Renunciation and Relinquishment of United States Citizenship: Discussion thread (Ask your questions) Part Two
Ask your questions about Renunciation and Relinquishment of United States Citizenship and Certificates of Loss of Nationality.
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NB: This discussion is a continuation of an older discussion that became too large for our software to handle well. See Renunciation and Relinquishment of United States Citizenship: Discussion thread (Ask your questions) Part One
Thanks, Heidi. That’s not Brock, that’s why I couldn’t find it here. Renunciation Guide has been around quite a while – longer than Brock. It disappeared briefly a few years ago, around 2013 IIRC, but was revived and expanded. Given its age, a few things are no longer current (eg, there’s no more Part III on the DS-4089 (formerly FS-581) and CLN processing now usually takes longer than 1 to 2 months), but overall a good resource!
@Pacifica
Yes, I found that guide invaluable back in 2012.
Glad Patrick is getting some help at the consulate, although I can’t think why they still persist with it for renunciations. The consular official I dealt with looked incredulous when I mentioned some consulates were requiring it to be filled in for renunciations, this was way back in 2012.
May I ask some questions that may have been covered some way back in the thread? I’ve gone back a long long way but things may have moved on anyway.
I’m considering renouncing. For various reasons, the time is probably not quite right. However, when it comes, I want to be ready. My situation is that I left the US when I was in my early twenties. I don’t think I ever paid tax when I lived there as I was mostly a student with some low paid summer jobs. I have a SSN but didn’t file or pay a tax return upon moving here and indeed I’ve lived in happy ignorance for the last 25 years without knowing there was any such bizarre requirement for me to do so. I’ve gone fully native in terms of both citizenship and finances and while things are relatively straightforward now, I do have a bunch of bank accounts, a PFIC which is current below reporting threshold (but won’t be forever), a pension, etc etc.
It seems to me that coming into compliance by backfiling 5 years of tax is going to be potentially difficult and expensive for me. I realise I could probably just muddle through it but I had a look at the forms and I am not feeling confident about my ability to do it myself. It also seems kind of silly to finally stick my head above the parapet to enter a tax system I don’t think I’ve ever been in and then screw it up by making a mistake. I have run the numbers enough to know that I don’t presently owe anything and I frankly take exception at paying thousands of dollars for an accountant to tell me that, on top of this BS extortion fee to renounce. I also take exception at the idea that I might end up owing taxes on what are otherwise perfectly legal tax free investments in the country I reside in.
My question is, is being a covered expatriate really that bad? If I am not compliant at the time of renouncing I find it bizarre to think of giving the IRS a laundry list of my assets so they can try to impose an exit tax on me. The whole notion of doing so boggles my mind-even if I can stay below the threshold, why would I tell them how much my house here is worth? Do people really give this information out willingly? I do have dual citizen kids who may or may not end up living in the US (I hope they do not) and I am aware of the tax implications for them if they choose to enter the US tax system (I hope they do not).
@Alice
A fast reply.
The only downside to being a covered expatriate (renouncing without tax compliance) is a big tax on any inheritance you leave your US-citizen kids, but that is only a problem if they are compliant with US taxes (either living in the US or foolishly filing US returns from outside the country) and even then nobody seems to know how it’s enforced.
The one reason you would have to renounce is banking restrictions due to US birthplace. If that’s not happening, to me it’s not urgent. But you need to make your own decision. Certainly I would not come into compliance for any reason, unless I was planning a full exit.
One other factor to consider, and maybe this is only a concern in Canada because I don’t know how it works elsewhere: if you don’t renounce, you might want to ensure that the executor of your will does not try to bring the estate into US tax compliance.
@Alice, it really just depends on you and how you feel about the whole thing. Being a covered expat scares some people and they worry they might not be able to travel to the States in the future so become compliant. Others don’t care so don’t file. Only 2 people have ever been refused entry to the US because of their covered expat status. Technically it is law that a covered expat can be refused (see the Reed Amendment), but so far they haven’t been able to come up with any way to make it work. Mr Reed keeps trying (last effort in 2015), but the law’s too vaguely worded.
https://en.wikipedia.org/wiki/Reed_Amendment_(immigration)
So, if you feel you can renounce, get your CLN for the banks and then it’s the end don’t bother to file. If you feel you’ll worry in future or are concerned you may not be able to enter the States some time in the future then maybe look into filing so you can sleep at night.
Frankly if you’ve never filed there’s not a lot the IRS can do. They have no idea of your worth so are unlikely to chase you since it could well be a waste of their time and resources with no gain.
@ Alice
You have nothing to fear from covered expatriate status. The reed amendment has proved impossible to implement. You can enter the US freely as any other visitor.
Your estate may be a problem if you do not renounce as executors are now becoming more aware of US person liabilities. I was also told that it would not be wise to have any of your children be executors of your estate if they also remain US persons as they will have signature authority over your accounts.
As nononymous mentioned there is a tax liability for any US citizen kids (at present 40%) who inherit from covered expatriates. But I have come to the conclusion that we can really only control our own lives, give the kids the facts and leave them to make their own decisions. You can’t base your decision on what your kids will do.
Renunciation is becoming progressively more and more difficult, it won’t get any easier.
Plus they can’t collect anyway if you’re a citizen of your residence country. CBT is largely a big fat naked emperor. 😉
25 yrs with no problems. There is no reason to change course. Either do nothing or renounce and don’t file. you can wear your covered expatriate status with pride. ( it’s meant for millionaires)
Thank you all so much for the speedy replies, I always feel like I’ve come to the right place.
So far I have had no problems with banking here in the UK. I am not sure what data they have on me as I don’t recall having to state my birthplace when I opened the accounts. The last account I opened was in 2012, before the FATCA hit the fan. It may all change if they start asking for confirmation one way or another. Because of my profession, I am not too keen to risk lying to my banks here so we will see how it goes. I figure it makes not much difference if they pass my details to the IRS because what will they do with that info anyway- for all they know I am a housewife with no income. As long as I can access services here I am good.
I won’t ask my kids to be executors- that’s good advice. I think what I do need if it comes to that is to make my kids (and any relevant people) understand that they need to keep their US status quiet- they were born here in the UK so as far as I am concerned nobody needs to know. Much of the time, winding up estates with any sort of complexity is handled by solicitors acting as executors. I don’t know if they would know about or try to comply with US tax law. I somehow how doubt it but probably good thing to check. I am hoping the kids will renounce anyway-although I will let them decide.
The renunciation fee is an absolute joke. It cost $100 for a Consular Report of Birth Abroad and there was a mountain of paperwork they had to process it. Grossly disproportionate costs to enter and exit the system.
I think there’s a bit of confusion about covered expat status. Simply being a covered expat isn’t proof that a person renounced to avoid tax and could therefore be banned from entering the US under the Reed amendment. It only means that the person either failed to certify full US tax compliance as of the day before their renunciation, or that their net worth was greater than the prescribed limits for being a non-covered expat.
Because of rules that prohibit inter-agency sharing of information it is practically impossible for the State Department to gain access to the information it would need to make a determination to apply the Reed amendment. Really, unless the individual repeatedly shouts “I renounced because I don’t want to pay US taxes” from the rooftops, its impossible for the State Dept. to prove that the renunciation was for tax reasons which is why the Reed amendment is never used. (And is also why its a bad idea to complain about taxes while taking the renunciation oath, by the way.)
When a person renounces without filing anything, they wind up in a state of limbo with respect to the IRS. Form 8854 is clearly intended for people of high net worth who are unquestionably covered expats and is the form upon which the amount of exit tax they owe is calculated. But the hitch is that people of low net worth who are not covered aren’t giving the IRS the information they need to know that until a Form 8854 is filed. Obviously, a person who renounces lives outside the US and the IRS has extremely limited access to the information they would need to take action unless there are US assets involved.
Bottom line: if being in perpetual IRS limbo doesn’t bother you, then just renounce and skip the filings. If some certainty makes you feel better, then go ahead and do all the filings by the book. (Keeping in mind there is never any such thing as absolute certainty when it comes to the IRS.)
An inbetween option: file only the 8854, stating zero tax liability and a few hundred dollars net worth.
@maz57, actually if the State Dept/IRS wanted to it’s very easy to decide – because if you fill in 8854 this is what the instructions say under Expatriation after June 3, 2004 and before June 17, 2008:
“Who Must File
You must file Form 8854 to:
Establish that you have expatriated for tax purposes; or
Comply with the annual information reporting requirements of section 6039G, if you are subject to tax under section 877.”
And again further down the instructions:
“Part II—For Persons Who Expatriated After June 3, 2004, and Before June 17, 2008
Line 1
Check the “No” box if you expatriated for immigration purposes after June 3, 2004, and before June 17, 2008, and haven’t previously filed Form 8854. You must complete a 2017 Form 8854 in order to be treated as having expatriated for income tax purposes.”
The instructions are suspiciously quiet on your status after June 17, 2008 in this regard.
The assumption is that everyone who expatriated did so for income tax purposes – the filing of an 8854 merely confirms that as far as the government is concerned.
In fact looking at the instructions you could be screwed either way. File and you’ve done so for income tax purposes, don’t and become a covered expat.
Can’t get the hang of bolding here. Meant to highlight only the sentences re expatriation for tax purposes.
Alex Marino is trying to scare people that the ex-PATRIOT Act might come back:
http://www.mondaq.com/canada/x/672396/tax+authorities/Renouncing+Your+US+Citizenship+Is+Divorcing+Uncle+Sam+Right+For+You
“File and you’ve done so for income tax purposes, don’t and become a covered expat.”
This is a bit of a red herring, as far as I can see. Although supposedly you become a covered expat if you never file 8854, “never” is not defined. How to decide whether a CLN belongs to a late-filer or a never-filer?
And why? They still wouldn’t be able to track down this not-yet-filing non-US-citizen and steal his/her pension.
@Medea
I guess I should have been a bit more specific. I was referring to present day (i.e. post 2008) renunciations. For such “modern” renunciations Section 877 doesn’t apply. Instead, the newer Section 877A is the relevant section. Regardless, the phrase “expatriated for tax purposes” doesn’t mean the person expatriated to avoid or evade tax. Rather it means the person has lost US citizenship and wishes to exit the US tax system.
Form 8854 gathers the information the IRS needs to know that, plus it also determines whether or not the person will be a covered expat and if so whether they are wealthy enough to owe some exit tax. There is absolutely no determination of “why” the person chose to expatriate which is what the Reed amendment is all about and why it is never used. In fact, I’ve heard it argued that Sections 877 and 877A already “punish” expats if they are sufficiently wealthy making the problematic Reed amendment unnecessary and obsolete.
If a person who renounces never files a Form 8854 all the IRS really knows about that person (depending on whether there were any previous filings, of course) is that the person lost US citizenship. The IRS doesn’t have the information they need to tell if the expat is covered or not covered. Its up to the IRS to decide if they want to investigate further; anecdotal experience seems to indicate they never do. A person who files a Form 8854 and fails to certify 5 years compliance will definitely be covered but one who doesn’t file the form just falls into a state of unclassified limbo.
What they are trying to do is make the determination of why someone expatriates objective rather than subjective.
If you are a covered expatriate, they decide that it was for tax purposes. Still doesn’t mean the Reed amendment applies. For that to happen they would need an outstanding liability of 50 K or more.
“You must complete a 2017 Form 8854 in order to be treated as having expatriated for income tax purposes.””
Are they saying that your purpose for expatriating is for income tax OR that to be treated as exptriated for the purpose of income tax rather than for immigration purposes?
I think that they are saying that if one wants to not continue to be charged income tax as a USC, they have to inform the IRS that they are no longer a USC and that this form is the way to inform them.
I don’t think thry are trying to determine the reason for expatriation.
@Portland & maz57, I hope you’re right, but the phrases are there and if the US government wanted to use them as a basis to refuse entry to the US in future …
If you don’t file 8854 form you become a covered expat regardless of your finances. They have no way of knowing whether you owe anything or not, but what other proof would the Attorney General need apart from the fact that you have a CLN (on record) and haven’t filed (also on record by cross checking with IRS) to declare you ineligible to enter the US in future? The Reed Amendment lays down no financial requirements, only that the AG has determined it was done to avoid paying tax.
“(E) Former citizens who renounced citizenship to avoid taxation
Any alien who is a former citizen of the United States who officially renounces United States citizenship and who is determined by the Attorney General to have renounced United States citizenship for the purpose of avoiding taxation by the United States is inadmissible.”
From what I have read in many articles Medea is correct that IF the Reed amendment is ever implemented the onus would be on the so called ‘covered expat’ to prove that he did NOT expatriate for tax purposes. Whereas it was the other way around pre Reed.
Under the failed 2013 amendment, a renouncing individual who was classified as a Covered Expatriate under § 877A would have had to prove to the U.S. Department of Homeland Security by “clear and convincing” evidence that he or she did not renounce for tax avoidance purposes. The burden of proving this negative would have fallen on the renouncing Covered Expatriate if he or she desired to ever re-enter the United States.
So how does a renouncing U.S. citizen become a Covered Expatriate under § 877A? Section 877A defines a Covered Expatriate as an individual who meets the requirements of subparagraph (A), (B), or (C) of § 877(a)(2). Section 877(a)(2) classifies a renouncing U.S. citizen as a Covered Expatriate if he or she meets one or more of the following criteria:
1.has an average annual net tax liability for the five preceding years of more than $165,000 USD (2018 amount);
2.has a net worth of over $2,000,000 USD (never inflation-adjusted); or
3.fails to certify compliance with U.S. tax obligations for the prior five years
https://moodysgartner.com/renouncing-your-us-citizenship-new-law-may-keep-you-out-forever/
If one owes no taxes to the US, how is one avoiding them?
@JapanT
Exactly, but if I was compliant, over 2,000,000 and had paid any taxes owed but deemed covered I would not want to write to plead my case to the IRS. as would not want my file reopened.
In the second case if I was covered because I had not filed they would surely ask what was my reason was for not filing?
You are on a loser to nothing. unless someone has a sick relative there, easier to stay away.
@heidi
I was challenging the “logic” of the US Gov..
I agree that if one can stay out of sight, they should continue doing so.
@JapanT
I know.
But those idiots possess no logic. As Hodgen once said, why slap a 40% tax on the estates of the kids of covered Expats, it forces them to also renounce or it forces the estate to go elsewhere rather than return to be invested in the economy of the USA. It will be a cold day in hell before any of my money returns there, I will, like Barbara spend every last franc (not dime) and that not spent will go to the World Wildlife Fund…barring no Oxfam like scandals 🙂
What I am taking from all this is that if you are a covered expat, whether or not you file form 8854, there is then a presumption that you have renounced for tax purposes which could in theory have implications in future for entry to the US (depending on the US appetite for putting the boot in about such things). Filing just stops the clock as far as the IRS is concerned.
I’d just go ahead cobble together 5 years back filing and renounce asap- but I suspect this would seriously damage my relationship with my parents. Trying to keep my head down for the rest of my life is probably the best plan but it’s hard to boldly invest for retirement knowing that the most financially advantageous methods incur US tax mess and that my banks here are going to rat me out at some stage. I’d say it’s unlikely that there will ever be entry problems if visiting the US as a covered expat but if my parents live to be 100, that’s another 25 years to bank on it being OK. I’m also well aware that the US continues on a trend of vindictive cruelty to those who don’t toe the line.
I’m feeling so trapped and screwed here.