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 U.S. Tax 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”
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Are you or have you ever been a U.S. citizen? These questions strike fear in the heart of a U.S. born person in a FATCA world. The question is frightening and the answer is complex. To understand how complex, see the post which appeared at the Isaac Brock Society which is referenced in the following tweet.
It’s about “citizenship” and about “taxes”.
First, let’s consider U.S. citizenship issues
For whom the bell tolls – are you really a U.S. citizen?
My “Educational Outreach” program exists to educate those who are U.S. citizens (Green Card holders too) who live outside the United States. When I say “U.S. citizens” I mean those who, under U.S. law, are considered to be U.S. citizens. Some who meet the U.S. definition of “U.S. citizen” do NOT consider themselves to be U.S. citizens. Some who meet the U.S. definition of “U.S. citizen” do agree that they are U.S. citizens. The issue is further complicated by the fact that U.S. citizens are “dual U.S. citizens”. They have “citizenship” under the Immigration and Nationality laws and (since 2004) citizenship for tax purposes.
Okay, here we go …
All U.S. citizens are “dual citizens”: First and foremost tax citizens (the burdens) and less importantly citizens for immigration and nationality
First, U.S. citizenship for purposes of immigration and nationality
Although the law of U.S. citizenship can be complicated as a general presumption:
Those who were born in the United States are U.S. citizens unless they have relinquished their U.S. citizenship pursuant to the U.S. Immigration and Nationality Act (as it has evolved over the years). This applies to “Naturalized U.S. citizens too”.
What is commonly referred to as “U.S. citizenship-based taxation” is overwhelmingly U.S. taxation based on a U.S. place of birth. This can be frustrating because (as you know), you didn’t choose where you were born. You might not even have chosen where you live. It’s easy to understand why the U.S. might consider you to be a U.S. citizen and you don’t think you are.
But this post applies to more than U.S. citizens abroad, it applies to “U.S. Persons” abroad – It’s all about the definitions in S. 7701 of the Internal Revenue Code
Second, About “tax citizenship” – U.S. citizenship defined by the Internal Revenue Code
A “U.S. person is defined in S. 7701(a)(30) of the Internal Revenue Code. At present the definition includes a “U.S. citizen or resident”. Neither of these terms is overly clear. That said, “resident” includes “Green Card” holders and those who meet the “substantial presence” test. See S. 7701(b)(1)(a) of the Internal Revenue Code. U.S. citizens considering renouncing U.S. citizenship should read S. 7701(a)(50) and Green Card Holders moving from the United States should see S. 7701(b)(6).
Make sure that you are a “U.S. person” before filing U.S. taxes!
There are many people who moved from the U.S. as U.S. citizens. They may or may not still be U.S. citizens. For example, there are many people who emigrated to Canada and became Canadian citizens. Many of these people believe that they are no longer U.S. citizens. An “over zealous” tax compliance industry works hard to encourage U.S. tax compliance often without considering whether one is still a U.S. citizen.
U.S. citizenship law (both tax citizenship and citizenship for nationality purposes) are complicated individually and exceedingly complicated jointly. Those considering whether they have already relinquished U.S. citizenship need to consider/confirm the “relinquishment date”. As the above tweet implies, it is possible that the “relinquishment date” may be different for “nationality purposes” than for “tax purposes”.
So, what’s a person afflicted with “U.S. place of birth anxiety” to do?
I suggest that if you have any doubt about your “citizenship” (or other) status that you take steps to clarify this. Regrettably, there have been many people who have “come into U.S. tax compliance” even though they had “relinquished their U.S. citizenship”. Do NOT be part of that group.
Those suffering from “U.S. Place Of Birth” anxiety should ask he following questions in the following order:
1. Are you a U.S. citizen? You may NOT be one.
If you were born in the U.S., you begin life as a U.S. citizen but it is possible to have relinquished U.S. citizenship.
If you were not born in the U.S., there is NO presumption of U.S. citizenship. Your citizenship will depend on other facts (citizenship and residence of your parents).
“Some” information pertaining to your possible U.S. citizenship may be found in S. 349(a) of the Immigration and Nationality Act.
Are you a “U.S. citizen” for tax purposes. (U.S. citizenship for tax purposes can be different from U.S. citizenship for immigration and nationality purposes.)
Many people will need specialized legal counseling to determine the answer to the “citizenship question”.
2. If you are a U.S. citizen, do you want to remain a U.S. citizen or do you wish to relinquish U.S. citizenship?
Living as a “tax compliant U.S. citizen abroad” has enormous disadvantages and problems. Take my word for it. You will want to do some research the rules of “U.S. Taxation Abroad“. The Government of Canada has passed legislation making the U.S. “FATCA law”, the law of Canada. This has turned Canadians with U.S. citizenship into “second class” Canadian citizens. Google “FATCA Canada” to learn more.
3. If you do NOT want to remain a U.S. citizen and wish to “renounce U.S. citizenship”, what will be your costs to renounce?
There are three costs to “renounce U.S. citizenship“. They are as follows:
A. The costs of five years of U.S. tax compliance with includes
– professional fees to prepare your tax returns
– the payment of any U.S. taxes owing
– the payment of any interest charges on any taxes owing
– the possibility of being subjected to various penalties for failing to file various information returns (although there is a general “reasonable cause” defense)
B. The payment of a $2350 USD fee to the U.S. consulate
Even though U.S. citizenship was conferred on you without your consent, you are required to pay to be relieved of it.
C. The possibility of being subjected to “Exit Taxes”
If you are a “covered expatriate” you will be subject to the 877A “Exit Tax” regime. Yes, you read correctly.
To repeat: If you are considering renouncing U.S. citizenship you need to understand the costs.
Coming into U.S. tax compliance
The next step is to “come clean”. For most people this means that you should you engage a tax preparer to file those outstanding U.S. tax returns.
You must approach these questions in a calm manner. In other words, “respond” to this situation and do NOT “react”.
Okay, back to where we left off. How to come into U.S. tax compliance.
Citizenship Taxation - Theory vs. Reality 
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