Featured post

Welcome to Citizenship Solutions – John Richardson

Welcome to Citizenship Solutions – The blog of John Richardson

I am guessing (actually I know for sure) that you arrived here because of some aspect of being a U.S. citizen living outside the United States. Maybe you are a Green Card holder. I also know how you are feeling.

“U.S. citizens” and “Green Card holders” are referred to as “U.S. Persons”. So, if you are a “U.S. Person Abroad”, well, life is pretty tough. in fact living as a “U.S. Person” outside the United States is: hard, expensive, confusing and (quite frankly) unsustainable.

Some of you are NOT in compliance with the intricate and (almost) impossible to understand web of tax and reporting requirements. Non-compliance has its share of problems.

Some of you ARE in compliance (as far as you know) with the intricate (and almost) impossible to understand web of tax and reporting requirements. Compliance also has its share of problems (stress, expense, anxiety).

Whether you are in compliance or not in compliance, you have problems. This is because:

U.S. citizenship is the one citizenship in the world that affects virtually every aspect of your life. in addition to the information on this blog, I help people with the following kinds of specific problems/questions (which include):

1. Are you a U.S. citizen at all? Have you relinquished U.S. citizenship along the way? If you have relinquished U.S. citizenship, are you a “U.S. Person” for FATCA and tax filing purposes?

2. Have you just received a “FATCA Letter” addressed to you as an INDIVIDUAL or to you as an ENTITY (corporation, trust, etc.)? How to respond. What’s a W9? What’s a W-8BEN-E anyway?

3. What about that old Green Card sitting in your drawer? What to do ….

4. Renouncing U.S. citizenship – What’s the “right way”? What’s the “wrong way”? The better question is “what’s the safest way”? What about that “back dated” relinquishment?

5. Green Card expatriation – How to exit the tax system and the U.S. immigration system.

6.  Oh My God!! The moment many of you will never forget. Yes it’s a problem. No it’s not as much of a problem as you think. Make certain that you respond and not react. If all you want to do is file U.S. taxes

7.  U.S. S. 877A “Exit Tax” consulting. If you think you can leave the “Land Of The Free” for free, you better think again. A bit about the the United States expatriation taxes. Those of you with a  non-U.S. pension should take specific note!

8. Retirement and financial planning
(including pensions) as a “U.S. Person” abroad – You will be surprised at the problems you will have living as a U.S. tax compliant American abroad. Think (or maybe you shouldn’t) “PFIC“.

9. Coming into U.S. tax complianceWhat are the various options?  Why one option over another? What about “Streamlined”? 99% of you should NEVER use “OVDP”!!!

10. Non-U.S. AKA “Foreign Corporations” – Yes, these can be a BIG problem. Caution: The U.S. CFC tax rules may attribute income to YOU that you never received!

11. Getting a divorce? Are you a U.S. citizen married to a non-citizen? – Your U.S. citizenship will play a role.

Respond, don’t react! – Do NOT make any decisions without understanding the present and FUTURE consequences of those decisions.

So, how do I know this?

First, I am a person (Toronto based lawyer actually) who was born in the United States and has lived almost all of my life outside the United States. In other words, I have lived and do live these problems.

Second, I have spent the last few years of my life assisting “U.S. Persons abroad” survive the unjust imposition of FATCA, FBAR and “CBT” (AKA U.S. “place of birth taxation”) on Americans abroad. I work with many groups of people including: “accidental Americans“, long term dual citizens who wish to retain U.S. citizenship, long term dual citizens who feel they must renounce U.S. citizenship, Green Card holders (whether they live in the United States or not) and those who have ONLY U.S. citizenship. It’s what I do.

Third,
I have been (and continue to be) actively involved in efforts to oppose FATCA in the courts and in the process of making submissions to the U.S. Treasury. If you want to learn about the Alliance For The Defense of Canadian Sovereignty lawsuit against the Government of Canada, see here.

I work with people all around the world! I have given “live presentations” about the “Problems of U.S. citizenship” all over Canada and Europe. I have given a number of “media interviews” about FATCA and the problems of U.S. citizenship. I have testified as a witness before the Canadian House of Commons Standing Committee on Finance (May 2014). I have written hundreds of articles and blog posts about FATCA, FBAR and U.S. taxation-based citizenship. I have and continue to teach courses both for Americans abroad and for professionals who counsel U.S. citizens abroad.

Anyway, the blog is free. The counselling and assistance require individual consultations. Contact me if you want me to help you solve these problems as they apply to YOUR SITUATION.

John Richardson

P.S. Here is the one of the very first posts that I wrote on for this blog. Some posts are “timeless”. “What you need to consider BEFORE consulting a lawyer or tax professional“.

 

 

 

Featured post

“Coming Into Tax Compliance Book” – How Americans can come into U.S. tax compliance in a FATCA world

Are you “Coming To America” by entering the U.S. tax system as an American Abroad?

https://twitter.com/ExpatriationLaw/status/616126456935137280

The “How To Come Into U.S. Tax Compliance” book for Americans abroad

John Richardson, LL.B, J.D.

I have contributed to establishing the new “Citizenship Taxation” site. As part of launching that site, I have written a series of posts providing relevant information (in a broad sense) about how Americans abroad, who did not know about their U.S. tax obligations, can come into U.S. tax compliance.

Sooner or later, it’s likely that many people will receive a FATCA letter. In your panic, you should be careful. There are a number of things Americans abroad should consider before consulting a lawyer or tax professional.

This series of posts developed from my “Educational Outreach” program for Americans abroad. It is an effort to respond in a practical way to the questions that people have.

The chapters of “Coming Into Compliance Book” are:

Chapter 1 – “Accepting Cleanliness – Understanding U.S. Citizenship Taxation – To remain a U.S. citizen or to renounce U.S. citizenship

Chapter 2 – “But wait, I can’t renounce U.S. citizenship if I’m not a U.S. citizen. How do I know if I am a U.S. citizen?”

Chapter 3 – “No matter what, I must come into U.S. tax compliance – Coming into U.S. tax compliance for those who have NOT been filing U.S. taxes

Chapter4 – “Oh no, I have attempted U.S. tax compliance by filing tax returns. I have just learned that I have made mistakes. How do I fix those mistakes?”

Chapter 5 – “I don’t want to renounce U.S. citizenship. How to live outside the United States as a U.S. tax compliant person

Chapter 6 – “I do want to renounce U.S. citizenship. This is too much for me. How the U.S. “Exit Tax” rules might apply to me if I renounce

Chapter 7 – “I really wish I could do retirement planning like a “normal” person. But, I’m an American abroad. I hear I can’t invest in mutual funds in my country of residence. The problem of Americans Abroad and non-U.S. mutual funds explained.

Chapter 8 – “We all have to live somewhere. Five issues – “The problem of Americans Abroad and non-U.S. real estate explained

Chapter 9 – “Receiving U.S. Social Security – #Americansabroad and entitlement to Social Security

Chapter 10 – “Paying into Social Security – #Americansabroad, double taxation and the payment of “Self-employment” taxes

Chapter 11 – “Saving the children – INA S. 301 – “Residence” vs. “Physical Presence” and transmission of US citizenship abroad

Chapter 12 – “Relinquishing citizenship and your IRA – bringing your IRA home

Chapter 13 – “Married filing separately” and the “Alien Spouse” – the “hidden tax” on #Americansabroad

Chapter 14 – “The Obamacare “Net Investment Income Tax” – Pure double taxation of #Americansabroad

Chapter 15 – “To be “FORMWarned is to be “FORMArmed” – It’s “FORM Crime” stupid!!

Chapter 16 – “Most “Form Crime” penalties can be abated if there is “reasonable cause”

Chapter 17 – “How to get “credit” for taxes (foreign) paid to your country of residence

Chapter 18 – “I don’t pay taxes in the country where I live. Can I “exclude” my foreign income from the U.S. tax return?

Chapter 19 – “Is it better to take the “Foreign Tax Credit” or the “Foreign Earned Income Exclusion” – a discussion

Chapter 20
– “The child tax credit: take it, leave it or how to take it

Chapter 21 – “How #Americansabroad can continue to use the #IRA as a retirement planning vehicle

Chapter 22 – “To share or not to share” – Should a U.S. citizen share a bank account with a “non-citizen AKA alien spouse?

The “Coming Into Compliance Book” is designed to provide an overview of how to bring some sanity to your life.

 Coming to America

You may remember the old Eddie Murphy movie about “Coming To America”.

Welcome to the confusing and high stakes rules for U.S. taxation and Americans abroad.

The United States has the most complex, confusing, most penalty ridden and most difficult anti-deferral regime in the world. McGill Professor Allison Christians has noted that Americans abroad are both:

“deemed to be permanently resident in the United States for tax compliance and financial reporting purposes” …

and are

“subject to the most complex aspects of the U.S. tax code regardless of any activity in the United States, and facing extraordinary compliance costs and disclosure risks even for nil returns”

Although Americans abroad are deemed to be resident in the United States, their assets are treated as “offshore”. In addition Americans abroad are subject to taxation in their country of residence.

All of this means that:

1. Americans abroad are subject to the worst and most punitive aspects of the U.S. tax system (there is no Homelander who is treated as badly as an American abroad); and

2. Denied most benefits of the tax systems of their country of residence.

To put it simply, Americans abroad get the worst of all possible tax systems.

The most horrific aspects of the U.S. tax system are saved for Americans abroad. Prepare to be shocked. As one commenter at the Isaac Brock Society site recently said:

Continue reading

Featured post

Renouncing US citizenship? How the S. 877A “Exit Tax” may apply to your Canadian assets – 25 Parts

Introduction:

usexittax

There is much discussion of the U.S. rules which operate to impose taxation on the residents of other countries and income earned in those other countries. You will hear references to “citizenship taxation”, “FATCA Canada“, PFIC, etc. It is becoming more common for people to wish to relinquish their U.S. citizenship. The most common form of “relinquishment is renunciation”. The U.S. tax rules, found in the Internal Revenue Code, impose taxes on everything. There is even a tax on “renouncing U.S. citizenship”. I don’t mean the $2350 USD administrative fee which everybody has to pay. (Isn’t that really a tax?). I mean a tax on your assets. To be clear:

You must pay a price to NOT be a U.S. citizen.

This tax is found in S. 877A of the U.S. Internal Revenue Code.

It’s defined as the:

Tax responsibilities of expatriation

Few people are aware of this tax. Fewer still understand how it works.  As FATCA operates to enforce U.S. taxation on many Canadian citizens, and increasing numbers wish to NOT be U.S. citizens, the importance of understanding the U.S. “Exit Tax” increases.

It is particularly important to understand what triggers the “Exit Tax”. You will be subject to the “Exit Tax” if you are a “covered expatriate”. You must know what that means and why, sooner or later, everybody will become a “covered expatriate”.

The “Exit Tax” is not a simple “token tax”. For Canadians, the tax can be a significant percentage of their net worth. Furthermore, the tax is payable NOT on actual gains, but on “pretend gains”. (Where would the money come from to pay the tax?)

Hang on to your seats. You will shocked, amazed and horrified by this.

Since the advent of FATCA in Canada, this issue is increasingly important.*

To be forewarned is to be forearmed!

This is a 22 part series which is designed to provide you  with some basic education on:

How the U.S. S. 877A Exit Tax rules work; and

How they particularly affect Canadians with a U.S. birthplace, who lived most of their lives in Canada.

This will be covered over a 9 day period in a “9 part” series. (It has since been expanded to 16 posts and counting.)

Although this series is beginning on “April Fools Day”, I assure that this is NOT a joke.

The 16 parts are:

Part 1 – April 1, 2015 – “Facts are stubborn things” – The results of the “Exit Tax

Part 2 – April 2, 2015 – “How could this possibly happen? “Exit Taxes” in a system of residence based taxation vs. Exit Taxes in a system of “citizenship (place of birth) taxation

Part 3 – April 3, 2015 – “The “Exit Tax” affects “covered expatriates” – what is a “covered expatriate“?”

Part 4 – April 4, 2015 – “You are a “covered expatriate” How is the “Exit Tax”  actually calculated

Part 5 – April 5, 2015 – “The “Exit Tax” in action – Five actual scenarios with 5 actual completed U.S. tax returns

Part 6 – April 6, 2015 – “Surely, expatriation is NOT worse than death! The two million asset test should be raised to the Estate Tax limitation – approximately five million dollars – It’s Time

Part 7 – April 7, 2015 – “Why 2015 is a good year for many Americans abroad to relinquish U.S. citizenship – It’s the exchange rate

Part 8 – April 8, 2015 – “The U.S. “Exit Tax vs. Canada’s Departure Tax – Understanding the difference between citizenship taxation and residence taxation

Part 9 – April 9, 2015 – “For #Americansabroad: US “citizenship taxation” is “death by a thousand cuts, but the S. 877A Exit Tax is “death by the guillotine”

Part 10 – April 10, 2015 – “The S. 877A Exit Tax and possible relief under the Canada U.S. Tax Treaty

Part 11 – April 11, 2015 – “S. 2801 of the Internal Revenue Code is NOT a S. 877A “Exit Tax”, but a punishment for the “sins of the father (relinquishment)

Part 12 – April 12, 2015 – “The two kinds of U.S. citizenship: Citizenship for “immigration and nationality” and citizenship for  “taxation” – Are we taxed because we are citizens or are we citizens because we are taxed?”

Part 13 – April 13, 2015 – “I relinquished U.S. citizenship many years ago. Could I still have U.S. tax citizenship?

Part 14 – April 14, 2015 – “Leaving the U.S. tax system – renounce or relinquish U.S. citizenship, What’s the difference?

Part 15 – May 22, 2015 – “Interview with GordonTLong.com – “Citizenship taxation”, the S. 877A Exit Tax, PFICs and Americans abroad

Attention: Parts 16 – 21 focus on the “dual citizen exemption in the context of Canada’s Citizenship laws.

Part 16 – February 16, 2016 – “Why the S. 877A(g)(1)(B) “dual citizen exemption” encourages dual citizens from birth to remain US citizens and others (except @SenTedCruz) to renounce” – Note that this module is composed of Parts 16 – 21 – six posts.

Part 17 – February 16, 2016 – The history of Canada’s citizenship laws: Did the 1947 Canada Citizenship Act affirm citizenship or “strip” citizenship and create @LostCanadians?

Part 18 – February 16, 2016 -The S. 877A “dual citizen” exemption – I was born before the first ever Canada Citizenship Act? Could I have been “born a Canadian citizen”?

Part 19 – February 16, 2016 – The S. 877A “Dual Citizen” exemption: The 1947 Canada Citizenship Act – Am I still a Canadian or did I lose Canadian citizenship? (The “Sins Of The Father”)

Part 20 – February 16, 2016 -The S. 877A “Dual Citizen” exemption: The 1947 Canada Citizenship Act and the requirements to be “born Canadian

Part 21 – February 16, 2016 – “The S. 877A “Dual Citizen” exemption: I was born a dual citizen! Am I still “taxed as a resident” of Canada?

Part 22 – February 29, 2016 – “The S. 877A “Dual Citizen” exemption: MUST certify tax compliance for the five years prior to relinquishment

More on the United States Expatriation Tax – ongoing miscellaneous:

Part 23 – “How the 1966 desire to “poach” capital from other nations led to the 2008 S. 877A Exit Tax

Part 24 – “Clinton Treasury representative Les Samuels explains why the U.S. Exit Tax SHOULD apply to the assets of Americans abroad

Part 25 – “Relinquishing US citizenship: South African Apartheid, the Accidental Taxpayer and the exit tax

 

________________________________________________________________________________________

* Why this is of increased importance: The role of FATCA and U.S. taxation in Canada

A picture/video tells a thousand words. Have a look at the “Rick Mercer FATCA video” in the following tweet:

FATCA is U.S. law which is designed to identify financial assets and people, outside the United States, that the U.S. believes are subject to its tax laws. (It makes no difference whether the person is a Canadian citizen”.) This includes people who were:

– born in the U.S.

– Green card holders

– people born to U.S. parents in Canada

– “snow birds” who spend too much time in the United States

The Government of Canada is assisting the United State to implement FATCA in Canada. To be specific:

– on February 5, 2014 the Government of Canada formally agreed to change Canadian law to identify “U.S. connected” Canadians in Canada

– in May of 2014, the Government of Canada passed Bill C 31 which contained the implementing legislation

– on July 1, 2014 FATCA became the law in Canada

– since July 1, 2014 many Canadians have received a “FATCA Letter” (can the U.S. claim you as a taxpayer?)

The Alliance For The Defence Of Canadian Sovereignty has sued the Government of Canada in Federal Court on the basis that the participation of the Canadian Government in FATCA, is in violation of the Charter Rights of Canadians. You can keep up with their progress on the Alliance blog” which is here.

FATCA is a tool to enforce “U.S. taxation in Canada”. The result is that more and more Canadian citizen/residents  will be forced to pay U.S. taxes. But, U.S. tax rules include much more than tax. They are source of comprehensive information gathering and “information returns”. Typical returns required by U.S. taxpayers in Canada include: FBAR, FATCA Form 8938, Form 5471, Form 3520, Form 3520A and many more.

In addition, U.S. tax rules are different from Canadian tax rules. The most painful example is that when:

– Canada allows a “tax free” capital gain on your principal residence

– the U.S. imposes a 23.8% tax on the sale of your principal residence (you get a $250,000 deduction)

Sound horrible?

It is, but:

It’s only Canadian citizens with a past “U.S. connection” who will be subject to these taxes. It is estimated that approximately one million Canadians may be subject (as “U.S. Subjects”) to these rules. But, Canadians with a “U.S. connection” are members of families. Therefore, U.S. taxation in Canada will impact all members of a Canadian family which has at least one “U.S. connected” member.

 

John Richardson

 

Featured post

What you should consider before contacting a lawyer

decision

The Reality of U.S. Citizenship Abroad

Nobody denied that the unintended targets of Congressional legislation aimed at those who supposedly “owe allegiance” to the USA, now assisted by craven foreign governments anxious lest their financial services entities lose access to the US market, are mostly unlikely to do anything at all. But the whole idea of universal self-assessment of taxation is to keep the taxpayer in an anxious condition, to make him overpay if possible, but at least not to underpay. Those now faced with an unprecedented, even retroactive, enforcement campaign and who must, if they wish to become compliant and avoid penalty or even prosecution (should they be identified in the future), sacrifice much of their wealth, even become insolvent.

Comment at the Isaac Brock Society blog – July 29, 2013

Continue reading

Citizenship-based reporting: Russia’s “citizenship reporting” requirements – will the United States be next?

Prologue – A law firm perspective …

As reported by Chelco Vat:

The law does not make dual citizenship illegal; it is merely a reporting requirement.

Federal Law No. 142-FZ on Amendment of Articles 6 and 30 of the Federal Law on Russian Federation Citizenship and Individual Regulations of the Russian Federation, which took effect on 4 August 2014, makes it a criminal offence for Russian nationals to conceal dual citizenship or long-term residence abroad.

Hmmmm … ONLY a reporting requirement you say …

The perspective of an individual subject to the citizenship-reporting requirement …

The above tweet references an article in the New York Times discussing Russia’s law that requires all Russians with a second foreign citizenship report that foreign citizenship to the Government.
Continue reading

Citizenship-based reporting: Mr. #FBAR as a role model for President Putin and the Russian government

 

It has been widely reported that American actor Steven Seagal has joined American boxer Roy Jones in becoming a citizen of Russia. By becoming Russian citizens, Mr. Seagal and Mr. Jones are now subject to Russia’s Currency laws, which include the requirement to report their non-Russian bank accounts to the Kremlin. Messrs Seagal and Jones may admire Russia. That said, it’s clear that the Kremlin admires the U.S. Treasury in general and Mr. FBAR – America’s most important citizen – in particular.

Citizenship-based reporting: Mr. FBAR as a role model for President Putin and the Russian government …

 

Although Russia has “residence-based taxation” it has “citizenship-based reporting”.
Continue reading

False Form 8854 used as part of “willful” #FBAR prosecution

The primary story is of a U.S. professor who pleaded guilty to an FBAR violation and was subjected to a 100 million FBAR penalty.  Notably the “tax loss” was 10 million dollars and the FBAR penalty was 100 million dollars. It appears that Mr. FBAR is becoming an important tool in the arsenal used by the United States Treasury.

The more interesting (for the purposes of expatriation) was the role that a “false Form 8854 “Expatriation Statement”) may have played in the guilty plea.

The story has been reported at the following two sources:

and on Jack Townsend’s blog

What is most  interesting is the description from the Department of Justice site which includes:

Horsky directed the activities in his Horsky Holdings and other accounts maintained at the Zurich-based bank, despite the fact that it was readily apparent, in communications with employees of the bank, that Horsky was a resident of the United States.  Bank representatives routinely sent emails to Horsky recognizing that he was residing in the United States.  Beginning in at least 2011, Horsky caused another individual to have signature authority over his Zurich-based bank accounts, and this individual assumed the responsibility of providing instructions as to the management of the accounts at Horsky’s direction.  This arrangement was intended to conceal Horsky’s interest in and control over these accounts from the IRS. 

In 2013, the individual who had nominal control over Horsky’s accounts at the Zurich-based bank conspired with Horsky to relinquish the individual’s U.S. citizenship, in part to ensure that Horsky’s control of the offshore accounts would not be reported to the IRS.  In 2014, this individual filed with the IRS a false Form 8854 (Initial Annual Expatriation Statement) that failed to disclose his net worth on the date of expatriation, failed to disclose his ownership of foreign assets, and falsely certified under penalties of perjury that he was in compliance with his tax obligations for the five preceding tax years.

Horsky also willfully filed false 2008 through 2014 individual income tax returns which failed to disclose his income from, and beneficial interest in and control over, his Zurich-based bank accounts.  Horsky agreed that for purposes of sentencing, his criminal conduct resulted in a tax loss of at least $10 million.  In addition, Horsky failed to file Reports of Foreign Bank and Financial Accounts (FBARs) up and through 2011, and also filed false FBARs for 2012 and 2013.

The point is that the false Form 8854 (used primarily to provide information about whether one is a “covered expatriate” and to calculate the Exit Tax) was used as evidence of part of a conspiracy to evade taxes. This is an interesting use of the Form 8854,  which is primarily an “information return”.

Obviously this a “general interest” post with extremely unusual circumstances. But, it is an example of how associations with others, in the  “Wide and Wonderful World of U.S. Tax Forms” can become a problem.

This is also a reminder the “information returns” DO matter!

 

 

 

 

 

 

 

 

 

Around the world in 192 pages: Experiences of #Americansabroad in an #FBAR and #FATCA world

Here it is:

richardsonkishcommentsamericansabroadapril152015internationaltax-2

This is one of seven parts of the Richardson Kish submissions to the Senate Finance Committee in April of 2015. I thank Patricia Moon for her unbelievable effort in putting this document together!

And speaking of Americans abroad in an FBAR and FATCA world, you might like to read:

The message is:

When In Rome, Live As A Homelander

#YouCantMakeThisUp!

John Richardson

 

The Internal Revenue Code vs. IRS Form 8854: the “noncovered expatriate” and the Form 8854 Balance Sheet

Introduction: For whom the “Form” tolls …

I would not want the job that the IRS has. There are many “information reporting requirements” in the Internal Revenue Code. The IRS has the job (sometimes mandatory “shall” and sometimes permissive “may”) of having to create forms that reflect the intent of the Internal Revenue Code. The forms will necessarily reflect how the IRS interprets the text and intent of the Code. Once created, the “forms” become a practical substitute for the Code. If you look through your tax return you will “form” after “form” after “form”. The forms reflect how the various provisions of the Internal Revenue Code are “given meaning” (if the meaning can be determined).

The Form (in theory) follows the requirements of the Internal Revenue Code …

Every “form” is the result of one or more sections of the Internal Revenue Code. For example, Form 8833 is described as:

Continue reading

How the “assistance in collection” provisions in the Canada US Tax Treaty facilitates “US citizenship based taxation”

The above tweet references the comment I left on an article titled: ”

Why is the IRS Collecting Taxes for Denmark?

which appeared at the “Procedurally Speaking” blog.

The article is about the “assistance in collection” provision which is found in 5 U.S. Tax Treaties (which include: Canada, Denmark, Sweden, France and the Netherlands). I am particularly interested in this because of a recent post at the Isaac Brock Society.

This post discusses the “assistance in collection” provision found in Article XXVI A of the Canada U.S. Tax Treaty. The full test of this article is:

Continue reading

Canada Pension Plan (and other “foreign social security”), The “net worth” test, Form 8854 and Form 8938

Q. How does the inability of the state of Rhode Island to pay its employee pensions help us understand the “net worth” of a U.S. citizen wanting to renounce U.S. citizenship?

A. The answer (like most wisdom in the modern world) is explained in the following tweet.

The article referenced in the above tweet helps us understand the difference between an “entitlement” created by statute and a “right” created by contract.

In most states, lawmakers or the courts have taken steps to make public pension systems creatures of contract law, as opposed to mere creatures of statute. This may sound obscure, but the difference is critical. Statutes are relatively easy to change — lawmakers just amend the law. But states that want to tear up pension contracts face an uphill fight, because of a clause in the United States Constitution that bars them from enacting any law that retroactively impairs contract rights.

Conclusion: Rhode Island’s Governor was able to change the Rhode Island pension benefits. The reason was that: the pension benefits were created by statute (the government can create the statute and the government can change the statute) and not by an enforceable contract (nobody can take the pension away) creating an enforceable right.

The article is fascinating. Other states have not been as fortunate and cannot legislate their pension obligations away. But, what does this have to do with anything?

For Americans abroad: “All Roads Lead To Renunciation“.

Renouncing U.S. citizenship – leaving the U.S. tax system …

“U.S. citizens” considering relinquishing U.S. citizenship or “long term residents” abandoning their Green Cards “may” be subject to the draconian S. 877A Exit Tax rules. I say “may”. Only “covered expatriates” are subject to the “Exit Tax”

Unless you meet one of two exceptions,* “U.S. citizens” and “long term residents” will be “covered expatriates” if they meet ANY one of the following three tests ..

1. Income test (well, based on “tax liability on taxable income”) – You have an average tax liability of approximately $160,000 for the five years prior to the year of relinquishment or abandonment

2. Net worth test – Assets totaling up to of $2,000,000 USD or more

3. Compliance test – Fail to certify compliance with the Internal Revenue Code for the five years prior to the date of relinquishment or abandonment

* See Internal Revenue Code S. 877A(g)(1) which describe the “dual citizen at birth” and the “relinquishment before age 181/2” exceptions.

Net worth is based on the value of all your property. Foreign pensions are included in property. Is non-U.S. “Social Security” included? “Social Security” is a creation of statute. “Social Security can be taken away by changing or repealing the statute.

Because “pensions” are based on a “contractual” right to receive the pension they are included as “property”. If your employer doesn’t pay the pension you are owed you have the right to sue.

Because “social security” is created by statute and can be taken away by statute it is NOT “property”.

Specified Foreign Financial ASSETS – “Non-U.S.” Social Security and Form 8938 …

When it comes to “non-U.S.” Social Security (think Canada Pension Plan) created by statute, the IRS says:

(This makes sense because “Social Security” which is created by statute is NOT property!)

But, when it comes to “foreign pensions” which were created by contract, the IRS says:

(This makes sense because the “pension” is a contractual right and is therefore property.)

Is the Australian Superannuation a Foreign “Social Security Type” plan? – Are Australian “Poorer Than They Think?”

See the post referenced in the above tweet.

Well, the “compliance industry” actually creates the law.** Perhaps the “compliance industry” in Australia should simply take the position that Australian Superannuation is the equivalent of “U.S. Social Security”. The U.S. Australian tax treaty would then exempt it from U.S. taxation.

Article 18(2) of the U.S. Australia Tax Treaty reads:

(2) Social Security payments and other public pensions paid by one of the Contracting States to an individual who is a resident of the other Contracting State or a citizen of the United States shall be taxable only in the first-mentioned State.

Important question indeed! Whether Australians are subject to asset confiscation the S. 877A “Exit Tax”,  may depend on the answer to this characterization/question.

______________________________________________________________________________

** In a recent post discussing the death of Dr. Pinheiro and the various “branches” of the U.S. tax compliance system, I identified brach 3 as follows:

Branch 3: The Tax Professionals – These include lawyers, CPAs, Enrolled Agents, and tax preparers. The latter two are specifically licensed by the IRS.

 What needs to be understood is that:

  1. U.S. tax laws are NOT enforced by the IRS as much as they are enforced by the “Tax Professionals”.
  2. The “Tax Professionals” “create” the interpretation of various laws by how they respond to them. (There is a reason that nobody knew about PFICs prior to 2009.) Is a TFSA really a “foreign trust”? Are the S. 877A Exit Tax rules retroactive?
  3. Tax Professionals are NOT independent of the IRS and depend on the IRS for their livelihoods.
  4.   Tax Professionals are also subject to Circular 230 which is the “Rules of Practice” before the Internal Revenue Service.

Understand that very very few “tax professionals” inside the United States know anything about U.S. taxation of its citizens abroad. This is a complex area that is highly specialized.

This is why your choice of tax professional matters very much! Tax Professionals  are NOT all the same. The fact that they are a licensed EA, CPA or lawyer is completely irrelevant. Some of them understand this stuff and some don’t. When it comes to “International Tax”, there is an exceptionally long learning curve. Regardless of their intention, tax professionals have, through their possible ignorance, possible incompetence and almost certain desire to “get along with the IRS”, the potential to completely destroy you!

Food for thought!

John Richardson

The “Exit Tax”: Dual US/Canada citizen from birth, no Canada citizenship today = no exemption to US “Exit Tax”

The above tweet references a “guest post” written by Dominic Ferszt of Cape Town South Africa. The post demonstrates how the “dual citizen from birth” exemption to the S. 877A “Exit Tax” relies on the citizenship laws of other nations. In some cases those laws of other nations are arbitrary and unjust. If these laws were U.S. laws, they might violate the equal protection and/or due process guarantees found in the United States constitution. For example, Mr. Ferszt describes how the “dual citizenship exemption” to the “Ext Tax” is dependent on South African “Apartheid Laws”. He describes a situation where a “black” U.S. citizen from birth is denied the benefits of the dual citizen exemption to the Exit Tax, which are available to a “white” dual citizen from birth. (During the “Apartheid Era” Blacks were not entitled to South African citizenship.)

So, what’s the S. 877A “Exit Tax”  dual citizen exemption and how does it work?

The dual citizen exemption, which I have discussed in previous posts,  is found in Internal Revenue Code S. 877A(g)(1)(B) and reads:

(B) Exceptions An individual shall not be treated as meeting the requirements of subparagraph (A) or (B) of section 877(a)(2) if—
(i) the individual—
(I) became at birth a citizen of the United States and a citizen of another country and, as of the expatriation date, continues to be a citizen of, and is taxed as a resident of, such other country, and
(II) has been a resident of the United States (as defined in section 7701(b)(1)(A)(ii)) for not more than 10 taxable years during the 15-taxable year period ending with the taxable year during which the expatriation date occurs, or

Entitlement to the “dual citizen exemption” depends entirely on the citizenship laws of other countries …


Continue reading

The US “expatriation tax” and the the incentive to apply for a Green Card and/or remain in the USA

America doesn’t really need skilled immigrants, or does it?

The above tweet references a post that references a comment by Victoria Ferauge:
Continue reading

Is Form 8938 required by “Green Card Holders” who are nonresidents by “treaty tie breaker”? – Any exemption is the result of “IRS grace”

Summary:

The context: Form 8938 was created by the IRS to meet the reporting requirements mandated by Internal Revenue Code S. 6038D. S. 6038D was mandated by S. 511 of the HIRE Act.

On March 18, 2010 President Obama signed the HIRE Act into law. The HIRE Act had two targets. The first target was the Foreign Financial Institutions that were willing to do business with U.S. citizens. The second target was Americans citizens who attempted to do business with any “non-U.S. bank or other financial institution.

The first target – Foreign Financial Institutions: The HIRE Act introduced Chapter 4 of Subtitle A – AKA FATCA – into the Internal Revenue Code. Pursuant to Chapter 4 Foreign Financial Institutions are threatened with a 30% sanction for failing to “Review, Identify and Report” those who the U.S. claims as “U.S. persons“. The Canadian FATCA lawsuit, launched by the Alliance For The Defence of Canadian Sovereignty, is related to the reporting requirements imposed on the banks.

The second target – American citizens attempting to use Foreign Financial Institutions outside the United States: The second group is composed of “individuals” who are required to disclose information to the IRS. The HIRE Act imposed extraordinary reporting requirements on Americans abroad. The most visible – Form 8938 – is an intrusive form that is aimed at targeting “individuals”. The terms “individuals” means every human life form on the planet.  The U.S. based “FATCA Legal Action” lawsuit (which was condemned by Democrats abroad), is a lawsuit that is primarily intended to attack the requirements imposed on individual Americans abroad.

Internal Revenue Code Section 6038D and “Foreign Asset Disclosure”

A previous post discussed the interaction among: the Internal Revenue Code, tax treaty tie breaker rules and whether a Green Card Holder is a U.S. resident for FATCA purposes. This post is to discuss the form 8938 requirement and how it applies to Green Card Holders (resident aliens) who are deemed by treaty to be “nonresidents” under a treaty “Tie Breaker” rule.

The statute – Internal Revenue Code Section 6038D – gives the “Secretary” (meaning IRS) the right to create specific exemptions. “Nonresident aliens” is one group that the IRS is allowed to specifically exempt from the Form 8938 requirement. Green Card Holders are statutory “resident aliens” under S. 7701(b) of the Internal Revenue Code. Yet, in some cases “Green Card Holders” can be treated as “nonresident aliens” pursuant to a tax treaty.

What is a “Treaty Tie Breaker” rule?

It’s possible for a person to be treated as a “tax resident” of two countries. In this case a Tax Treaty can be used to determine where the person is a “tax resident”. For example Section 2 of Article IV of the Canada U.S. Tax Treaty says:

2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:

(a) he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him; if he has a permanent home available to him in both States or in neither State, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests);

(b) if the Contracting State in which he has his centre of vital interests cannot be determined, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode;

(c) if he has an habitual abode in both States or in neither State, he shall be deemed to be a resident of the Contracting State of which he is a citizen; and

(d) if he is a citizen of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

(Note that the “Treaty Tie Breaker” rules are available to “Green Card” holders. The treaty “savings clause” prevents U.S. citizens from being treated solely as a resident of Canada.)

So, what do the IRS regulations say?

On December 29, 2014 the IRS removed the temporary regulations (which are described here) and issued final Form 8938 reporting rules. The final regulations, which took effect on December 29, 2014 (making them applicable for years 2014 and onward), make it clear that Green Card Holders, who pursuant to a treaty tie-breaker provision, are treated as “nonresidents” (nonresident aliens) are NOT required to file Form 8938.

Specifically, the IRS confirms that:

1. Dual resident taxpayers

A comment recommended an exemption from the section 6038D reporting requirements be included for an individual who is a dual resident taxpayer and who, pursuant to a provision of a treaty that provides for resolution of conflicting claims of residence by the United States and the treaty partner, claims to be treated as a resident of the treaty partner. In such a case, a dual resident taxpayer may claim a treaty benefit as a resident of the treaty partner and will be taxed as a nonresident for U.S. tax purposes for the taxable year (or portion of the taxable year) that the individual is treated as a nonresident. The final rule adopts this recommendation for a dual resident taxpayer who determines his or her U.S. tax liability as if he or she were a nonresident alien and claims a treaty benefit as a nonresident of the United States as provided in § 301.7701(b)–7 by timely filing a Form 1040NR, “Nonresident Alien Income Tax Return,” (or such other appropriate form under that section) and attaching a Form 8833, “Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b).” The Treasury Department and the IRS have concluded that reporting under section 6038D is closely associated with the determination of an individual’s income tax liability. Because the taxpayer’s filing of a Form 8833 with his or her Form 1040NR (or other appropriate form) will permit the IRS to identify individuals in this category and take follow-up tax enforcement actions when considered appropriate, reporting on Form 8938, “Statement of Specified Foreign Financial Assets,” is not essential to effective IRS tax enforcement efforts relating to this category of U.S. residents.

Why this makes sense …

Continue reading