We recently helped a green card holder clean up his tax situation so he could avoid covered expatriate status. This is his own post-mortem of the process.
It is a familiar story: green card holder returns to his home country but does not formally cancel his immigrant visa. He does not know about the ongoing tax-filing obligations imposed by the U.S. on green card holders.
Eventually, he learns of the problem and wants to file Form I-407 and tie up his loose ends. He is not rich enough to be a covered expatriate ($2,000,000 or more net worth) but his tax returns for the previous five years were not up to snuff. The problem with the tax returns was a paperwork problem, driven by astonishingly dunder-headed U.S. tax laws. (Hint: the U.S. tax system does not know how to correctly handle superannuation).
The Expatriation Experience
Here is his report.
It’s my impression that I’m at the stage where the expatriation process is winding down for me (though I don’t really know when the process is officially finished).
So I thought I’d send you a little more material for the eventual blog, this time from the perspective of having been through most of the process. I’d be happy to add anything else you would like.
For starters, it was probably an outstanding example of how *not* to initiate expatriation: mailing off my old Green Card with I-407 with no idea about the chain reaction it would set off. Being completely ignorant about the citizenship based, worldwide nature of US taxation, and (unbeknownst to me) my status as a US person for tax purposes, was a recipe for disaster. Ignorance is not bliss when it comes to expatriation. I should have read the financial section of the news more often – maybe something would have alerted me to my predicament.
Looking back now, a core lesson has been: no matter how smart you are (or think you are), if you want to exit cleanly you need professional help from start to finish. Above all when you find that you are not in tax compliance, such as my case, The US tax code appears to be extremely complex, and very punitive if you make a mistake.
From an article describing the tax plight of Americans living in Australia, “…. the American tax code is 74,608 pages compared with Australia’s 3657 pages.” Source (I assume they’ve corrected for font and page size etc. Regardless, their point is fairly clear).
FATCA was a real eye opener, and not in a good way. I hadn’t even heard of it until my impromptu expatriation, but the potential penalties are just enormous compared to what someone like myself earns.
Then there’s also the prospect of losing the ~$100k tax free exemption for late tax returns unless they are filed correctly by someone knowledgeable about this.
On top of that there is the $10k fine for filing form 8854 late.
And finally the run of the mill late filing and payment penalties for 1040.
And I’m sure there are others that I’ve missed.
I think I’m stating the obvious when I say that without your great generosity in this matter, there was no reasonable prospect that I could exit cleanly. There is no way that I could have afforded to pay the usual fees to have professionals guide me through this, and there was practically no chance I could have attempted it myself without stumbling (and being punished severely as a result). So, apart from contributing to an eventual blog, I don’t know how to repay you (and Debra, William and everyone at HodgenLaw). About the best I can do for now is “pay it forward” as the saying goes, to in turn help out other people whenever I’m in a position to do so.
To be honest, without your generosity I don’t think I would have even attempted to become compliant. Instead, I think I would have just hoped that whatever had kept me of the radar before would could continue do so.
But always feeling like you’re being hunted wouldn’t be a great way to live life either. And I’m not confident that I would have escaped. The trend appears to be (not just in the US – I’m seeing it here, too) for ever more stringent enforcement and ever more severe punishment for non-compliance to the tax code. I guess it’s because governments everywhere seem to be racking up huge debts and need more income.
Apart from the financial costs, I wonder about other consequences of my expatriation, specifically to how it would affect my chances of returning to the United States as a visitor sometime in the future. Having entered the FATCA streamlined program, I must have an FBI file now, and I doubt I’m the darling of the IRS either. It makes me wonder if I would ever be allowed entry again (or worse, be detained upon entry for some reason). Given my financial position it’s a question that won’t be answered for a long time.
Having said that, I should add that no matter the outcome, I’m not anti-tax, or anti-IRS, or anti-US government and especially not anti-American. Ultimately my own ignorance was to blame.
Caution: Opinion Ahead
There is a memorable and cautionary quote from another context:
The context for that quote is alcoholism.
For those of you on the fence about expatriation, take that warning to heart. The alcoholic keeps drinking, hoping things will get better. They never do.
In tax, the same principle is true. Tax law and the privacy colonoscopy that is the Federal government will, over time, get worse. Not better.
Clean up your tax messes now.
If you want to expatriate, sooner is better than later. Welcome to Brazil.
Philip D. W. Hodgen is the principal attorney of HodgenLaw PC, an international tax law firm based in Pasadena, California. He earned his undergraduate degree from Claremont McKenna College and his law degree from the School of Law at the University of California, Los Angeles. He then went on to earn a Master of Laws degree with a specialty in taxation from the University of San Diego School of Law. Admitted to the California bar in 1982, Phil spent nine years in law firms and with a large U.S. bank before starting his own firm in 1991.
Phil is a past chair of the International Tax Committee of the State Bar of California's Tax Section and was a member of the Executive Committee of the State Bar of California's Tax Section for 2004-2007. Phil frequently speaks on a variety of international tax, trust and estate topics to attorneys, accountants, and real estate professionals.
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Tax laws change over time, and the information in this post above may be less accurate today than it was at the time of the last revision. This post is not tax advice for your specific situation. Please contact an international tax professional to get personalized advice for your situation.