Accidental American and the exit tax

by Phil Hodgen on October 7, 2011

A question from a reader (edited to obscure personal details):

I am an accidental U.S. citizen, having been born in the United States while my mom was visiting there.  Never lived or worked in US.  Now I am doing voluntary disclosure. Never knew about filing. Close to retirement.  Is there an exit tax to Canadians born abroad? There was some comment about having to be registered in Canada therefore not considered dual. Canada passed a retroactive law 2 years ago saying that all such babies were in fact considered Canadian at birth. Do you know?

My answer:

From the U.S. side, there is nothing that I know about which gives you an easy “out” from the U.S. tax system.  You have some paperwork ahead of you, I’m afraid.

Assuming you want to cancel your U.S. citizenship in 2011, here is what you need to do:

  1. Make sure 2006 – 2010 U.S. Federal income tax returns are on file and up to date and accurate.  (You have to have a 5 year history of tax returns on file).
  2. Go to the Embassy or a Consulate before year-end and give up your citizenship in a small bureaucratic ritual.
  3. For 2011, file your final U.S. income tax returns along with Form 8854.  Your final tax returns for 2011 will be Form 1040 (the U.S. resident tax return) for the time until you cancelled your U.S. citizenship, and Form 1040-NR for the remainder of the calendar year.  And did I say Form 8854?  Don’t forget Form 8854.  ;-)

You might have to pay the United States an exit tax for the privilege of cancelling your U.S. citizenship.  Or you might not.  This is something I can tell you after we talk and I get specific details about you and your situation.

The “all such babies born abroad are considered Canadian at birth” idea you’re talking about probably was a (sane) Canadian legislative reaction to the (koo-koo) U.S. exit tax law.

For someone who is a U.S. citizen AND was also a citizen of another country at birth, there is a way to give up U.S. citizenship without paying any U.S. exit tax.  You still have to do all the paperwork described above, thought.

The Canadian Parliament was probably hard-wiring the “You’re a Canadian at birth” idea into the Canadian legal system so there would not be any ambiguity for purposes of the U.S. exit tax.  If your Canadian politicians were thinking that way, they get bonus points for foresight.

Bad position to be in.  Good question though.  It’s worth a blog post.  :-)

Keep in touch.  If I can help you, please let me know.

Thanks for the question!

(Insert routine lawyer disclaimer/pre-emptive strike/waiver/advance repudiation here — I’m not your lawyer, you’d be a damn fool to believe everything you read on the interwebs, go get some smart professional to advise you, etc. etc.) :-)

 

 

 

Reader comments (11)

  • Canadian Citizen says Oct 7, 2011 10:29 am

    This is an interesting question.

    Prior to 2009 the US took the position that people born in the United States of Canadian parents between January 1, 1947 and February 15, 1977 did not acquire Canadian citizenship at birth, but rather through subsequent registration (SEE old form at http://www.taxmeless.com/images/State%20Dept%20Forms.pdf )

    However, the new Canadian Citizenship was passed and retroactively said that all Canadian citizens born between January 1, 1947 and February 15, 1977 is “deemed to be a citizen from the time that he or she was born?”
    Therefore, would this “at birth” section exempt somebody who originally had to register as a Canadian citizen , but since 2009 has been considered a Canadian citizen from birth under Canadian legislation that says she is “deemed to be a citizen from the time that he or she was born?
    In other words, would that person be considered “at birth a U.S. citizen and a citizen of another country” under the Expatriation Tax Act.

    I guess this depends on how the IRS defines dual citizenship “at birth” and whether it is different than from “birth”. Does anyone know the answer?

  • The question of whether you are a citizen of another country “at birth” is an interesting and open one. (The fact that it is up in the air for interpretation is a known issue at the IRS. So there’s no harm in addressing the problem head-on.)

    My sense is that you’d look at the laws of the country in question to see what’s there. If the basic right to citizenship is established at the moment of birth, then later paperwork is just clerical stuff that confirms reality. The later paperwork doesn’t CREATE the citizenship at that moment.

    But this is nebulous. At what point does the paperwork requirement shift from being merely clerical (“You were a citizen all along, and now this piece of paper proves it”) to being the event that creates citizenship? There is no easy answer here.

    Phil.

  • Canadian Citizen says Oct 7, 2011 10:53 am

    Ok. As the following like shows the US took the position that Canadians were not dual citizens at birth, but now has taken the statement off of its form.
    http://www.taxmeless.com/images/State%20Dept%20Forms.pdf

    Do you think it is just a way to lure people into paying an renouncing citizenship so that they can collect the exit tax in ambiguous situations like this. Would it be possible to get an advance private letter ruling to figure out whether one would be liable?

  • I don’t understand why this Canadian would do voluntary disclosure. The Canadian government needs to step in and stop accidental Americans from doing this, by making a clear statement to the IRS to back the f-up. I am far from an accidental American and when I saw that this was an unjust shake down, I just simply said that the IRS can go to the devil.

  • I would not apply for a private letter ruling in advance except in exceptional circumstances.

    As far as Section 877A and the exit tax is concerned, there are things that are clear. And there are things that are unclear. And there are things that are not addressed at all. I would not expect the IRS to issue additional guidance or regulations or anything for quite a while.

    The gates are slowly closing. Run like hell and get out while this is happening. Take advantage of the fog that exists right now.

  • Just Me says Oct 7, 2011 11:02 am

    I am re-posting Opinion piece from the NYTs…Sorry for the repeat, but I think it is timely that this is getting more attention…

    For Tax Purposes, We are All Americans..
    http://www.nytimes.com/2011/10/07/opinion/07iht-edsokol07.html?_r=2

    Thanks Don, for posting the entire thing in comments at… http://hodgen.com/new-brunswick-premier-is-in-the-ovdi/

  • Concerned Canadian says Oct 7, 2011 12:17 pm

    I believe that Canadian expats were doing VDs because they:
    - think this is somehow a Canadian law
    - think that Revenue Canada will enforce US penalties
    (the public statements that they could not and would not were late breaking news (mid-August)
    - they and/or their advisors do not fully understand the implications
    - fear they will be arrested within the US. There is lot of urban myth and rumor about this; an informed legal opinion on likelihood or due process to actually arrest a cross-border traveler is welcome!

  • Canadian Citizen says Oct 7, 2011 2:16 pm

    How would a Canadian like the accidental american above go about finding out whether or not they would be subject to the exit tax. I feel like a lot of Canadians want to get rid of US citizenship but are worried that they will be subject to hundreds of thousands in dollars in exit tax based on a simple question of whether the recent Canadian legislation makes them a dual citizen at birth.

    I guess I am wondering if there is any way that an accidental american could know with certainty that they would not be subject to exit tax based on the new Canadian legislation before choosing to renounce US citizenship, as the exit tax would apply to people who would otherwise not owe estate tax.

  • @Canadian Citizen,

    The way you know what the exit tax law says when it applies to you. There are a number of ways in which an Accidental American could drop citizenship without incurring the exit tax. The easiest one is to come in below the financial thresholds, of which the US$2 million net worth test is primary. If your net worth is below this number, you can escape tax free. Paperwork required of course.

    For people who are wealthy (as defined as net worth greater than US$2 million) there are other avenues to take. Including the exemption for dual citizens who were citizens at birth of another country.

    It’s just a matter of talking to someone who knows his/her stuff, telling your story, and getting an answer.

    The alternative is to figure it out yourself. This is possible. Tax law is not a black art reserved for the priesthood. Anyone with a bit of patience and a mathematical brain can figure it out. You need the math skills for the logic required, not for adding and subtracting numbers). I took a course in Symbolic Logic in philosophy during college. That’s exactly what you need. Alternatively, a good sixth grade English teacher who can teach you how to diagram a sentence will do. :-)

    Go look at Section 877A of the Internal Revenue Code. Notice 2009-85 is the only other plausible source of information from the government about this. You can find links and other information at http://www.irs.gov/businesses/small/international/article/0,,id=97245,00.html

  • Accidental American says Oct 8, 2011 9:03 am

    So if one is successful at giving up their US citizenship, are you banned from entering the US on a Canadian passport? I am sure that it will be flagged at the border.

  • In theory you should be able to enter and exit without problems. But bureaucracies in general are broken. Border bureaucracies exponentially so.

    Problems may happen.