Another expatriation driven by U.S. tax complexity
I received an email this morning. Someone I’ve been working with for several months. He has sent in all of his paperwork to terminate his green card.
Situation
At the moment he is a resident of a high-tax European country. He has no U.S. tax exposure since he pays more in tax there than he would pay in the United States. So he’s not doing this to save income tax. This is the common assumption: that people leave the USA to avoid paying tax. My experience is quite the contrary. This gent is typical.
His business takes him back and forth from Europe to the United States and it would be exceedingly valuable for him to remain a green card holder. Yet today he sent in the forms to cancel it.
Why He’s Bailing Out
Here’s why. Paperwork. The cost and complexity of U.S. tax returns for American taxpayers abroad is insane on stilts. If he has mutual funds, he has Form 8621 problems. Things that are tax-free in his current country of residence are not necessarily tax-free in the USA. And in fact you can usually guarantee that Uncle Sam wants a piece of it. While the tax load can usually be eliminated in the USA (because he pays so much income tax abroad) it is still messy and adds complexity and cost to his U.S. tax return.
But what really kicked it off was a business opportunity. He has the opportunity to enter into a startup business with some friends. Because he is a U.S. taxpayer, the tax compliance costs are monstrous. If they use a corporation, he has a Form 5471 problem. If they use a partnership, he is a U.S. taxpayer with an interest in a foreign partnership. He has FBAR and Form 8938 problems. The financial structure of the proposed startup was optimized for the European tax/fiscal landscape, but worked very badly indeed for US purposes.
So, faced with the alternative of about $10,000 of U.S. tax advice (and possible loss of his startup business opportunity) vs. giving up the green card, he chose the obvious one. Give up the green card and cut ties with the United States.
Paperwork Burden, Not Tax Cost Burden
I want to be crystal clear. This is an important point:
- – He is paying a metric ton in tax.
- – It is annual compliance cost of dealing with CFC, PFIC, foreign tax credit, foreign earned income exclusion, and the like that really gripes him.
- – The U.S. tax complexities would force him to lose an opportunity to participate in a startup business. His tax situation is so anomalous compared to the other participants that he would either have to absorb enormous compliance costs himself, or be barred from participating in the business as too much trouble.
So there you have it. A person who gets things done. Who builds businesses. He’s been pushed out of the USA because of U.S. tax compliance burdens. Not U.S. tax. U.S. paperwork.
Heads-up to Atossa
@atossaaraxia, if you’re reading this, it is exactly what we talked about yesterday. This is on top of two consultations yesterday that I did with people to explore the expatriation avenue. One will definitely do this, and the other might (and she should expatriate; she’s just not sure yet).
The person I talked to yesterday came to the USA as a student in her teens. Repeatedly told me she loves the people and the country. But . . . the tax paperwork crap. She ends up paying very little tax after the foreign tax credit and the foreign earned income exclusion. It’s the paperwork burden and frankly the fear factor engendered by the current regime in Washington DC that caused both of my appointments yesterday to take this dramatic step.
Three in two days. I must say this is not an uncommon situation for me.
And it’s sad. My parents were immigrants. They came to the USA in 1951 as students and stayed. Tax PAPERWORK policy and tax ENFORCEMENT policy is driving people away. Not tax COST.
EDIT: Two new expatriation clients today. It’s 10:36 a.m.
I recently spoke to a lawyer who had said there was a case just recently of the reed being used in Vancouver and one case in Calgary. Anyone hear this?
WRT Peter’s point: Relinquishment, as opposed to renunciation, is probably worth a post in its own right.
Typical situation is: American emigrates to Canada in the early 1970s and becomes a naturalized Canadian. (There were many of these in the Vietnam era.) At the time, taking another nationality necessarily erased your US citizenship, and they went ahead in full knowledge of the consequences. A later court decision reversed the automatic stripping of citizenship, but few of them were aware of this. Decades later, they’re being questioned by border guards who notice the US birthplace, asked about their tax filing status and told they should be using a US passport. In principle all they have to do is report their expatriating act to a US consulate, say that they intended it to be expatriating and ask for a CLN.
This is relinquishment, but it does have its own wrinkles and pitfalls which make it different from renunciation. (Basically you can’t have done anything since your expatriating act that implies a claim to US citizenship, like voting, applying for or using a US passport or, in the Kafkaesque logic of the thing, file a tax return.)
From:
http://www.uscis.gov/ilink/docView/PUBLAW/HTML/PUBLAW/0-0-0-10948.html#0-0-0-1251
“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 excludable.”
Gosh, it looks the the Attorney General has a busy period ahead, ruling on each renunciation in the the upcoming tidal wave! Maybe now there’s a non-rebuttable presumption of tax avoidance in 877A he’ll cut his workload and just defer to that. Who could possible object?
Broken man wrote: “The Reed Amendment refers to any individual “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.””
For those of you who are lawyers, you should be encouraging your clients to relinquish their citizenship. There are seven ways to relinquish, only one of which is to “renounce”. If the Reed Amendment strictly says “renounce” then those who relinquish but do not renounce would not be covered by the letter of the law, even if their intention in relinquishing was to avoid taxes.
The last part should read: ” but they will probably renounce to avoid the same problems and also problems with inheritance.”
American born and bred, I am a national in a high-tax country. I renounced at the beginning of 2012. I have owed 0 or minimal tax the 20 years I have lived abroad, but it’s just too complicated to figure out how to fill out all the forms. (The times I paid tax, I probably didn’t really owe any, I just filled out the forms incorrectly…) My children retain citizenship, but they will probably renounce to avoid the same problems with inheritance.
Any expat who renounces citizenship will also have other reasons for doing so. For instance, the decision to live in the country of (new) citizenship, the desire to be able to vote, etc.
The IRS nonsense just brings things to the tipping point.
BMoaHP – Excellent point. I agree!
@Asher Rubinstein –
The Reed Amendment refers to any individual “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.”
There’s an important distinction (alluded to in the post) between renouncing to avoid taxes and renouncing to avoid the administrative burdens of the tax system. Someone who doesn’t owe any taxes, ever, can’t reasonably be said to be renouncing because of taxes.
This is more than true. Any American living abroad is strangled with mind-numbing complicated reporting and paperwork requirements that are almost impossible to comply with if one owns their own small business.
For small business owners and entrepreneurs, renunciation is a matter of survival.
These idiots in Washington don’t seem to realise that tax revenue is somewhat like electricity, those with the least resistance will recieve it. Put up complex rules, regulations, filling in forms to re-claim withholding tax, and people will go elsewhere and avoid the time wasting with the IRS- it gives them peace of mind rather than deal with the what ifs even if its more expensive.
I think Winston Churchill’s thinking is appropiate “the Americans will do the right thing when all the alternatives have been exhausted” – to paraphrase.
The Americans will only cop on when they see that they’re losing business to the rest of the world.
Worth noting that a green card holder who elects to take treaty benefits can trigger 877A and the exit tax. As is so often the case with the IRS, the cure can be worse than the disease.
Asher — I agree completely. My intent was merely to comment re: enforcement to date as information to be considered along with the applicable statute. Certainly not in lieu of!
Absolutely agree. However, there are various statutes and policies that are rarely, if ever, enforced, until one day, they are resurrected and applied. When I advise people contemplating renouncing citizenship, I bring the risk, however low, to their attention.
@tim, you stated “A request to the Canadian or foreign Competent Authority will be necessary to initiate negotiation between the competent authorities regarding the proper application of the tie breaker rules contained in the residency article of the convention. The taxpayer should approach the competent authority of the country in which the taxpayer asserts residency.”
Best of luck, but I caution you that any effort like this on the part of Canadian authorities, or those in any other country in attempting to negotiate with the US will fall on deaf ears. The US asserts its authority to levy and collect taxes from its citizens and green card holders, no matter where they live. and the Saving Clause in the US-Canadian Tax treaty, and every other US tax treaty, confirms that the US has this authority to tax green card holders who have not formally canceled their permanent US residence status with Homeland Security as prescribed by US law. See htt://irs.gov.ub/irs-pdf/p4588.pdf. These conditions apply irrespective of whether or not their is a tax treaty.
I believe the US tried to block Kenneth Dart (who had expatriated to Belize) from returning to the US as a Belize diplomatic rep so he could stay in the US. But that was obviously an egregious case (indeed likely part of the reason such laws were enacted), and the government was simply refusing to accept his diplomatic appointment, which is a different issue altogether.
Although the US can bar expatriates from returning to visit and spend money, I am not aware of any instance in which this has actually happened. So, while the risk is something that people should be aware of, the risk may well be purely theoretical.
I agree. It is become impossible to be an American Abroad. Not because I want to hire earnings. I don´t need to do it because I have a Tax Credit for the taxes I pay where I reside. But because of the paper work. I can´t imagine continuing to go through this insane forms every year. I have spent a lot of time and money on them. Also because of fear of the threats and incredible penalties for my mistakes. My professional and personal life is now impaired because of this craziness. I know I will have to do something but not sure yet. The only thing I am sure is that I can´t go through this every year.
Aren’t Green Card holders entitled to protection under tax treaties(unlike citizens who are specifically excluded under the Savings Clause). I know that CRA has a guide on their website telling Canadian Resident who are being claimed by another country as resident(say the US)that they need to contact CRA right away so CRA can take care of the issue. This is what CRA specifically says:
A Canadian resident taxpayer is also considered to be a resident of a treaty country under that country’s domestic law, and each country asserts that the taxpayer is a resident of its jurisdiction for purposes of the tax convention. If unresolved, the taxpayer could be subject to tax on the same income in both countries. A request to the Canadian or foreign Competent Authority will be necessary to initiate negotiation between the competent authorities regarding the proper application of the tie breaker rules contained in the residency article of the convention. The taxpayer should approach the competent authority of the country in which the taxpayer asserts residency.
http://www.cra-arc.gc.ca/E/pub/tp/ic71-17r5/ic71-17r5-e.html
There is a poster on the IBS website who is a lapsed Green Card Holder(left the US in 1994) who is contacting the CRA Competent Authority Treaty Office to see what they can do.
I’ve also been seeing an increased interest in expatriation inquiries. I attribute the recent burst of interest to, among other reasons, (i) the greater reach of the IRS, and (ii) foreign banks notifying US taxpayers (including US taxpayers living and working abroad with a local account) that their banking business is no longer welcome, both due to FATCA coming into effect.
With respect to Phil’s client, while Phil distinguishes between the burdens of tax compliance versus paying taxes (the latter apparently not being an issue), as the rationale for the expatriation, I’m not so sure that the IRS will appreciate that distinction, but I don’t think the distinction is relevant to the client, a green card holder, in a practical sense. If the client were a citizen, then one possible result could be a finding that the renunciation of citizenship was motivated by tax avoidance, with a further result that a former citizen will not be allowed back into the US, even on a visit. Presumably, this will not apply to Phil’s client who is giving up a green card rather than giving up citizenship.