Irony-“Because it’s the Law” – For once, NOT applied to non-willful expats but a “citizenship” Lawyer

While this particular post is not about a tax-compliance professional per sé, it IS about a person with whom many of us have had interactions and from whom we have been assured we WILL BE CAUGHT in one way or another. Given that, I find it extremely ironic to come across what follows in this post. How many of you who have paid a retainer or left any other type of funds when using a lawyer, ever worry about that person absconding with it?

David S Lesperance used to post comments on Brock. Here is an example of the first of many on the post “Americansabroad in Canada may soon be unable to receive payments from Government by USCitizenAbroad, September 16, 2013.

First comment Continuing to ignore the issue; yell at your foreign banker for closing your account; hoping and praying that FATCA and the Qualified Intermediary Regime will be revoked; etc. are all a waste of time. It is time to either comply with the law or expatriate. Complaining is just a waste of time.

I believe my first real exchange with him occurred sometime back on a WSJ article “The Law That Makes U.S. Expats Toxic” October 10 2015 (paywalled-I can’t get around it with the Google News action). Unfortunately, while I have my own comments via my profile, I cannot access the article nor his comments. This limits what I would like to address for the most part. The first set of comments was his reaction to my referring to him as a tax-compliance professional. He did not agree with that label. It was an exchange where I felt constantly challenged at being tripped up especially because I could not (yet) refute the idea that the Qualified Intermediary program (QI) would “out” us hands-down. And I let him have the upper-hand to a certain degree, because he was a professional and I assumed he would know more than I. We seemed to develop a respectful, civil relationship. On several occasions since, I posted comments for him as he could not log on for some reason. I was aware he was in Poland visiting family as he explained it.

Later comments on Brock:

Comment on US Intention to Pursue Enforcement in Spite of Foreign Law

Comment on Do Canadian or Australian etc Tax Attorneys Advising on United States IRS Compliance Typically Comply with the Professional Code of Conduct of their Law societies?

I was very surprised to see some of the Tweets on Twitter when Keith Redmond tried to warn Accidentals not to put themselves into the US tax system. It is interesting that without any proof as to the ability of IRS able to collect via QI, he presumes it and treats Keith in a manner I found inappropriate and unprofessional. I believe the point of contention was to prove that actual Accidental Americans had been “outed” due to QI. This was not provided, nor has it been since that time. There were others that ganged up in more “attacks” that I will not put up here. Brock/Wed Rally Tweeps will remember this extremely unpleasant incident. After that, I declined to post anything further on his behalf. What is ironic, is a number of exchanges that took place privately, up to as late as March 16, with no indication of any actions such as this:

Law Society of Upper Canada Files a Notice for Interlocuatory Suspension or Restriction Against David Sylvio Lesperance Filed March 10, 2017
 
or this:
 
Wareh vs Lesperance
  Continue reading Irony-“Because it’s the Law” – For once, NOT applied to non-willful expats but a “citizenship” Lawyer

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.

******

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.

The Internal Revenue Code vs. IRS Form 8854: the “noncovered expatriate” and the Form 8854 Balance Sheet

 
 
cross-posted from citizenshipsolutions.ca

Introduction: For whom the “Form” tolls …

I would not want the job that the IRS has. There are many “information reporting requirements” in the Internal Revenue Code. The IRS has the job (sometimes mandatory “shall” and sometimes permissive “may”) of having to create forms that reflect the intent of the Internal Revenue Code. The forms will necessarily reflect how the IRS interprets the text and intent of the Code. Once created, the “forms” become a practical substitute for the Code. If you look through your tax return you will find “form” after “form” after “form”. The forms reflect how the various provisions of the Internal Revenue Code are “given meaning” (if the meaning can be determined).

The Form (in theory) follows the requirements of the Internal Revenue Code …

Every “form” is the result of one or more sections of the Internal Revenue Code. For example, Form 8833 is described as:

Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)

Taxpayers use this form to make the treaty-based return position disclosure required by Internal Revenue Code section 6114. Dual-resident taxpayers use this form to make the treaty-based return position disclosure required by Regulations section 301.7701(b)-7.

Form 8833 reflects how the IRS understands Internal Revenue Code sections 6114 and 7701(b) and how it attempts to give effect to those sections. Imagine having the job the job of creating forms for the Internal Revenue Code. In most cases the IRS has done an admirable job.
In some cases, the IRS form may not accurately reflect the language and intent of the statute.

But, back to the Internal Revenue Code and the Form 8854 Balance Sheet …

This post is about some (but not all) aspects of IRS Form 8854. Form
8854 is familiar to most who relinquish U.S. citizenship or abandon their green card. In July 2014, the “American College of Trust and Estate Counsel” wrote the IRS an extensive submission describing many discrepancies between Internal Revenue Code S. 877A and IRS Form 8854. The focus of this post is less ambitious. It is restricted to a discussion of the relationship between Internal Revenue Code S. 6039G and the “balance sheet” found in Part V of IRS Form 8854.

Do the asset disclosures required in Part V of Form 8854, to the extent that they apply to “noncovered expatriates”, follow the requirements of Internal Revenue Code 6039G?

Back to the future: The evolution of “asset disclosures” and Form 8854 …

The evolution of Form 8854 may be seen here. A perusal of Form 8854 over the years reveals
that:

Since 2009, every release of Form 8854 has required full asset disclosures for any person expatriating after June 16, 2008. This means that asset disclosure has been required by Form 8854 for both “covered expatriates” and for “noncovered expatriates”.

Prior to 2009, no release of Form 8854 required full asset disclosure for “noncovered” expatriates. This is significant because this means that those with assets of less than two million USD were NOT required to disclose their assets.

This is probably explained by the fact that prior to June 16, 2008, the value of assets was relevant ONLY to determine whether someone was a “covered expatriate”. After June 16, 2008 the value of “assets” was relevant to determine the actual expatriation tax.

Internal Revenue Code Sections: 6039G, 877A, 877(a)(2) and Form
8854 …

Form 8854 has been designed to do the work of the above three sections of the Internal Revenue Code. Let’s see how.

Form 8854 and Internal Revenue Code S. 6039G

26 U.S. Code § 6039G – Information on individuals losing United States citizenship

Includes in part:

(a) In general Notwithstanding any other provision of law, any individual to whom section 877(b) or 877A applies for any taxable year shall provide a statement for such taxable year which includes the information described in subsection (b).
(b) Information to be provided Information required under subsection (a) shall include—
(1)the taxpayer’s TIN,
(2) the mailing address of such individual’s principal foreign residence,
(3) the foreign country in which such individual is residing,
(4 )the foreign country of which such individual is a citizen,
(5) information detailing the income, assets, and liabilities of such individual,
(6) the number of days during any portion of which that the individual was physically present in the United States during the taxable year, and
(7) such other information as the Secretary may prescribe.

The 6039G requirement applies to those who are “covered expatriates” under the rules of Internal Revenue Code 877A (and under 877(b)). (Those expatriating after June 16,
2008 are subject to the requirements of 877A.) This means that the requirement to report “(5) information detailing the income, assets, and liabilities of such individual,” applies ONLY to those who are “covered expatriates”. Therefore, the part of Form 8854 which requires “(5) information detailing the income, assets, and liabilities of such individual,” should apply ONLY to those who are “covered expatriates”.

The Form 8854 balance sheet is found in Part V of the current version of Form 8854.

form8854partvschedulea

form8854partvschedulea2

 

Notice that the instructions at the top of Part V specifically say:

Form 8854 (2015)
Page 5
Part V
Balance Sheet and Income Statement

Schedule A
Balance Sheet

List in U.S. dollars the fair market value (column (a)) and the U.S.
adjusted basis (column (b)) of your assets and liabilities as of the following date:
• Part II filers – the end of the tax year for which you are filing the form
• Part IV filers – your expatriation date.
Note:
Part IV filers do not complete column (d).

The above directive is described as applying to ALL people expatriating in the current year. The directive is NOT restricted to “covered expatriates”! Yet the asset disclosure requirements in 6039G apply ONLY to “covered expatriates”.

The Part V balance sheet requires the disclosure of very significant information about the complete scope of an “expatriate’s assets”. The balance sheet requires:

  • the identification of all assets
  • in the case of property, sufficient information to determine
    any deemed capital gains
  • in the case of “Foreign Pensions” the present value on the
    date of expatriation
  • significant information about “specified tax deferred
    accounts”
  • significant information about “grantor trusts”
  • valuation of controlled foreign corporations
  • more …

It is the most intrusive “asset inquisition” known to man.

Form 8854 appears to require this asset disclosure:

  • whether the “expatriate” is a “covered expatriate” (and is
    therefore subject to the S. 877A Exit Tax) or whether the person
    is NOT a “covered expatriate” (and is therefore NOT subject to
    the S. 877A Exit Tax); and
  • whether income and assets is even relevant to a
    determination of whether someone is a “covered expatriate”.

How Form 8854 elicits information about the assets of “noncovered expatriates” …

Form 8854 has been designed to elicit information about the assets of ALL “noncovered expatriates”. There are two categories of “noncovered expatriates”.

Category 1 – The value of their assets IS relevant, but that value is below two million USD.

Category 2 – The value of their assets is NOT relevant because they benefit from either the “dual citizen exemption” or the “renounce before the age of 18-1/2 exemption”.

For example, for “expatriates” who meet the “dual citizen” exemption to the Exit Tax, asset disclosures are NOT relevant. It is ONLY the “compliance requirement in Internal Revenue Code 877(a)(2)(C) that must be met. Yet, as noted by the “American College of Trust and Estate Counsel“, Form 8854 requires full asset disclosure.

 

Required Financial Disclosure – Form 8854, Part IV, Section A [Expatriation Information], Lines 1 & 2.

Section 877A(g)(1)(B)(i) provides that certain dual-citizens will not be treated as meeting the requirements of subparagraph (A) or (B) of section 877(a)(2) if the individual:

(1) became at birth a citizen of the United States and a citizen of another country and, as of the expatriation date, continues to be a citizen of, and is taxed as a resident of, such other country, and

(2) has been a resident of the United States for not more than 10 taxable years during the 15-taxable year period ending with the taxable year during which the expatriation date occurs.

Similarly, section 877A(g)(1)(B) provides that an individual who relinquishes his or her U.S. citizenship before attaining age 18½ if he or she has been a U.S. resident will not be treated as meeting the requirements of subparagraph (A) or (B) of section 877(a)(2) for less than 10 taxable years. Such an individual will not be subject to the expatriation tax even if his or her (i) average five-year net income tax liability exceeds the threshold amount or (ii) net worth was $2,000,000 or more on the date of expatriation. The individual, however, is still treated as a covered expatriate unless he or she certifies that he or she has complied with all federal tax obligations for the five tax years preceding the date of expatriation as required pursuant to subparagraph
(C) of section 877(a)(2). Form 8854, which is used to make this certification, should not require disclosure of net worth or five-year average income tax liability because neither is relevant to his or her eligibility for the exception.

So, what does all of this mean?

Internal Revenue Code 6039G applies only to “covered expatriates”.
Therefore the extensive and intrusive asset disclosures in the Part V “Balance Sheet” should NOT apply to those who are NOT “covered expatriates”.

Yet, Part V of Form 8854 appears right after Part IV of Form 8854. Part IV is where one makes the “certification of tax compliance” which is a necessary condition to avoid “covered expatriate” status.

My advice – just suck it up and complete the Part V balance sheet …

Complete the balance sheet and “exit” the U.S. tax system cleanly, finally and irrevocably. There are times when the “Form” does not follow the requirements of the Internal Revenue Code. Think of it as an example of a breach of the unstated principle of:

Form Fairness!

John Richardson