For the last few weeks, Americans living in Expatland have been becoming increasingly concerned over news that, as reported, the U.S. Internal Revenue Service is embarking on what it calls “Six Additional Compliance Campaigns” that potentially could impact on some expat U.S. citizens...
Such concerns have been fanned by social media postings and e-mailings from certain firms specializing in advising expat Americans on their taxes, some of which have warned of potentially major consequences for, for example, those who may have participated in a voluntary disclosure initiative to come into compliance years ago, but who may have failed to remain compliant; and others who may have expatriated (renounced their citizenships) "on or after June 17, 2008 [but who] may not have met their filing requirements or tax obligations" before doing so.
Here, John Richardson, a Toronto-based lawyer and citizenship expert, considers the six compliance initiatives that were unveiled on July 19, and whether those who renounced their citizenships after 2008 need to be as worried as some "tax compliance vultures" might wish them to be.
Of the six "Additional Compliance Campaigns" that the IRS announced on July 19 that it is preparing to embark upon, the one that seems to be capturing the attention of many U.S. citizens abroad and permanent residents (Green Card holders) appears to be the one the IRS simply calls "Expatriation."
The IRS announcement says, in its entirety (just 54 words): "U.S. citizens and long-term residents (lawful permanent residents in eight out of the last 15 taxable years) who expatriated on or after June 17, 2008, may not have met their filing requirements or tax obligations.
"The Internal Revenue Service will address noncompliance through a variety of treatment streams, including outreach, soft letters, and examination."
Expatriation, for those who aren't familiar with the term, is a legal term for what many people refer to informally as "citizenship relinquishment," which is to say that it's the process of ceasing to be a “tax resident” of the United States.
A U.S. citizen expatriates by relinquishing their U.S. citizenship; a permanent resident expatriates by either surrendering their Green Card or making an appropriate election under a tax treaty.
A major issue for both U.S. citizens and permanent residents who live outside of the United States, as has been much discussed over the last few years, is the fact that the U.S. regards both groups as subject to U.S. tax on their worldwide income, and for this reason expects them to file tax returns annually if their income is above a relatively low threshold.
In the United States meanwhile, “tax residency” does not necessarily follow from “immigration status”. In other words, the IRS rules for taxation may differ from the State Department rules for citizenship and immigration. In effect: the United States has two kinds of citizenship (tax and nationality).
1. It is possible to have relinquished U.S. citizenship for immigration/nationality purposes, but still be considered to be a U.S. citizen for tax purposes.
2. It is possible to be a permanent resident for immigration purposes, but no longer be a “tax resident” of the United States.
Expatriation and U.S. citizens
abroad – scratching the surface
In recent years it has become increasingly difficult for U.S. citizens to live outside the United States, be a “tax resident” of another country and, at the same time, also comply fully with U.S. tax rules.
As a result, growing numbers of Americans abroad feel they have no choice but to renounce their U.S. citizenships, as the statistics tracking such renunciations have been showing.
Renunciations, which are normally handled by the U.S. State Department, may trigger tax past, present and future tax consequences, with those who qualify as "covered expatriates" normally having the biggest issues – and costs.
(A covered expatriate is an expatriate who meets one of the three requirements, and may therefore be subject to an exit tax on all their assets in their final year. The requirements are that their average annual net income tax for the period of five tax years ending on the date before relinquishing citizenship or residency is greater than US$168,000 (for those expatriating in 2019); their net worth is at least US$2m, on the date of their expatriation; or they fail or are unable to certify that they have met the requirements of U.S. tax law for the five preceding tax years.) These requirements typically apply to individuals who have expatriated after 2008, or who are seeking to now.)
Certain dual citizens may, however, be able to take advantage of special rules designed to mitigate the punitive provisions of the expatriation tax rules.
Meanwhile, it is important to note that a permanent resident does not automatically end his/her U.S. tax obligations by simply moving from the United States to another country, even though many people think that this is the case.
Given such issues, and the complexity surrounding them, it is hardly surprising that we have already begun to see a raft of articles from tax "experts" warning of the dire issues some expatriated Americans may face, as a result of the IRS's new expatriation compliance initiative.
And I'm not saying here that there's no cause for concern.
What I would say, though, is that we can expect to see a large number of articles and social media posts in the days and weeks to come that will be designed to create anxiety, and possibly entice individuals to immediately “fix” certain perceived compliance errors, in order to put such worries to rest.
The message will play on the uncertainty that undoubtedly is out there, because it is certainly a fact, no one knows what the IRS has in mind. Its 72-word explanation on its website of its new "Expatriation Compliance Campaign" gives few clues.
Suffice it to say that even tax experts are in the dark on this one.
Tax treaties could come in handy
For some American expatriates, treaty provisions between the U.S. and the countries of which they are now citizens may ultimately prove to be useful.
Those who expatriated and now are citizens of Canada, for example, have Paragraph 8 of Article XXVI A; expatriates now living in and citizens of France also will have treaty provisions they can call on.
As for those who may have expatriated with the intention of following all the rules, and filed an 8854, meanwhile, my guess is that they have little to be concerned about.
If someone expatriates with the intention of following the rules, they usually do (follow the rules).
So my advice for everyone, for now, is to sit tight and await further clarity from Uncle Sam. This is not, of course, legal advice... just an observation.
But under the circumstances, I just don't see how anyone, given the information thus far available in the public domain, can recommending any other course of action for now.
John Richardson is a Toronto-based tax lawyer with dual Canadian and American citizenship, who specializes in U.S. expat issues. This piece was taken from a posting on his website, CitizenshipSolutions.ca.