A renunciation report and explanation of what happened

Hi, it's Phil Hodgen—here's a sampling of what you'll find in our Friday Edition newsletter. We cover expatriation, trusts, and a whole ton more. This week is about renunciation of US Citizenship.

Success Story

This episode is a report from one of my correspondents about her successful expatriation. Here is her email:​

Mission accomplished! I uploaded 6 F*BARs Monday night, FEDEXed 5 years worth of amended tax returns on Wednesday morning (with a date and time stamp and a photo) and went to the Embassy on Wednesday afternoon.​The process was a bit surreal – two different people asked me the same questions. I was asked if I wanted to ‘swear’ or ‘affirm’, but they could not tell me the difference so I said I’d affirm as it was a nicer word than ‘swear’. They asked if I wanted to make a written statement – I said no. They took my money. After I read the oath I was given a letter addressed to me to confirm that I’d taken the oath of renunciation but would remain a citizen until I received the CLN. I asked the Consul what I might want the letter for – he said I may need it to show my bank (so clearly they are aware of the situation long-term expats are being put in with their banks). All in all, I was in and out in half an hour.I then met up with my son and daughter-in-law to celebrate! It felt really good to have all gotten the paperwork out of the way before going to the Embassy, so thanks for encouraging me to do it that way.One last question for you - is there any reason I have to wait for the CLN to arrive (which they said could take up to 6 months) before I file my final return, form 8854 and 2015 FBAR - or could I just go ahead and get these out of the way in January?Thanks again for your blog and newsletter – without them I would have found all of this so much more difficult than it has been.

The Certification Test

Go find Form 8854 and look at Part IV, Section A, Line 6. It is on page 3, at the bottom. Here is the question:

Do you certify under penalties of perjury that you have complied with all of your tax obligations for the 5 preceding tax years (see instructions)?​

You either check the "yes" box or the "no" box.Let's talk about two things this person did prior to her renunciation, in order to make sure she could check the "yes" box.

Pre-Expatriation Tax Filings: FBARs​

Note that she cleaned up six years of FinCen 114 ("FBAR" is what most people call this paperwork) filings immediately prior to expatriation.The expatriation process does not require this, though common prudence suggests that it is a good idea.Failing the certification test makes you a covered expatriate. The certification test requires you to be up to date with all of your tax obligations under Title 26 of the United States Code. (We mortals call this the Internal Revenue Code.) IRC §877(a)(2)(C).The Form Formerly Known as FBAR ("FFKF" heh) is a filing requirement driven by requirements in Title 31 of the United States Code.​Therefore, my correspondent could have answered the question for the certification test with a truthful "yes" even if she had not cleaned up her FBAR filings.Common prudence says "file this form anyway". There is a legal requirement to file the form, and a variety of severe penalties if you screw this up. Your Most Important Objective is to exit the United States cleanly and completely, with no residual open loops. Cleaning up FBAR filings is a good idea. The particular strategy will be selected carefully. I did not advise my correspondent on the strategy she chose, but it is frequently the best way to go.

Pre-Expatriation Tax Filings: Amended Tax Returns

My correspondent also fixed the previous five years of tax returns (i.e., 2010 - 2014) and filed them before her expatriation date.She did this because she (presumably) discovered errors in the tax returns she had filed before.The Instructions for Form 8854 do not say exactly when you must be all up to date with your tax obligations (paperwork and payment) in order to pass the certification test. The two choices are:

• As of your renunciation date; or
• As of the date you sign and file Form 8854.

For a variety of reasons, I think the correct answer is "You certify under penalty of perjury that your prior five years' tax returns are filed when you actually sign the form and file it."​However, the prudent would-be expatriate should not rely on a random person's opinion (i.e., me). Take the more conservative approach and get things cleaned up ahead of time.Ordinarily I like to leave a time gap so I can confirm that the amended returns are actually in the hands of the IRS before the renunciation date. Sometimes the real world, however, prevents this from happening.

Remain a Citizen?

​The next point is interesting to me. The Consul told my correspondent that she will still be a U.S. citizen until she receives a Certificate of Loss of Nationality ("CLN").From a tax law point of view, this (at best) highlights a way in which the law is broken. At worst, the Consul, shall we say, mis-spoke. From an immigration law point of view . . . really?For expatriation tax purposes, the Internal Revenue Code defines your expatriation date as the date that you "relinquish United States citizenship." IRC §877A(g)(3)(A).​In order to figure out the date that you "relinquish United States citizenship", the Internal Revenue Code gives you a method for picking a date, based on the earliest occurence of a few different events:

A citizen shall be treated as relinquishing his United States citizenship on the earliest of—​

(A) the date the individual renounces his United States nationality before a diplomatic or consular officer of the United States pursuant to paragraph (5) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(5)),​(B) the date the individual furnishes to the United States Department of State a signed statement of voluntary relinquishment of United States nationality confirming the performance of an act of expatriation specified in paragraph (1), (2), (3), or (4) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(1)–(4)),(C) the date the United States Department of State issues to the individual a certificate of loss of nationality, or(D) the date a court of the United States cancels a naturalized citizen’s certificate of naturalization.​

Subparagraph (A) or (B) shall not apply to any individual unless the renunciation or voluntary relinquishment is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the United States Department of State.

IRC §877A(g)(4).​From a tax point of view, my correspondent will fit into IRC §877A(g)(4)(A) and (C). Her expatriation date (remember, this matters for tax purposes only) will be the earlier of:

• the date on which she went to the Consulate and renounced her citizenship. IRC §877A(g)(4)(A).
• the date on which she receives her Certificate of Loss of Nationality. IRC §877A(g)(4)(C).

​It is impossible to receive a Certificate of Loss of Nationality before renouncing her U.S. citizenship. So her true expatriation date must be the date that she stood in front of that Consul and made the affirmation to renounce her U.S. citizenship.The problem is that until she receives the Certificate of Loss of Nationality, she cannot rely on that date because of that magic language at the end of IRC §877A(g)(4), that says:

Subparagraph (A) or (B) shall not apply to any individual unless the renunciation or voluntary relinquishment is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the United States Department of State.

​In other words, the sale is not final until the cashier has given you the receipt.This is dumb. I have had email correspondence with many, many people whose Certificates of Loss of Nationality have been delayed for months. This creates tax return filing problems. What if you renounce citizenship in late November, 2015 (as my correspondent did) but for some reason out of your control the State Department does not issue your Certificate of Loss of Nationality for 15 months -- in early 2017?​You are supposed to file your Form 8854 in a timely fashion for the year in which your expatriation date occurs. That should be a late November, 2015 date, which means that you file Form 8854 for the 2015 year sometime in 2016.But if you do not get your Certificate of Loss of Nationality until 2017, you cannot use IRC §877A(g)(4)(A) to claim a late November, 2015 expatriation date when you are supposed to file your 2015 Form 8854 sometime in 2016.And when you receive your Certificate of Loss of Nationality in early 2017, IRC §877A(g)(4)(A) and the flush language at the end says that your expatriation date is that moment in late November, 2015 when you renounced your citizenship. But of course now, in 2017, it is too late to file a timely 2015 Form 8854. Does this make you a covered expatriate? Notice 2009-85 seems to say so.In short, the system is broken. Hope and pray that the State Department processes your Certificate of Loss of Nationality promptly.

Filing Form 8854

Which leads to the final question in my correspondent's email: when should she file Form 8854? Should she wait to get her Certificate of Loss of Nationality before filing? Or should she just file?I agree with her action plan: get to work immediately to get the paperwork done and cued up, ready to go.​The first filing deadline is June 15, 2016 (for renunciation dates in 2015). If she is lucky, she will get her Certificate of Loss of Nationality well before June 15, 2016. This means she can file Form 8854 on time, and rely on IRC §877A(g)(4)(A) to establish her expatriation date.I would recommend requesting an extension of time to file, however. This gives you until October 15, 2016 to file a timely 2015 Form 8854. Presumably the State Department will issue the Certificate of Loss of Nationality by then. If so, my correspondent can file Form 8854 on time, and rely on IRC §877A(g)(4)(A) to establish her expatriation date.​If the Certificate of Loss of Nationality has not arrived by September, 2016, I would apply for a further extension of time to file, extending the deadline to December 15, 2016. Again, getting the Certificate of Loss of Nationality will ensure that the Form 8854 is filed on time for a 2015 renunciation, relying on IRC §877A(g)(4)(A).If you are running up the last drop-dead deadline for filing a timely Form 8854 and the State Department has still not issued the Certificate of Loss of Nationality, I would file Form 8854 and claim the renunciation date as your expatriation date. The risk here is that the State Department rejects your renunciation and says you are still a U.S. citizen. I think it is better to unwind a wrong Form 8854 than it is to risk being a covered expatriate because you filed a late Form 8854.

Disclaimer

This is the standard pre-emptive strike: this is not legal advice, and indeed it isn't even legal advice to my correspondent, who I have never met and who did not hire me to help her, so she's not my client.Expatriation rules are tricky. The U.S. government sees you as a self-propelled source of revenue and deeply resents your choice to opt out of the U.S. tax system. The rules are hostile to humans. Go hire someone to help you walk through this stuff once, and walk through it correctly.See you in a couple of weeks.​Phil.