Category Archives: Little Red Exit Tax Book

Why is the United States imposing an “Exit Tax” on the Canadian pensions of Canadian citizens living in Canada?

This post is based on (but is NOT identical to) a July 17, 2017 submission in response to Senator Hatch’s request for Feedback on Tax Reform

“Re the impact of the S. 877A “Exit Tax” on those “Americans living abroad” who relinquish U.S. citizenship:

Why is the United States imposing an “Exit Tax” on their “non-U.S. pensions” and “non-U.S. assets”? After all, these were earned or accumulated AFTER the person moved from the United States?”

Part A – Why certain aspects of the Exit should be repealed

In a global world it is common for people to establish residence outside the United States. Many who establish residence abroad either are or become citizens of other nations. Some who become citizens of other nations do NOT wish to be “dual citizens”. As a result, they “expatriate” – meaning they relinquish their U.S. citizenship. By relinquishing their U.S. citizenship they are cutting political ties to the United States. They are signalling that they do NOT wish the  opportunities, benefits and protection from/of the United States.

Yet Internal Revenue Code S. 877A imposes a separate tax on “expatriation”. The “expatriation tax” is discussed in a series of posts found here.

Specific examples of HOW the “Exit Tax Rules” effectively confiscate pensions earned outside the United States are here.

Assuming, “covered expatriate status” and NO “dual-citizen exemption to the Exit Tax“, the S. 877A “Exit Tax” rules operate to:

  1. Virtually “confiscate” non-U.S. pensions that were earned when the individual was NOT a  United States resident; and
  2. Allow for the retention of “U.S. pensions” which were earned while the individual WAS a resident of the United States.

(One would think that the result should be THE EXACT OPPOSITE!”)

Specific request: The S. 877A Exit Tax should be repealed. If the United States is to impose a tax on expatriation, the tax should not extend to “non-U.S. pensions” earned while the individual was NOT a U.S. resident. Furthermore, the tax should NOT extend to “non-U.S. assets” that were accumulated while the individual was NOT a U.S. resident.

But, that’s assuming that the United States should have ANY kind of “Exit Tax!”

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The teaching of Topsnik 2 – 2016: #Greencard expatriation and the S. 877A “Exit Tax”

What! You want to abandon your Green Card and leave the USA!

Introduction – Introducing Gerd Topsnik – The World According to Facebook

“This case will be seen as the first of an (eventual) series of cases that determine how the definition of “long term resident” applies to Green Card holders. The case makes clear that if one does NOT meet the treaty definition of “resident” in the second country, that one
cannot use that treaty to defeat the “long term resident” test. A subsequent case is sure to expand on this issue. Otherwise, the case confirms that the S. 877A Exit Tax rules are “alive and well” and that the “5 year certification” test must be met to avoid “non-covered status”

Topsnik may or may not be a “bad guy”. But even “bad guys” are entitled to have the law properly applied to their facts. It would be very interesting to know how the court would have responded if Topsnik had been paying tax (a nice taxpayer) in Germany as a German resident.”

A nice summary of Topnik 1 and Topsnik 2

This is part of a series of posts on: (1) “tax residency“, (2) the use of “treaty tiebreakers” when an individual is a “tax resident” of more than one jurisdiction and (3) how to use “treaty tiebreakers” to end “tax residency” in an undesirable tax jurisdiction.

This is the second of the two Topsnik posts.

Topsnik 1 focused on the “tax residence” of Green Card Holders. The decision in Topsnik 1 is here:

topsnikdiv.halpern.TC.WPD
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US Taxation of the Australian Superannuation? – No, #DontMessWithTheSuper!

I recently engaged in a discussion with people who are worried that they might be “U.S. Persons” living in Australia. Their primary concern (and understandably so) is the possible U.S. taxation of their Australian Superannuations. For many, the “Super” is considered to be their most important retirement planning asset.

In a FATCA world, where  possible “USness” is now an issue, one must consider whether U.S. tax laws, effectively disable a group of Australians from effective retirement planning. But, hey! Even Americans should have the right to plan for retirement? Shouldn’t they?

There have been a number of recent articles attempting to understand the possible U.S. taxability of the Australian Super. I don’t know whether this is good or bad.

Most of these articles (what would you expect?) attempt to analyze the issue from the perspective of U.S. law – specifically the Internal Revenue Code. Rightly or wrongly, this approach assumes that the USA has the right to impose taxation on the retirement plans created by other nations. I don’t believe that this should be assumed!

In any event, what follows is a presentation that I created to discuss this issue. It is NOT intended to be a legal analysis. (If you want trouble, call up a lawyer!) It is intended to be a “contextual” and “common sense” analysis. Sooner or later, all laws (if they are to survive) must move towards “common sense”.

My message to residents of Australia is this:

Your Superannuation is far too important to be left in the hands of the tax professionals!

You will find “my thoughts” by clicking on the following:

The Australia Superannuation For Dummies

Feel free to leave “your thoughts” as comments to this post.

John Richardson

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!

 

 

 

 

 

 

 

 

 

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:

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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.

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** 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 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:
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Relinquishing US citizenship: South African Apartheid, the Accidental Taxpayer and the United States S. 877A exit tax

Introducing this “guest post”

This guest post is written by Dominic Ferszt of Cape Town, South Africa. I first became aware of Mr. Ferszt when, in October of 2014, his post: “The Accidental Tax Invasion” was published in Forbes. I have discussed various aspects of “citizenship-based taxation” with him since. I am very pleased that he has accepted my invitation to write this “guest post” for publication at Citizenship Solutions. His post exposes an aspect of “citizenship taxation” and the S. 877A U.S. expatriation tax that has not (as far as I am aware) been discussed before. Those who did NOT acquire “dual citizenship” at birth because of discriminatory laws (example British and Canadian laws saying that citizenship could be passed down from the father but not from the mother) will find this post extremely interesting and relevant.

Without further adieu …

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Apartheid and the Accidental Taxpayer

How the United States Congress has passed legislation which imposes a tax obligation in accordance with the discriminatory policies of foreign nations; and how this might offer a glimmer of hope to millions around the world who feel unjustly targeted by FATCA or the IRS.

By Dominic Ferszt, Cape Town

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Tax Haven or Tax Heaven 5: How the 1966 desire to “poach” capital from other nations led to the 2008 S. 877A Exit Tax

Title 26, Subtitle A, Chapter 1, Subchapter N, Part II, Subpart A of the Internal Revenue Code is of great interest..

IRC871

IRC8712

The text of S. 871 of the Internal Revenue Code is here. The IRS interpretation of S. 871 along with the requirements for when the non-resident alien is required to file a 1040-NR return are here.

The above subsection of the Internal Revenue Code applies to “NON-RESIDENT ALIENS AND FOREIGN CORPORATIONS”. It contains rules for how those who are not “U.S. Persons” are taxed under the Internal Revenue Code. As is expected, the Internal Revenue Code imposes U.S. taxation only on those “aliens” who have income sources that are connected to the United States. The previous post explained that S. 871 (in its present form) was enacted in 1966. Internal Revenue Code S. 871 also provides strong incentives for “aliens” to bring their capital to the USA.

Interestingly this subsection of the Internal Revenue Code also includes the S. 877A and S. 877 Expatriation Tax provisions. Significantly, both S. 871 and S. 877 were enacted in 1966 as part of the Foreign Investors Tax Act of 1966, Public Law 89-809.

The combination of the inclusion of both Internal Revenue Code sections 871 and 877 suggests that the intent of the Foreign Investors Tax Act of 1966, Public Law 89-809, included:

1. The intent to attract “Foreign” capital to the United States by imposing either no or low taxes on that “Foreign” capital lured to the United States, as expressed in S. 871 of the Internal Revenue Code;

2. The intent to give “non-resident aliens” certain tax benefits that were NOT available to U.S. citizens;

3. A recognition that some U.S. citizens might wish to expatriate to avail themselves of the benefits of NOT being a U.S. citizen;

4. A “penalty” expressed in S. 877 of the Internal Revenue Code for those U.S. citizens who expatriated to receive the same tax benefits enjoyed by “non-resident aliens”.

For a pdf of the 1966 Foreign Investors Tax Act (a massive document), see …

Foreign Investors Tax Act 1966 809

My point is a simple one …

It is clear that the U.S.desire to establish itself as a “Tax Haven”, also resulted in the S. 877 Exit Tax, which gradually evolved into the S. 877A Exit Tax that exists today.

To put it another way: the desire to establish the United States as a “Tax Haven”, eventually evolved into the S. 877A Exit Tax rules that:

1. Impose confiscatory taxation on assets that are outside the United States; and

2. Impose confiscatory taxation on assets that were acquired after a “U.S. Person” abandoned residence in the United States.

To illustrate why this is so, please see:

The S. 877A Exit Tax in Action – 5 actual scenarios with 5 completed U.S. tax returns

You will be shocked by what you see!

Like the 1970 FBAR rules, S. 877 of the Internal Revenue Code has gradually evolved into a mechanism to confiscate the assets of Americans abroad. Think I am kidding? See the examples in the link above!

John Richardson

Part 10 – The S. 877A “Exit Tax” and possible treaty relief under the Canada US Tax Treaty

Introduction – The Canada U.S. Tax Treaty Does Not Always Prevent Double Taxation

When countries independently make major changes in tax law, double taxation can occur

The following comment from 5thSwiss on the Isaac Brock Society site explains why and how double taxation can be a reality. It also underscores the dangers of a U.S. citizen leaving the United States.

It’s not obvious that renunciation of citizenship will cure failure to report in the past, or forgive unpaid tax. (“a ‘disposition’ of PFIC shares can occur by redeeming them, selling them, gifting them away, or even by giving up one’s US resident status or citizenship”)

The increasingly complex, expensive and draconian US tax law as applied to “accidental” US Persons might be considered by some a “good thing”. The more draconian – disproportionate – tax laws and penalties become, the more costly it is for ordinary families living abroad to report and pay tax on concessionary funds (such as for minors and disabled dependents, and retirement and tax-sparing funds not envisaged in the relevant bilateral tax treaty) the more impossible of enforcement and outrageous in principle such unilateral and exorbitant laws are seen to be.

And the less likely it is that the country of residence of a noncompliant person deemed to be a US person will assist the USG in collecting tax, prosecuting an individual and pursuing others on the basis of “transferee liability”.

Canadians who faced double taxation of their inheritance in that decade after Canada moved to capital gains taxation of estates based on deemed sale at death vs US imposition of estate duty (there is now a credit of one against the other under a tax Protocol) will understand that individuals are cannon fodder for Governments, who when they negotiate tax treaties are mainly concerned with the interests of multinational firms as represented by lobbyists. It is no wonder that of the 6 million Americans said to be resident abroad (the State Department knows of only half of those), an increasing number, unable to pay for tax advice or preparation, for renunciation of citizenship or the incremental US tax itself, are simply remaining underground. A series of GAO reports has looked at this and found no solution. And, by and large, legislators and bureaucrats (including diplomats) don’t care.

For the time being, the Lord Mansfield Dictum protects. But the hostility towards tax evasion abroad translates into hostility to expatriates generally. That is not a good sign.

5thSwiss describes the creation of  “double taxation” after one country (in this Canada) moved from an Estate Tax to a deemed disposition of assets on death. We now have a problem of the U.S. creating a deemed disposition of assets on expatriation when Canada has no such tax. This is what happens when one country makes a major change to its tax system and the other does not. (In this case there is at a minimum a “timing mismatch” in the taxable event.)

The S. 877A “Exit Tax” and the Canada U.S. Tax Treaty

The primary purpose of this post is to explore whether the Canada U.S. Tax Treaty can be used to mitigate some or all of the effects of the “Exit Tax”. I don’t know the answer. Therefore, this post will “raise an important question”, but not “answer the important question raised”.

U.S. Tax Treaties 101 – The outline

I am also going to use this post to outline some VERY basic aspects of U.S. tax treaties.   There will  four parts to this post:

Part 1 – Tax Treaties and the U.S. Constitution

Part 2 – Tax Treaties and the “Savings Clause”

Part 3 – The S. 877A “Exit Tax” and possible treaty relief

Part 4 – The “Savings Clause” as an argument against “citizenship taxation”

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