Relinquished before 2004? Applying for CLN now? What are the IRS consequences?

reposted from Maple Sandbox .

Posted on March 6, 2013 by Pacifica777 .

There’s no question with renunciation (Immigration and Nationalities Act, s. 349(a)(5)).  You are relinquishing your citizenship and notifying the US government of it at the same time, and that’s the date your US citizenship ends.

But what if you relinquished your citizenship by a different method of INS, s. 349(a), such as taking citizenship in another country with the intent to relinquish your US citizenship (349(a)(1))?

The State Department is clear.  No matter when you notify the US govt of your relinquishment, once your CLN application is approved, your US citizenship ended on the date you actually relinquished it (that is the date your performed the relinquishing act, eg. naturalised as a citizen of another country — this date is indicated as your expatriation date on the the CLN.)

The IRS, however, according to s. 877A(g)(4) of the US Tax Code, considers the date of your relinquishment for IRS purposes is not the date of your actual relinquishment but the date you notified the US government of it (your consulate meeting).  This was not the case prior to 2004, however [the relevant section was 7701(n) in 2004 and it was replaced by 877A in 2008].

So, what if you relinquished your US citizenship long ago, but only recently learned of US law and policy changes which make it important to be able to prove you are not a US citizen, and wish to obtain Certificate of Loss of Nationality (a document you probably never even heard of before)?  What if the current law regarding IRS and citizenship termination did not exist at the time you relinquished?  Logic  leads one to the conclusion that laws passed after a person ceases to be a citizen are irrelevant.  The IRS has never made a definitive statement on this issue, however their instructions for the 8854 (expatriation tax form) are only directed at people with expatriation dates “after June 3, 2004.”

Tax lawyers Michael J. Miller and Ellen Brody have just published an excellent article on this matter, Expats Live in Fear of the Malevolant Time Machine, in which they point out the legal, as well as common sense, absurdity of a retroactive application position.  It’s very clear reading with useful references to legislation and case law as well.

The Devil is in the Details When it Comes to the U.S. Exit Tax

reposted from isaac brock society
 

A very   interesting discussionabout the Exit Tax has been taking place at Brock this week. In particular, the comment below from USCitizenAbroad highlights some of the major differences between the U.S. Exit Tax and the more benign Departure Tax that occurs in Canada and Australia. It cannot be overstated how punitive and destructive the U.S. Exit Tax is and anyone contemplating renouncing, should be certain to be familiar with all aspects of it; do a preliminary set of returns and an accurate accounting of all assets including pensions. While anyone can renounce at a Consulate before filing tax and information returns, anyone who is close to being “covered” should get counselling before taking such a step.

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USCitizenAbroad says says:

@Watcher makes the point that:

As you see, then, the devil is very much in the detail. These latter two things have no analog in the Canadian exit tax. So… the US is not the only country to have an exit tax, but the exit tax it does have is one of the worst. And very likely the actual worst.

@Karen notes that:

On the Exit Tax – Australia also has an exit tax similar to Canada’s. When you cease to be a tax-resident of Australia you have a choice – pay capital gains tax on your current unrealised gains OR defer the tax until you sell the asset, at which time you pay tax to Australia on your entire realised gain, even the gain that accrued after you left Australia (Australian real property may be treated differently as most treaties would allow Australia to tax non-residents on real property gains where the property is located in Australia).

With respect the comments that compare the U.S. “Exit Tax” with “Departure Taxes” levied by other countries confuse the issue.

The “departure tax” imposed by Canada is a tax imposed based on a change in “residence”. The U.S. S. 877A Exit Tax is a tax imposed based on a change in “citizenship” in the case of “citizens” and a change in “immigration status” when applied to Green Card holders.

In the case of “Green Card Holders” the U.S “Exit Tax” (provided that it is applied when the Green Card Holder BOTH moves from the USA and surrenders the Green Card at the same time) is somewhat like the Canadian departure tax. It does however apply to more items and it applies to items that have no connection to the United States.

In the case of U.S. citizens, the U.S. Exit Tax is in NO way connected to residence in the United States. It does NOT apply at the time the a U.S. citizen moves from the United States. It applies at the time that they decide that they do NOT want to be a U.S. citizen and renounce U.S. citizenship. This means that it mainly applies to assets (both capital assets and pensions) that have no connection whatsoever to the United States. To put it simply the way the U.S. Exit Tax rules operate is that the United States uses it as a a mechanism to (in effect) confiscate the non-U.S. assets.

In addition, as @Neill, @Heidi and others have noted the confiscation is RETROACTIVE confiscation. In other words, the law appeared in 2008 (so NO Neill did NOT agree to this by moving to the USA) trapping assets that existed at that time. As @Heidi puts it:

NO ONE coming to the US could possibly expect to become a prisoner of the ‘freest country in the world’

Wrong, the simple fact is that there are many Green Card Holders who are now “in prison in America”.

Furthermore, as some comments have noted the application of the S. 877A rules has the practical effect of subjecting those assets to double taxation. And as @Watcher notes, there is NO realization event to pay the Exit Tax.

@Watcher concludes with:

the US is not the only country to have an exit tax, but the exit tax it does have is one of the worst. And very likely the actual worst.

The U.S. is NOT the only country that imposes taxation when one breaks “tax jurisdiction” with a country. But, because all other countries use “residence based taxation”, the U.S. IS the only country that has an Exit Tax based on a change in personal characteristic “citizenship or immigration status”. The pure evil of the Exit Tax flows from the pure evil of a system of citizenship-based taxation. Because there is NO other country that uses citizenship-based taxation, there is no other country that can have an “Exit Tax” that is based on a change in citizenship.

Therefore:

On the one hand to compare the Canadian Departure Tax to the U.S. Exit Tax is an incorrect comparison; and

On the other hand, (since many commenters seem to be making the comparison), some thoughts on the suggestion the U.S. Exit Tax is the worst.

When the U.S. S. 877A Exit Tax is compared to Exit Taxes imposed by current and past regimes, it is clear that the U.S. Exit is by far the worst by today’s standards.

But, the U.S. Exit Tax is also by far the worst by historical standards. The Exit Taxes imposed by the nastiest regimes in history (say during the World War II era) made NO attempt to confiscate assets acquired after the person left the country. As @Karen put its:

The US exit tax is, as others have said, much worse. At least with the Canadian and Australian versions, assets purchased after leaving the country are not included.

So, yes there is NO doubt that the U.S. 877A Exit Tax is the nastiest in history.

@Nononymous the S. 877A Exit Tax is unjust whether one complies or not, whether it is paid or not and whether one “feels the injustice” or not. The fact that an accidental American ignores the issue, is completely irrelevant to the injustice of the tax.