This week’s question is from reader R. His question:
I filed my renunciation in September, 2013, but I haven’t been called back to get the loss of nationality certificate.
Do I need to file 8854 if i am not a covered expatriate?
Yes, you need to file Form 8854.
Wow this was a lot harder than I expected. I thought this would be an easy-peasy answer. Instead, there are 3,723 words in this email, and no definite answer.
If you don’t have a lot of time to read this email, the short answer to your question is that you are at risk of a $10,000 penalty, but you have a good excuse.
Further, you may or may not be a covered expatriate–based on being late in filing Form 8854. I have no simple answer for that. Conventional wisdom says you are in trouble, but I think there is some logic to NOT being a covered expatriate.
If you have some time, come along with me on a leisurely stroll through some confusing Federal tax law.
When you relinquish U.S. citizenship, the U.S. government (sooner or later) gives you a piece of paper to prove that you are no longer a U.S. citizen. This piece of paper is called a Certificate of Loss of Nationality.
Sometimes you will get your Certificate of Loss of Nationality very quickly after relinquishment. The Embassy in Riyadh will process these within a couple of weeks of a renunciation there.
Unfortunately, some people are not lucky enough to renounce citizenship in Riyadh. Periodically I get emails from people saying their paperwork has been astray for over a year. Like you.
(By the way. I would dig up those quarterly publications of expatriates’ names from the Federal Register and see if your name is there somewhere. Maybe the Certificate of Loss of Nationality went astray in the mail. Maybe the State Department told the IRS about you and the IRS published your name on the list already.)
Think of it this way. Pretend you go to a store and buy a camera. You hand over the money and the cashier puts the camera in a bag and you walk out. The camera is yours.
Now pretend that you buy the camera, but the cashier puts a receipt in the shopping bag, along with the camera.
Does the receipt make a difference as to whether you, standing on the sidewalk, are the owner of the camera? No. It is merely a proof of purchase, so that if needed in the future (e.g., you want to return the camera and get a refund), you can prove to someone else that you are the owner.
A Certificate of Loss of Nationality is like that receipt. It is an acknowledgment from the U.S. government that you stopped being a U.S. citizen, just like the receipt from the camera store is an acknowledgment that you bought a camera.
Plainly put, getting the Certificate of Loss of Nationality doesn’t make you a noncitizen. Not getting the Certificate of Loss of Nationality does not mean you remain a citizen.
Standing in front of the Consular official and swearing the oath makes you a noncitizen.
However, what the State Department thinks (you are relinquished your nationality) and what the IRS thinks (we’re not sure whether you are an “expatriate” or not) is where we get confusion.
The exit tax laws say that you become an “expatriate” when you relinquish your U.S. citizenship.1
Yeah but when? There are four dates on which you can be treated as relinquishing your U.S. citizenship:
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)),
© 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.2
You renounced your U.S. citizenship, so Section 877A(g)(4)(A) applies to you. You will (eventually) get a Certificate of Loss of Nationality, so Section 877A(g)(4)© will apply to you.
This means that your expatriation date is the earlier of your renunciation date or the date that you receive the Certificate of Loss of Nationality.
Now, you’ve probably spotted the problem here. On Planet Earth, the U.S. government will NEVER issue a Certificate of Loss of Nationality to you BEFORE you renounce your citizenship. Only time travelers can get paperwork proving they relinquished U.S. citizenship before they, y’know, actually relinquish U.S. citizenship.
I’m sure there was a reason that Section 877A(g)(4)© was included, but for the life of me I can’t figure out why. Help me out here. Can anyone explain this?
You are in the interesting (can you see those air quotes I am making with my fingers when I say that word?) position of not actually having the Certificate of Loss of Nationality in hand. The State Department’s Fat Lady has not yet sung her farewell song to you.
Well, aren’t we lucky? The same person who anticipated renunciation via time travel in the Internal Revenue Code has added a special paragraph that applies to people just like you.
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.3
What does that mean?
Here’s my interpretation: “you can’t claim to have an expatriation date by renunciation unless you get a Certificate of Loss of Nationality.”
That makes sense. The IRS doesn’t want you running around claiming you renounced your U.S. citizenship and claiming that you’re not a taxpayer anymore. You have to prove it, just like if you want to return that camera to the store you have to prove you bought it there by brandishing the receipt.
Put bluntly, they don’t want expatriation fraud, in the same way that the IRS does not want people to claim dependent children that don’t exist, etc. etc. That seems entirely reasonable to me.
If we take that interpretation, then as soon as you get the Certificate of Loss of Nationality you will have to figure out your expatriation date. You will have to pick the earlier of your renunciation date4 and the date that you received your Certificate of Loss of Nationality.5 That extra paragraph does not matter anymore, because you now have a Certificate of Loss of Nationality, so the sentence that says “Section 877A(g)(4)(A) does not apply to you” is negated. Section 877A(g)(4)(A) can apply to you now.
This means that you relinquished your U.S. citizenship in September, 2013.
Your problem is pretty simple. And it is created because the law is badly written.
When you were preparing your 2013 income tax returns, you had a decision to make: can I claim that I expatriated in 2013?
You did all the stuff to make yourself a non-citizen of the United States. And from the perspective of the Immigration Dudes and Dudettes, you are indeed a non-citizen. You did an expatriating act voluntarily and with the requisite intention.
But the Internal Revenue Service says that you can’t claim an expatriation date in September, 2013, because you didn’t get the Certificate of Loss of Nationality. You can’t claim that you relinquished on the earlier of your renunciation date or the date you received the Certificate of Loss of Nationality:
What is the earlier of no dates?
This means that if you had filed a Form 8854 in 2013, the IRS could have come back and said you are not entitled to do so. And they would have the law on their side. So you were correct in not filing Form 8854 in 2013. (Warning: not legal advice, etc.)
You diligently look at the 2015 tax forms because finally you can wrap up old business with the IRS. You have to figure out your expatriation date. When did you relinquish your U.S. citizenship?
Again, we turn to Section 877A(g)(4). You are told to pick the earlier of two dates:
You can do that math: 2013 comes before 2015. Your expatriation date was in 2013.
So you pull up the Form 8854. First you look at the 2015 version of the form. Part I, Question 4 asks when you expatriated, and if you tell the truth (in 2013), the form tells you not to file Form 8854.
But wait. You pull up the 2013 version of Form 8854. Part I, Question 4. The last check box. That applies to you. So you check the box, answer the questions you are supposed to, and get ready to file Form 8854.
You grab the instructions so you know where you are supposed to mail Form 8854. You spy the heading “When To File” on page 3 of the instructions to the 2013 Form 8854 (for people expatriating after June 16, 2008):
If you expatriated after June 16, 2008, attach Form 8854 to your income tax return (Form 1040 or Form 1040NR) for the year that includes your expatriation date, and file your return by the due date of your tax return (including extensions). Also send a copy of your Form 8854, marked “Copy,” to the address under Where To File, later. If you are not required to file Form 1040NR or Form 1040, send your Form 8854 to the address under Where To File, later, by the date your Form 1040NR (or Form 1040) would have been due (including extensions) if you had been required to file. (See Resident Alien or Nonresident Alien in the Instructions for Form 1040NR.)11
Let’s look at Notice 2009-85:
Time and manner of filing initial Form 8854. A covered expatriate must file Form 8854 with the covered expatriate’s Form 1040NR or Form 1040, whichever is applicable, for the covered expatriate’s taxable year that includes the day before the expatriation date. A covered expatriate who is required to file Form 8854 for such taxable year will be considered to have timely filed Form 8854 if it is filed by the due date of the original Form 1040NR or Form 1040 (including extensions) for such taxable year. Covered expatriates who are U.S. citizens or long-term residents for only part of the taxable year that includes the day before the expatriation date must file a dual-status return. See section 8.B of this notice.12
Well. The year that includes your expatriation date is 2013. The deadline for filing your 2013 was sometime in 2014. It is now 2015. Your Form 8854 is late. Or, as the IRS would say, “not timely”. Feck. Now what?
You were supposed to file Form 8854 in 2014 because you expatriated in 2013. You are filing it late, in 2015. (Never mind the reason for now. We’ll figure that out later.) What are the consequences?
Simple: you’re a covered expatriate:
Certification of compliance with tax obligations for preceding five years. All U.S. citizens who relinquish their U.S. citizenship and all long-term residents who cease to be lawful permanent residents of the United States (within the meaning of section 7701(b)(6)) must file Form 8854 in order to certify, under penalties of perjury, that they have been in compliance with all federal tax laws during the five years preceding the year of expatriation. Individuals who fail to make such certification will be treated as covered expatriates within the meaning of section 877A(g) whether or not they also meet the tax liability test or the net worth test. For more information about the tax liability test, the net worth test, and the certification test, see section 2 of this notice.13
You file Form 8854 to, among other things, certify that the five years of tax returns before your expatriation year are all clean, and you paid all your taxes. Since your expatriation year is 2013, that means you are supposed to certify that 2008 – 2012 tax returns are on file and fully paid up.
Well, you’re doing this now, in 2015, but you are doing it late. Oh, sorry. On a “not timely filed” Form 8854.
In vain you look through the Instructions to Form 8854 for any clue about what to do if you are late to the party and need to file your Form 8854 after the deadline.
You, dear former citizen, must now go look at the Internal Revenue Code to figure this out.
The IRS is required to collect a bunch of information from you when you relinquish U.S. citizenship.14 Congress told the IRS to collect specific information, then gave the IRS permission to collect any other information else it feels like extracting from you.15
So let’s just take it as a given that the IRS is entitled to ask you whether you did your taxes right for the five years before you expatriated. And let’s take it as a given that the way they ask the question (and expect the answer) is in the form of a check-box on Form 8854, Part IV, Line 6.
The penalty for not giving the IRS the information is $10,000, but the IRS can waive the penalty for reasonable cause.16 My guess? You have a pretty good excuse here, and unless you get assigned the Designated Grumpy Revenue Agent, you will not be tagged with the penalty.
But let’s get back to that troublesome extract from Notice 2009-85, Section 8©. Are you a covered expatriate because you filed a late Form 8854? You certified your tax compliance for the previous five years, but you certified late. Notice 2009-85 says you have to make this certification on a “timely” filed Form 8854.
Notice 2009-85 says a person is a covered expatriate if he/she:
fails to certify, under penalties of perjury, compliance with all U.S. Federal tax obligations for the five taxable years preceding the taxable year that includes the expatriation date, including, but not limited to, obligations to file income tax, employment tax, gift tax, and information returns, if applicable, and obligations to pay all relevant tax liabilities, interest, and penalties (the “certification test”). This certification must be made on Form 8854 and must be filed by the due date of the taxpayer’s Federal income tax return for the taxable year that includes the day before the expatriation date. See section 8 of this notice for information concerning Form 8854.17
Does failure to file a timely Form 8854 cause you to be a covered expatriate?
The trigger for covered expatriate status will be the certification test. A person is a covered expatriate if:
such individual fails to certify under penalty of perjury that he has met the requirements of this title for the 5 preceding taxable years or fails to submit such evidence of such compliance as the Secretary may require.18
The law does not give a deadline for certifying that you are in compliance. But the IRS has administratively stated there is a deadline for this action.
I don’t have any good answers for you. I see two interpretations that the IRS could make here.
The first is horrible, but is supported by being the apparent conventional wisdom. The position they would take is that Notice 2009-85 creates conjunctive requirements that you must satisfy in order to pass the certification test: if you file Form 8854 and you file it before the deadline, then you pass the certification test and you are not a covered expatriate.
If A and B, then C.
That’s the equation. Now, with words.
If (certify on Form 8854) and (file Form 8854 by the prescribed deadline), then (pass the certification test).
You fail the second conjunctive requirement, thus causing a result you do not want:
A and -B, therefore -C
(You filed Form 8854) and (you did not file Form 8854 by the prescribed deadline), therefore (you did not pass the certification test)
If you do not pass the certification test, you are a covered expatriate.
The second interpretation is benign. You did the required certification, you were late, but you still pass the certification test.
We look at Notice 2009-85 (quoted above) and note that everything needs a deadline. Time exists so everything doesn’t happen at once. Or something like that. We note that the obligation to certify continues to exist, but the fact that the IRS put a filing deadline does not affect your ability to make the certification late.
In this way, it is similar to a late tax return. Right above your signature there is some tiny text that says you are certifying that your tax return is correct, under penalty of perjury. If you file late, you are still making that certification.
What’s the difference between filing a late income tax return with the Form 1040 certification of correctness for that one year, and filing a late Form 8854, certifying correctness for five preceding years? I would argue none.
My conclusion? I don’t know. For you, I would definitely file Form 8854. I think you have a good reason for getting out of any financial penalties for being late. Whether the IRS chooses to tag you as a covered expatriate because the Form 8854 is late – who knows.
I would file, and take the fight to them. There is no upside to not filing. You just prolong the agony.
If we have someone who has renounced but has not yet received a Certificate of Loss of Nationality, we file Form 8854 on a timely basis. Screw Section 887A(g)(4), its illogic, and its flush language.
We want to head ’em off at the pass (by “’em” I mean the IRS) and have a timely filed Form 8854 in order to protect the certification test position the taxpayer is taking. We figure that sooner or later the Certificate of Loss of Nationality will come through, then the “earlier of (A) or ©” rule will apply, and we have properly satisfied the rule.
I am not your lawyer, and this is not legal advice to you. (And God help you–I didn’t even come to a firm conclusion one way or the other this week.) If you need help, please hire someone who can advise you.
Next week I will answer another question about expatriation. Send me an email!