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!”
@Karen…LOL LOL……a Kodak Moment. 🙂
I can picture you guys holding hymnals and in unison…..tears in my eyes.
Hey, thanks for all your effort in OZ….lots of Commonwealth Citizens are watching you guys and rooting for you.
The other day I had a need to open a prepaid travel card for an upcoming trip. The popup box asked place of birth and because a certain country was selected the application stopped full stop and I was advised they could not issue a card to me. This was even before Citizenship was asked in which I would have stated one.
@George – “The other day I had a need to open a prepaid travel card for an upcoming trip. The popup box asked place of birth and because a certain country was selected the application stopped full stop and I was advised they could not issue a card to me. This was even before Citizenship was asked in which I would have stated one.”
Not Oyster I hope? 🙁
@iota…..do not think we need to worry about that one. I found a card I could easily open but the fact that I got bounced from one…..well it was rather disturbing.
I agree. If it had been Oyster I was going to say that that would be an excellent case to take to one’s MP.
@Iota, I know the new NS&I bonds in the autumn statement are basically “&*^ because of the low purchase limit but I would guess that US Persons would be excluded from buying.
That might be a nice lever to pester MPs with……
British Citizens who carry solely a UK Passport but because of misfortune of birth are unable to take advantage of this new offerring unless they pay a foreign power £2,000.
@George
The renunciation was a family bonding moment – reading the oath in unison was a bonus.
I find this concerning:
I am no longer a US citizen. I can’t change my place of birth. If a financial institution were to deny me services because of my place of birth, it would be discrimination, plain and simple.
Thanks for your kind words about our efforts here in Oz. (be careful though, some words mean different things down here 😀 )
@George – “I know the new NS&I bonds in the autumn statement are basically “&*^ because of the low purchase limit but I would guess that US Persons would be excluded from buying.”
Unlikely. NS&I is “deemed compliant”. Some of their accounts are not available to USPs, but bonds are usually ok. Even if USPs were barred, there would be no grounds for complaint as long as it was stated in the t&c’s. Which it always is.
The disturbing thing about your pre-paid travel card experience is the fact that you were denied on the grounds of your place of birth – not citizenship. Don’t think they’re supposed to do that unless they have a good reason.
@Iota, that last set of “OAP Bonds” excluded USC.
The problem is that excluding British Citizens resident in the UK who happen to be USC by no fault of their own is patent discrimination regardless of T&C.
@George – interesting. Maybe they’re tightening up as FATCA implementation proceeds.
“The problem is that excluding British Citizens resident in the UK who happen to be USC by no fault of their own is patent discrimination regardless of T&C.”
I’m not a lawyer, but as I understand it, citizenship is not a protected characteristic (https://www.gov.uk/discrimination-your-rights/types-of-discrimination). Place of birth (national origin) is. ICBW
@Iota………..from the link…..”nationality.” Its a subset of race, I made that omission many moons ago too…..
@Iota…….BUT I do suspect somewhere in UK law there is a provision like in Canada with the Charter where they have some sort of notwithstanding clause to throw you under the bus.
@Iota…..do you find that friends and family are in disbelief when you explained your situation?
@George – again, I’m not a lawyer, but my layperson’s view is that banks are probably entitled to exclude USCs if it’s in the t&c’s. I guess we’ll have to wait and see if it ever gets challenged. If interest rates ever rise enough to make it worth anybody’s trouble. 🙂
I don’t think HMG is throwing anybody under any buses.
My US family were incredulous when I told them about CBT, and FATCA. My children thought it was absurd, and I should ignore it. I came to realize that they were right. (On the other hand, it was only due to researching renunciation that I learned of the Totalisation Agreement, which has resulted in my receiving SS. 🙂 )
This is no surprise when the entire process resembles a religious cleansing ritual, of which I’m still in the hair shirt phase.
Going back to the Caroline case,just suppose that instead of listening to Max Reed et al,she simply files the info at the bottom of her bird cage. So what if her tax info is shared with the IRS ? So what? Being in tune with the younger generation where privacy is nonexitent,she might not care less.After all, privacy may just be a fiction in todays world.
But to the point,many of you have renounced,but I believe that most expats ,accidental or not,aren’t going to land at the consular doorstep but are going to avoid it because it makes no sense ,simple and clear. For Caroline to start filing returns after 50 years or paying for extortion is beyond reason.
@Robert Ross…..on my side of the pond according to census data there are around 30,000 accidentals (born in the USA) who do NOT consider themselves “American” and do not have a US Passport.
I know “them” and they are all JAM..”just about making it.”
They can NOT afford to renounce.
They can NOT afford to hire a trans-national accountant.
They will NOT renounce and they will NOT file because they are British Citizens living in and fully tax compliant with the laws of the United Kingdom, they are NOT tax cheats.
@bubblebustin,
“…the entire process resembles a religious cleansing ritual, of which I’m still in the hair shirt phase.”
Laughed so hard I spit out my coffee.
Thanks!
I think of it like trial by ordeal in the Dark Ages – if you drown, or are severely burnt, maimed, or die, you might be judged innocent ……
https://en.wikipedia.org/wiki/Trial_by_ordeal
People differ. My position was very similar to “Caroline’s”. I renounced a.s.a.p. and thoroughly enjoyed every minute.
@bubblebustin;
First is achieving the holy state of US extraterritorial CBT ‘compliance’ (as you know, no quick, inexpensive or mean feat to attain and prove) and then comes atonement for the sin of living, earning , saving and paying taxes according to one’s local laws outside the walls of the US, and now the ongoing rituals to maintain that blessed state into the future, which must apparently include a built in degree of injustice and suffering as well as ongoing balancing on a wire above camouflaged pitfalls, forever and ever in order to assuage the US Treasury and FINCEN deities.
I jumped through the lengthy series of fiery hoops of complexity, layered and confiscatory penalty structures, incomprehensible forms, irrational rules, and illogical complexities, past the relinquishment ritual performed in person before a State Department priest – held only the sanctified grounds of a US consulate, on past the last trials of 8854, last return and final FBAR, in order to finally reach the other side of the river and be free after years of effort and local legal Canadian savings paid to a US homeland tax worshipper – but did not come out unscathed. I guess that is how the US knows it worked – the scars on myself and my Canadian family proved that I STILL wasn’t a UStax-evading-moneylaundering-terrorfunding-druglord.
The US extraterritorial tax system works just like the trials by ordeal in the old days……. guilty until proven maimed.
@badger
Glad I could make someone laugh 🙂
Yes, exactly! The renunciation process is nearly as arduous. The financial cleansing one must undergo to to prove to the powers that be that one doesn’t owe the US a dime in income or exit tax, the scrutiny one is subjected to in determining if one’s heretic act is of their own free will, the waiting for judgement.
This shirt grows itchier every day. I see myself in the not so distant future donning only the beaver pelt and walking out of my own Dark Ages into the light, cleansed of the sin of being an American who dared leave the homeland. How does it feel?
@Badger
Did not catch your last post before I posted mine. Well put.
Glad you made it @iota!
I’m in favour of whatever leaves the least scars.
I said (in regard to NS&I barring US Citizens from buying the new bond issue) “Maybe they’re tightening up as FATCA implementation proceeds.”
Remembered why some NS&I accounts are open to USPs and others are not: some are exempt products (Annex II, Paragraph III.B).
@Bubblebustin, re;
“How does it feel?”
Felt and feels like a huge dark threatening cloud lifted. For myself, and for my family’s future.
Big immediate relief – though of course that wasn’t the end of it – US CBT was the gift that kept on giving – the IRS compounded things with escalating yet erroneous computerized autodemands for an imaginary sum for months after the fact – a sum which was entirely and obviously baseless, imaginary and absurd given the paltry sums on my last returns – but which cost me much effort and time and additional stress to resolve because they are so clueless and short staffed (though this time polite unlike some were prior).
A useless empty exercise for both myself and for the US – it brought the US zero revenue (it actually cost them; a ‘refund’ to me plus the considerable IRS, Treasury and State Dept. staffing costs to process the useless endless stacks of documents that continued to add up to a big fat zero no matter what – which was entirely predictable) and of course there were no illicit ‘offshore’ moneylaunderingterrorfundingdruglordtaxevasions to uncover in my entirely ordinary local legal Canadian accounts.
The only lasting remedy and recourse I had to stop the torment for the rest of my life and help my Canadian family was to surrender my legal and constitutional birthright.
Well, so be it.
The US gained only my enmity and continued determination to participation here in order to resist and repel this US invasion of my home, and my opposition to any Canadian politicians and policies who seek to surrender/pander to the US invader and make Canadians suffer and pay for it.
@ badger
I’m so grateful that your OVDI ordeal has brought us one of our best and most determined resources but I absolutely seethe when I read about it. If this FATCA/FBAR/CBT mess is ever made right, you can be proud of playing a big role in that process.