Sure, and that would make recordings even more valuable. Of course I know you didn’t know what was going to happen, and in those days it wasn’t easy for honest people to record calls even if they knew what was going to happen, but surely we can dream about it.
Yes, one can dream. Unfortunately, ours dreams were nightmares. 🙂
“Virginia La Torre Jeker comments:
”
Further comments from Ms Jeker on retroactive tax legislation, in light of a recent case:
http://blogs.angloinfo.com/us-tax/2016/11/22/setting-the-clock-back-retroactive-tax-legislation/
I’m pretty sure the US Supreme Court legalized retroactive taxation around 200 years ago.
Calder v. Bull, 3 U.S. 386 (1798)
Milliken v. United States, 283 U.S. 15 (1931)
United States v. Hudson, 299 U.S. 498 (1937)
United States v. Darusmont, 449 U.S. 292 (1981)
This is why some of us say the benchsitters are judges not justices.
@ND
The cases above relate to specific cases where there is a question whether a given tax situation conforms to a laws intent as well as preventing its abuse.Also, the period of retroactivity is deliberately made short.
I wonder what your remarks have to do with Mme Jeker’s statement.
“The cases above relate to specific cases where there is a question whether a given tax situation conforms to a laws intent”
Yeah, the same question as in the present situation.
“as well as preventing its abuse.”
Preventing abuse of a law? A law which didn’t exist at the time of the transaction?
“Also, the period of retroactivity is deliberately made short.”
OK that helps, but some of us think the period of retroactivity should be zero, the same as for criminal laws.
“I wonder what your remarks have to do with Mme Jeker’s statement.”
You mean my reply to this:
‘If a later Congress had intended the “surprising result” of retroactivity when passing the 2008 expatriation laws, it would no doubt have spelt this out very clearly….’
and to her citation of United States v. Carlton 512 U.S. 26 (1994)? I remarked that the US has a LONG history of approving retroactive taxation.
The difference with these cases and the 7701.50.a issue is that the former has clearly defined players and smaller playing field.The latter still needs to define the players.Define clearly who are US citzens. What about those who lost or gave up their citzenship through retention lapses and other reasons.Visit the 1994 Naturalization Technical Corrections Act for a more refined taste.
Add to that the disjointed DOS enforcement of SC decisions and then you end up with bland, tasteless,unpresentable mess.
This a tangled mess that wont be straightened out by simple wave of a retroactive wand.
@Robert Ross, “Define clearly who are US citzens.”
I think the following would be more appropriate; “Define clearly and proportionally who are US citzens.”
“Add to that the disjointed DOS enforcement of SC decisions and then you end up with bland, tasteless,unpresentable mess.” Yep, but as we have learned here at IBS (thanks to Calgary), State literally attributes “priceless” and “most valuable passport in the world” in the definition of US which is part of the big picture problem.
State and Congress can NOT grasp that for many US Citizenship is viewed as; 1. something toxic, 2. as beneficial as chewing gum on your shoe heel.
That is why they have created a form of “religious ritual” in getting rid of it. It greatly resembles the same process of having a marriage annulled in the Catholic Church.
@George says
When we renounced, the three of us said the oath of renunciation in unison. It felt very much like a religious ritual.