Deliberately Choosing Covered Expatriate Status
I received a question from a reader that is worth discussing. Lightly edited to protect the innocent 🙂 here is the question:
goat covered expatriate are:
Describing an anonymous third-party friend here of course. [Of course. 🙂 ] Dual US-Canadian citizen from birth, born in the US, lived a few years in the US in the 90s, filed tax returns those years only, then moved back to Canada. Recently discovered the whole tax and FBAR thing, far too stubborn to comply at this point. To the question. If the net gain on all your assets was less than $650k (or whatever the limit is), could or should you renounce US citizenship, indicate that you were not tax compliant on form 8854, and enter the exit tax regime as a covered expatriate? Then you’d just have to do the exit declaration, at which you show net gains under the limit for taxation, rather than fuss about with five years of 1040s and FBARs and all that. Or would this just piss off the powers-that-be? Fines aren’t collectible in Canada, so the risk is more travel inconvenience than financial penalty.
The Question is Really . . .
What the reader is asking is whether pursuing a strategy of deliberately declaring status as a covered expatriate will work.Sheep and Goats
When you give up your U.S. citizenship the IRS categorizes you as a sheep or a goat. You are a goat and condemned to hell if you are are rich (the definition is irrelevant for this question) or if you have not been faithful with your U.S. tax obligations (paperwork and payment of tax). The IRS is too polite to call you a goat, so they call you a “covered expatriate.” If you are poor (again, we don’t care about what this means for the purpose of this blog post) and you have been faithfully filing tax returns and paying your U.S. taxes, then you are, to the IRS, a sheep. You are a mere “expatriate”.“I Want to be a Goat”
In the scenario described above, the dual citizen is presumably does not meet the financial tests to become a covered expatriate. This means when he gives up his U.S. citizenship his status as “sheep or goat” (meaning “expatriate” or “covered expatriate”) turns on whether his U.S. tax paperwork and tax payments are up to date. Or not. And here we are exploring a deliberate choice of NOT bringing all of the paperwork up to date, and NOT paying any U.S. income tax that is due. If you want to see where this happens, look at page 1 of Form 8854, near the bottom, where the person signing the statement says under penalty of perjury that all of the tax obligations for the last five years (Title 26 is the part of the United States Code having to do with taxes) are up to date and paid. This person will deliberately not file tax returns for the prior five years, and of course will not pay the taxes due. Or the penalties for late filing various forms — whatever they are. He will, however, presumably file excruciatingly correct U.S. tax returns for the year of expatriation.Consequences of Covered Expatriate Status
The consequences of being a- Gift. If you make a gift to a U.S. person, the recipient has a potential tax to pay. See 26 USC Section 2801. Presumably our hypothetical dual U.S./Canadian individual will never give a penny to a U.S. person.
- Bequest. If you die and leave an inheritance to a U.S. person, the recipient has a potential tax to pay. Again, see 26 USC Section 2801. Again, I assume this is not going to happen, so our hypothetical dual citizen won’t care about this.
- Lorena Bobbit. The IRS could go on a binge of jilted-lover vengeance and attempt to tag our hypothetical dual citizen with U.S. tax liabilities and penalties for past sins. This is a risk if the Canadian tax authorities are playing footsie under the table with our IRS Overlords. If the Canadians have half a spine and tell the U.S. government to go bite tires, then there is no risk — unless our would-be goat decides to travel to the United States. I suspect there is no extraordinary rendition of Canadians to the United States for taxes owed to the USA. Yet.
- “Hello, Lion. May I inspect your teeth?”. If our deliberate goat decides to travel to the United States, the consequences are unknown to me. If there is a criminal indictment, there would be the possibility of arrest. If it is a mere civil tax debt to the U.S. government, well, I thought we abolished debtor’s prisons a while ago. But don’t quote me on this–it’s a Brave New World we’re living in. So the better answer is to stay out of the United States for the rest of your life.
I believe that a dual citizen (USA plus another country) must enter the USA with the US passport. At least, this is what I have seen happen.
After you renounce your US citizenship, travel to the USA will occur using your other passport.
Hi,I’m new to this forum, but it looks interesting. Regarding the sheep and goat thread, if the “goat” had a second nationality (or to be honest, a primary nationality having left the US as an infant), is this still risky for travel to the US on this other passport ?
Thanks in advance, David
This amendment would take us back to the days of Section 877.
Back then the IRS was on the receiving end of hundreds of Private Letter Ruling requests by taxpayers who didn’t want to be tagged as tax-motivated. This proposed law would take us back to those times.
A covered expatriate is presumed to be tax motivated. But this presumption can be bypassed by asking for a ruling.
I guess the people in Chief Counsel’s office are slacking off and need more work. The Esteemed Senator from New York must think so, anyway. If this passes, cue the avalanche of pointless PLR requests in 3 . . 2 . . 1 . . .
Why doesn’t Shumer just take this to the logical conclusion? Once a US taxpayer, always a US taxpayer. There is no exit possible. That’s what he wants.
Goats may be permanently barred if Reed, Schmuer, and Casey have their way:
http://www.reed.senate.gov/news/release/reed-offers-amendment-to-prevent-ex-citizen-tax-dodgers-from-reentering-the-us
http://thomas.loc.gov/cgi-bin/bdquery/z?d113:SP01233:
SA 1233. Mr. REED (for himself, Mr. SCHUMER, and Mr. CASEY) submitted an amendment intended to be proposed by him to the bill S. 744, to provide for comprehensive immigration reform and for other purposes; which was ordered to lie on the table; as follows:
At the appropriate place, insert the following:
SEC. __. INADMISSIBILITY OF INDIVIDUALS WHO RENOUNCE CITIZENSHIP TO AVOID TAXES.
Section 212(a)(10)(E) (8 U.S.C. 1182(a)(10)(E)) is amended to read as follows:
(E) FORMER CITIZENS WHO RENOUNCED CITIZENSHIP TO AVOID TAXATION
(i) INADMISSIBILITY — The following aliens are inadmissible:
(I) Any alien who is a former citizen of the United States who officially renounces United States citizenship and who is determined by the Secretary of Homeland Security to have renounced United States citizenship for the purpose of avoiding taxation by the United States.
(II) Subject to clause (ii), any alien who is a former citizen of the United States and who is a covered expatriate.
(ii) REVIEW FOR COVERED EXPATRIATES — A covered expatriate shall not be inadmissible under clause (i)(II) if the Secretary determines that the covered expatriate has established by clear and convincing evidence that avoiding taxation by the United States was not one of the principle purposes that the covered expatriate renounced United States citizenship.
(iii) COVERED EXPATRIATE DEFINED — In this subparagraph, the term ‘covered expatriate’ means an individual described in section 877A(g)(1) of the Internal Revenue Code of 1986 and to whom section 877A(a) of such Code applies.