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This week

This week’s e-mail is about losing resident alien status for green card holders:

If you live outside the U.S. without officially abandoning your green card or having it revoked, are you still a U.S. taxpayer?

Answer

Yes. After you receive a green card you are a U.S. taxpayer until you formally cancel it in one of the approved ways.

Summary

In the 2014 case Topsnik vs Commissioner, 143 T.C. No. 12 (2014), the Tax Court held that a green card holder must file the proper paperwork (I-407) or take some other action to have the USCIS officially revoke permanent resident status to end resident alien status under the green card test under tax law.

You cannot lose resident alien status under tax law by simply living outside the U.S., even if it is for a period long enough that the USCIS would revoke your green card if you attempted to enter the U.S. with it.

Background on resident alien status

Internal Revenue Code section 7701(b) defines a resident alien. One of the ways to be a resident alien is to be a green card holder:

An alien individual shall be treated as a resident of the United States with respect to any calendar year if (and only if) such individual meets the requirements of clause (i), (ii), or (iii):

(i) Lawfully admitted for permanent residence. Such individual is a lawful permanent resident of the United States at any time during such calendar year. IRC §7701(b)(1)(A)(i).

The question here is: Once a person has obtained a green card, how does he stop being a resident alien under tax law?

What happened in the Topsnik case?

Mr. Topsnik obtained a green card in the late 1970s. In the mid-2000s, he sold a business and then moved to Germany. He was receiving installment payments from the sale, and

He wanted to avoid U.S. taxes. He decided that he would do so by ceasing to be a U.S. taxpayer.

The IRS disagreed, and the case ended up in Tax Court.

The Court’s analysis was simple:

  • Internal Revenue Code Section 1 and Treasury Regulations Section 1.1-1(a)(1) impose income tax on citizens and people who are not citizens but are residents of the United States.
  • A resident alien includes someone who is a noncitizen who is a lawful permanent resident. IRC §7701(b)(1)(A)(i).
  • A lawful permanent resident is someone who has the immigration status of being allowed to permanently reside in the United States. Status as a lawful permanent resident continues until that immigration status is administratively terminated. IRC §7701(b)(6), Reg. §301.7701(b)-1(b)(1).

The Tax Court cited legislative history to support its conclusion:

The bill defines lawful permanent resident to mean an individual who has the status of having been lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws, if such status has not been revoked or administratively or judicially determined to have been abandoned. Therefore, an alien who comes to the United States so infrequently that, on scrutiny, he or she is no longer legally entitled to permanent resident status, but who has not officially lost or abandoned that status, will be a resident for tax purposes. [H.R. Rept. No. 98-432 (Part 2), at 226 (1983), 1984 U.S.C.C.A.N. 697, 1166.] Topsnik, 143 T.C. No. 12, 20.

Terminate permanent residence by filing the correct paperwork

The Treasury Regulations tell us how to terminate permanent residence.

Treasury Regulations Section 301.7701(b)-1(b)(3) says:

Administrative or judicial determination of abandonment of resident status. – An administrative or judicial determination of abandonment of resident status may be initiated by the alien individual, the Immigration and Naturalization Service (INS), or a consular officer. If the alien initiates this determination, resident status is considered to be abandoned when the individual’s application for abandonment (INS Form I-407) or a letter stating the alien’s intent to abandon his or her resident status, with the Alien Registration Receipt Card (INS Form I-151 or Form I-551) enclosed, is filed with the INS or a consular officer. If INS replaces any of the form numbers referred to in this paragraph or § 301.7701(b)-2(f), refer to the comparable INS replacement form number. For purposes of this paragraph, an alien individual shall be considered to have filed a letter stating the intent to abandon resident status with the INS or a consular office if such letter is sent by certified mail, return receipt requested (or a foreign country’s equivalent thereof). A copy of the letter, along with proof that the letter was mailed and received, should be retained by the alien individual. If the INS or a consular officer initiates this determination, resident status will be considered to be abandoned upon the issuance of a final administrative order of abandonment. If an individual is granted an appeal to a federal court of competent jurisdiction, a final judicial order is required.”

The INS stands for Immigration and Naturalization Service. It was the predecessor to the U.S. Citizenship and Immigration Services (USCIS). The Treasury Regulations have not been updated to reflect the agency reorganization, but you can substitute USCIS for INS without any problems.

Mr. Topsnik did not file Form I-407, nor did he take any steps that would cause the USCIS to revoke his green card. Under tax law, he was still a permanent resident. Therefore, he was still a resident alien.

File Form I-407 to cancel your green card

If you have a green card, and you want to stop the requirement of filing U.S. tax returns and complying with U.S. tax laws, then hand in the proper paperwork. Visit the nearest U.S. consulate and hand in Form I-407 and your green card.

Have the government take away your green card

The government can revoke your permanent resident visa. Usually this happens if you spend too much time outside the United States, then re-enter the United States. Your friendly officer at the border will look at your travel dates and your green card and will announce that you have spent so much time outside the United States that you must not want to be an immigrant anymore.

Very frequently you will be given one last chance — you must stay in the United States for a long-ish amount of time, like 6 months, in order to prove your intent to remain a permanent resident.

This does not happen a lot, but it does happen. Just be aware that the government can take away your green card.

Make a treaty election to stop being a U.S. taxpayer

If you do not cancel your green card officially by filing Form I-407, you can avoid being a U.S. taxpayer by electing to be a nonresident of the United States (for tax purposes) using an income tax treaty.

You do this by filing Form 1040NR, then attaching Form 8833 to tell the IRS that you are making a treaty election to be taxed as a nonresident alien.

Tax implications

When your green card is abandoned (you give it up), is revoked (the government takes it away from you), or you elect to be a nonresident of the USA because of tax treaties, be aware that this change of status will have tax consequences.

You, of course, are focused on the good tax consequences: you are now a nonresident of the United States and are no longer taxed on your worldwide income.

But there are potentially negative effects, too. The biggest of these is involuntary expatriation. If you have had the green card for a long time, and you lose your green card, you will be treated as an “expatriate” and there is at a bare minimum a complicated tax return for you to file in the year that you give up or lose your green card. At worst, you will be treated as a “covered expatriate” and will be subject to a substantial exit tax.

You will lose your green card once the USCIS finds out that you’ve been making treaty elections to be taxed as a nonresident alien.

Bottom line: before you flip status from resident alien (holding a green card) to nonresident alien, figure out the tax consequences. Look before you leap.

Disclaimer

This is not legal advice, so hire someone to help you.

Send me your questions!

Phil.