There is no DIY green card abandonment
We get questions. Some of them are answered on the weekly Expatriation Only email list (subscribe!). Here the email that went out earlier today.
Hi from Phil Hodgen. You signed up for my “Expatriation Only” email list–every Tuesday you will get an email every week with a real question from a list subscriber and a real answer from me. Maybe there will be other emails, but they will only be from me, and only about expatriation-related topics. If you want to stop getting these emails, just click on the link at the bottom of the email and you will be instantly unsubscribed. If you want to ask a question, hit “reply” and send it to me. 🙂
Hi from Phil Hodgen. You signed up for my “Expatriation Only” email list–every Tuesday you will get an email every week with a real question from a list subscriber and a real answer from me. Maybe there will be other emails, but they will only be from me, and only about expatriation-related topics. If you want to stop getting these emails, just click on the link at the bottom of the email and you will be instantly unsubscribed. If you want to ask a question, hit “reply” and send it to me. 🙂
Dubai and Riyadh Soon
I will be headed to Dubai and Riyadh soon: October 11 – 19, 2014. If you want to meet up, shoot me an email. Yes I will keep sending this email while I am in the Middle East.This Week
The discussion is thanks to an email I received from Susan Brown Otto, CPA. If the Tax Court can put a wooden stake through a vampire’s heart and then dance on its grave, they did it last week, in the case of Topsnik vs. Commissioner (PDF). There is no do-it-yourself abandonment of green card status, as far as the IRS and the Tax Court are concerned. Green card holders: if you want to stop being U.S. taxpayers, you have to do the paperwork. File Form I-407. Until you do that, you are supposed to file U.S. income tax returns and pay U.S. income tax. Even if you have lived for the last 40 years in the deepest reaches of Burkina Faso and have no intentions of setting foot in the United States ever again, you are a U.S. taxpayer.Details
Mr. Topsnik had a green card for many years. He left the United States after selling a business, and started living abroad. He was receiving installment payments from the sale, and predictably he looked around for ways to, well, not pay tax. The “I’m not a U.S. taxpayer so you can’t tax me” strategy looked good to him. The IRS begged to differ. After tussling a while, the combatants ended up in Tax Court. The ruling went the government’s way. The important part of the Tax Court’s opinion starts at page 19 (!). The logic chain is simple and quick.-
- Internal Revenue Code Section 1 and Treasury Regulations Section 1.1-1(a)(1) impose income tax on citizens and people who are noncitizens but residents of the United States. (Let’s call a noncitizen who is a resident of the United States a “resident alien” because that’s what U.S. tax law calls such a person.)
-
- A resident alien includes someone who is a noncitizen (duh) who is a lawful permanent resident. See Internal Revenue Code Section 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. Importantly, status as a lawful permanent resident continues until that immigration status is administratively terminated. See Internal Revenue Code Section 7701(b)(6) and Treasury Regulations Section 301.7701(b)-1(b)(1).
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.]The Fat Lady’s gotta sing! The Treasury Regulations tell us the song that the Fat Lady must sing–this is exactly how you terminate your immigration status as a permanent resident, which in turn suffices to terminate your lawful permanent resident status for tax purposes, which (whew! finally) means you are no longer a resident alien and you no longer need to file U.S. income tax returns. Treasury Regulations Section 301.7701(b)-1(b)(3) tells us:
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.From a tax point of view, it could not be clearer. If you, the taxpayer, want to cancel your green card and stop being a U.S. income taxpayer, you have to do it on paper. This was Mr. Topsnik’s first failure. He just bailed out and did not file Form I-407. He was still a green card holder, and therefore continued to be a U.S. taxpayer. Here are the arguments he raised:
-
- “I was out of the country so long that if the Immigration Boffins had found me, they would have cancelled my green card, so I really wasn’t a green card holder anymore.” You fail, said the Tax Court. Your tax status as a resident alien (who is supposed to pay tax in the United States) is only loosely coupled to the immigration laws and what the Immigration Boffins might do to you. Tax status is defined in the Internal Revenue Code and you didn’t follow those rules.
- “I was a resident of Germany under the income tax treaty, so I was a nonresident of the United States for income tax purposes.” No you weren’t, says the Tax Court. Your own behavior, Mr. Topsnik, says otherwise.
Thanks Rachel for the comment. You are right. Something in the distant past might be amenable to some creative work.
Reading the ruling I’d disagree on the point that living outside the US for 40 years (in Burkina Faso or elsewhere) at this point would still subject a LPR to the tax laws (maybe only 29 yrs and some change).
The court makes a point to discuss the somewhat inappropriately titled (considering the widening of the tax base in the legislation, a la Edict of Caracalla) Deficit Reduction Act of 1984 and it’s applicability to the US tax laws and Treasury Regulations, without explicitly stating in the dicta what a pre-January 1, 1985 LPR abandonment case might look like.
Footnote 14 points out:
“The committee believes that aliens who have entered the United States as permanent residents and who have not officially lost or surrendered the right to permanent U.S. residence should be taxable as U.S. residents. These persons have rights that are similar
to those afforded [U.S.] citizens (including the right to enter the United States at will); equity demands that they contribute to the cost of running the government as much as citizens. [H.R. Rept. No. 98-
432 (Part 2), supra at 223, 1984 U.S.C.C.A.N. 697, 1163.
Clearly, petitioner, as one who retained (and exercised) the right to enter the United States at will throughout the years in issue, is among the class of
individuals targeted by the 1984 legislation.”
I think the laws at the time of the abandonment are in play; and a taxpayer who was in a similar situation but had informally abandoned this LPR status prior to 1984 would likely NOT be considered a U.S. person under the tax laws today. I don’t know why the court would mention this, and the implications of the 1984 legislation at length, if they thought otherwise.
If I had a potential client come to me and they informally abandoned their LPR status prior to January 1, 1985, I would ask them to seek the advice of an immigration attorney to determine their legal status in the U.S. today, as a result of their particular facts/circumstances and the laws on the books at the time, PRIOR to subjecting them to a lifetime under the U.S. tax regime.
There may also be a similar connotation for dual citizens pre-1986 Citizenship Act, but that’s probably a post for another day.
@Don,
Yes, using the treaty to expatriate is a useful strategy. It uses IRC Section 7701(b)(6) — the flush language at the end of the Section — to work.
In the case I discussed the gentleman gave up his green card in 2010. He also could have probably become a resident of Germany and made the tax election under the treaty to break ties with the USA. But I think that would have made for higher tax instead of the zero tax he wanted.
He was not trying to expatriate. He just wanted to escape tax, I think. Someone trying to expatriate properly should use his experience to understand the importance of cutting ties with the US in the proper way(s).
Couldn’t someone do it the other way around? Take up residence in a country whose Tax Treaty is more favorable to dumping the Green Card?
now signing up for your email.
It appears that the judgement looked in to whether the (strong?) US / German tax treaty would have governed over the I-407, as he was arguing. However, the court didn’t buy that he was a German resident. I didn’t see if the strategy would have worked had he been able to prove his residence there.
Knowing whether the tax treaty governs or the I-407 governs would help most people understand as to whether they might be in trouble or not.
His case could have been different if he had lived in a treaty country. Yes. In that case he would have made an election to be a nonresident of the USA for tax. That would have burned his ability to renew his green card but he clearly didn’t care.
Is this case unique in that he didn’t pay the tax in his home country?
Would the ending have been the opposite according to his tax treaty?
I suppose the IRS will charge $2350 to process the Form I-407 as well.
Hi Phil–could you clarify if the rules were different for people who dumped LPR before AJCA went into effect in June 4, 2004? Specifically if you look at an 8854 instruction guide from, for example, 1999, it says
http://www.irs.gov/pub/irs-prior/i8854–1999.pdf
Long-Term Residents
If you are a former LTR, the date of your expatriation is the earliest of:
1. The date your green card was rescinded by the
Immigration and Naturalization Service (INS).
2. The date your green card was administratively or
judicially determined to have been abandoned. (If you filed Form I-407, Abandonment of Lawful Permanent Resident Status, with the INS, the date of the abandonment of yourgreen card is on line 6(c) of that form.)
3. The first day of the tax year for which you began to be treated as a foreign resident under the provisions of an income tax treaty and do not waive the benefits of the treaty.
Specifically number 3 above could get you out without a formal paperwork requirement…
If you look at the rules after AJCA provisions were passed on a, for example. 2013 8854, the instructions say:
Dates.
1. The date you voluntarily
abandoned your lawful permanent
resident status by filing Department of
Homeland Security Form I-407 with a
U.S. consular or immigration officer.
2. The date you became subject to
a final administrative order for your
removal from the United States under
the Immigration and Nationality Act and
you actually left the United States as a
result of that order.
3. If you were a dual resident of the
United States and a country with which
the United States has an income tax
treaty, the date you commenced to be
treated as a resident of that country and
you determined that, for purposes of the
treaty, you are a resident of the treaty
country and gave notice to the
Secretary of such treatment. See
Regulations section 301.7701(b)-7 for
information on other filing requirements
if you are such an individual.
In other words it seems people who started treating themselves as tax residents for purposes of the tax treaty before June 4, 2004, could get out of the paperwork requirement