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DENATURALIZATION COULD OPEN THE DOOR THE U.S. ‘EXIT TAX’

 

   America is poised to enforce denaturalization of some citizens in unprecedented numbers. Some of these residents may face the U.S. exit tax.
According to the Migration Policy Institute, there are 24.5 million naturalized Americans in the U.S. Until recent years, the U.S. Department of Justice (DOJ) filed only a handful of denaturalization cases annually, a number that did increase slightly under President Biden and increased much more in the first term of President Trump (who created an office specifically to scrutinize denaturalization).
With denaturalization, the government files a lawsuit to strip one’s U.S. citizenship after they have become citizens, turning them back into noncitizens who can be deported. Historically, observers say, the U.S. has reserved denaturalization for individuals who committed serious crimes, including war criminals and funders of terrorist groups. More recently, using false IDs to procure naturalization or even underreporting income on a tax return have become reasons for the federal government to challenge one’s naturalization.

What are the tax implications of denaturalization?
Long simmering, now boiling
Denaturalization occurs when the U.S. government revokes citizenship of a naturalized immigrant. (Denaturalization is different from deportation, which removes noncitizens from the country.) This can happen because of:

• “Sufficient evidence,” a lower burden of proof than “beyond a reasonable doubt,” for naturalization fraud (aka “deliberate deceit on the part of the person” in failing to disclose or misrepresenting a material fact that would have influenced awarding U.S. citizenship, such as a past crime).
• Illegal past procurement of naturalization because the person does not meet or fails to comply with such requirements for naturalization as residence, physical presence, lawful admission for permanent residence, good moral character and attachment to the U.S. Constitution.
• Membership or affiliation with a terrorist or other hostile organization.
The burden of proof is on the federal government, but a person may voluntarily renounce U.S. citizenship.
In June, a DOJ Civil Division memo specifically moved denaturalization to the front burner. “The Civil Division shall prioritize and maximally pursue denaturalization proceedings in all cases permitted by law and supported by the evidence,” the memo reads, establishing categories of priorities for denaturalization cases against naturalized U.S. citizens who:
1. Pose a potential danger to national security, including those with a nexus to terrorism, espionage, or the unlawful export from the United States of sensitive goods, technology, or information raising national security concerns;
2. Engaged in torture, war crimes, or other human rights violations;
3. Further or furthered the unlawful enterprise of criminal gangs, transnational criminal organizations, and drug cartels;
4. Committed felonies that were not disclosed during the naturalization process;
5. Committed human trafficking, sex offenses, or violent crimes;
6. Engaged in various forms of financial fraud against the United States (including Paycheck Protection Program (“PPP”) loan fraud and Medicaid/Medicare fraud);
7. Engaged in fraud against private individuals, funds or corporations; and
8. Acquired naturalization through government corruption, fraud, or material misrepresentations, not otherwise addressed by another priority category.
The memo also gives the Division latitude to pursue other cases. Some denaturalization procedures, unclear to begin with, are potentially casting a wider net for naturalized citizens who have committed more minor crimes. Clearly, denaturalization is becoming more possible for more taxpayers.

‘Exit tax’ threat As we’ve discussed before, voluntarily surrendering a green card if pressured at a U.S. port of entry can expose a holder to the American expatriation tax, or exit tax, which applies to American citizens who have renounced their citizenship and long-term residents who end their U.S. resident status. The tax is designed to prevent taxpayers simply moving aboard to avoid U.S. taxes.
Only “long-term permanent residents” might have to pay exit tax, meaning those who have held LPR status in at least part of eight out of the last 15 years. For those who expatriate now or in the near future, the tax applies if your average annual net income tax for the five years ending before the date of expatriation or termination of residency exceeds a specified amount (adjusted for inflation). These amounts are $171,000 for 2020, $172,000 for 2021, $178,000 for 2022, $190,000 for 2023, $201,000 for 2024 and $206,000 for 2025.
The tax might also apply if your net worth is $2 million or more on the date of expatriation or termination of residency or you fail to certify on Internal Revenue Service Form 8854 that you have complied with all U.S. federal tax obligations for the five years preceding.
The exit tax is a mark-to-market regime, which generally means that all property of a covered expatriate is deemed sold for its fair market value on the day before the expatriation. Tax-deferred retirement accounts, trusts and certain types of deferred income can add to the taxed amount.
This year, the first $890,000 is excluded (also an amount annually indexed for inflation); the remaining amount of assets incurs the U.S. capital gains tax.
Does this tax apply right to those who are involuntarily denaturalized – or, in other words, has such a person become a “covered expatriate” for American tax purposes?
The IRS says only that expatriation tax provisions under Internal Revenue Code (IRC) sections 877 and 877A apply to U.S. citizens who have renounced their citizenship and long-term residents (as defined in IRC 877(e)) who have ended their U.S. resident status for federal tax purposes.
At this point, observers say no express requirement differentiates a taxpayer who voluntarily renounces citizenship and one forced to denaturalize. An involuntary denaturalization could still incur the exit tax, observers say, under similar logic by which the IRS requires domestic taxpayers to report criminal income on their U.S. tax return.
For now, the best rule is that cancelation or revocation of naturalization means a taxpayer is no longer a U.S. citizen. If they then become a covered expatriate, they may become subject to exit taxes.

Preparing If you think you face denaturalization, plan mitigation measures for the exit tax:
• Transferring or gifting assets and restructuring trusts before expatriation to reduce net worth, if you have time before expatriation.
• Professionally valuating assets.
• Rolling over or distributing retirement accounts before expatriation, though this must be done carefully or it could make the exit tax higher.
• Examining details of U.S. income tax treaties with other nations that may mitigate or exit tax components.
Post-expatriation U.S. federal tax obligations include filing a U.S. Form 8854 with a timely filed tax return that includes the date of expatriation and filing for any U.S. taxes still owed on U.S.- source earnings and accounting for U.S. taxes owed on distributions from retirement accounts, among others.
Failure to comply with exit tax and expatriate U.S. federal tax obligations can result in substantial penalties and potential criminal liability.
The threat of denaturalization looms larger than ever for naturalized citizens in the U.S., igniting tax risks and obligations that may not be recognized until too late. Those who feel threatened by the new American administration’s actions against immigrants would be wise to start tax planning for all the eventualities of having to leave the U.S. involuntarily.
Your tax specialist needs to stay on top of this and many other issues of wealth, foreign income and tax enforcement. If we can help, please let us know.
Please note: This content is intended for informational purposes only and is not a replacement for professional accounting or tax preparatory services. Consult your own accounting, tax, and legal professionals for advice related to your individual situation. Any copy or reproduction of our presentation is expressly prohibited. Any names or situations have been made up for illustrative purposes — any similarities found in real life are purely coincidental.

 

NEW YORK PLOWS ON WITH ITS OWN BOI REPORTING REQUIREMENT

Despite the apparent suspension of the U.S. Corporate Transparency Act’s requirement to report information on companies’ beneficial owners, New York’s own BOI requirement is still set to kick in next year.
The New York LLC Transparency Act (NYTA) signed by New York Gov. Kathy Hochul on March 1 and that kicks in Jan. 1, could remove obstacles from finding out the true owners of newly created LLCs. New York will become the only state to have such a requirement.
The U.S. Corporate Transparency Act (CTA) was passed in 2020 as part of the Anti-Money Laundering Act of 2020, establishing uniform beneficial ownership information (BOI) reporting requirements for certain types of corporations, LLCs and other similar entities created in or registered to conduct business in the United States. A company was to have reported BOI to the Financial Crimes Enforcement Network. In March, though, the U.S. Treasury essentially suspended the CTA/BOI reporting requirement for U.S. persons.
New York’s law is still modeled largely on that federal one, including that a beneficial owner, among other conditions, generally exercises substantial control over the reporting company or owns or controls 25% or more of the ownership interests of the reporting company. New York also generally follows the CTA/BOI categories of exempt companies, including types of entities already subject to disclosure or regulation such as publicly traded companies, investment companies, banks, insurance companies, tax-exempt entities and government entities.

Some differences “Anonymous corporate ownership has proliferated since the 1990s and has contributed to numerous problems,” reads the text of New York’s bill.
“Anonymous shell companies are used to bypass sanctions, avoid taxes, fund terrorist organizations and organized crime and launder money. Anonymous LLCs leasing real property are correlated with more numerous code violations, higher rents and more evictions compared to non-corporate owners. Drug and human traffickers use anonymous shell companies like LLCs to launder the proceeds of their criminal activities and evade detection. Deed theft, campaign finance violations, and bid rigging can be facilitated by anonymous LLCs … The anonymous ownership of a significant portion of real estate in New York hampers policymaking and upends centuries of precedent” regarding ownership.
Reporting companies formed – or merely authorized to do business in – New York on or after Jan. 1, 2026, have 30 days after formation or qualification to file their beneficial ownership information report or establish their exemption with the secretary of state. By Jan. 1, 2027, reporting companies formed or qualified prior to Jan. 1, 2026, must file or establish an exemption.
Filing requires identification to the New York secretary of state of the names of the company’s individual beneficial owners and certain company applicants who participated in the filings with the secretary of state. Owners must provide their full name, date of birth and current home or business address. They must also a unique ID from a passport, driver’s license or other ID card.
New York’s law differs in part from the federal CTA/LLC:
LLCs claiming exemption under the NYTA must electronically file, under penalty of perjury, an attestation of exemption, which includes the specific exemption claimed and the facts on which it’s based.
The NYTA’s reporting requirement is annual (the CTA/BOI’s was one-time) and LLCs formed or authorized to do business in New York prior to Jan. 1, 2026, have until December 31, 2026, to comply. LLCs formed or authorized to do business in New York on or after January 1, 2026, must file their BOI within 30 days of submitting their articles of organization to form a domestic LLC in New York or within 30 days of filing their application for authority to do business in New York. Non-compliance is punishable by fines of up to $500/day, suspension of the company’s ability to do business in the state.
BOI collected by New York will be in a secure database, accessible only if necessary to law enforcement and other official authorities.

Competitiveness question Despite the obvious need to use all tools to combat money laundering, critics of NYTA maintain that it will hamper the state’s competitiveness and disproportionately burden small businesses. Despite an early rush of interest by other states in the early days of the federal CTA/BOI, New York standing alone with a reporting requirement. Others question if the state is ready for this huge administrative task that begins in just six months.
Your tax specialist needs to stay on top of this and many other issues of wealth, foreign income and tax enforcement. If we can help, please let us know.
Please note: This content is intended for informational purposes only and is not a replacement for professional accounting or tax preparatory services. Consult your own accounting, tax, and legal professionals for advice related to your individual situation. Any copy or reproduction of our presentation is expressly prohibited. Any names or situations have been made up for illustrative purposes — any similarities found in real life are purely coincidental.

COURT DECISION MIGHT MEAN FOREIGN TAX CREDITS CAN BE USED AGAINST U.S. TAX

A federal court ruling could allow expats to use their foreign tax credits to offset U.S. NIIT liability.

U.S. taxes for American citizens living abroad include the Net Investment Income Tax (NIIT), 3.8% to certain net investment income of individuals, estates and trusts that have high income. Foreign tax credits from various specific countries have not usually been widely usable in offsetting NIIT liability.
But the U.S. Court of Federal Claims has decided, in Paul Bruyea v. United States, that foreign tax credits might be used to offset NIIT in U.S. tax treaties with more than a few nations.
Canada Treaty
The case stems from a tax refund complaint that Bruyea filed two years ago against the United States. He paid nearly $2 million in taxes to Canada and claiming a foreign tax credit of $1,398,683 to offset the regular U.S. tax liability for the 2015 tax year. At that time, Bruyea did not claim a foreign tax credit to offset the NIIT. In November 2016, Bruyea filed an amended U.S. tax return (Form 1040X) with the Internal Revenue Service, claiming a refund of $263,523 by virtue of a foreign tax credit that offsets the NIIT.
Bruyea argued that he was entitled to a foreign tax credit based on Article XXIV of the Convention between Canada and the United States with Respect to Taxes on Income and on Capital (aka, the “Canada Tax Treaty”).
The IRS rejected the refund claim, concluding that “the Canada Tax Treaty did not provide an independent basis for a foreign tax credit to offset the NIIT and that such a foreign tax credit is not allowed under U.S. statutory foreign tax credit rules.” Bruyea then invoked the Simultaneous Appeal Procedure to obtain the opinions of the U.S. and Canadian authorities to resolve the double taxation. – Canadian income tax and U.S. NIIT – on the same items of income and gain with no foreign tax credit offset available.
The Canadian tax authority agreed with Bruyea: “Canada, as the country of source, has the right to tax the gain, while the U.S., as the country which has residual taxation rights, must provide relief in accordance with Article XXIV of the Convention.”
After the IRS’s denial of his tax refund claim, Bruyea filed a complaint in the Court of Federal Claims, asserting that he was entitled to a refund of the NIIT that he paid, $263,523, for tax year 2015. On Feb. 14, 2024, he moved for partial summary judgment; the U.S. government filed a cross-motion for summary judgment and response.

Treaty Interpretation
“Interpreting a treaty is similar to interpreting a statute or a contract,” writes Federal Claims Judge Matthew H. Solomson in the Bruyea decision. “When it comes to a treaty, however, there is a notable difference from other legal instruments: Courts are encouraged to consider a treaty’s purpose, as well as extrinsic evidence of the intent of the parties to the treaty.”
In citing Article XXIV of the Convention, the opinion points out that in the case of the United States, double taxation shall be avoided and “the United States shall allow to a citizen or resident of the United States … as a credit against the United States tax on income the appropriate amount of income tax paid or accrued to Canada.” The opinion also points out that paragraph four of the Article specifies that “the United States shall allow as a credit against United States tax the income tax paid or accrued to Canada,” with some conditions.
The Court found that the U.S. government argument relied primarily on the U.S. Law Limitation clause of Article XXIV, that any Treaty-based credit must be “[i]n accordance with the provisions . . . of the law of the United States.”
“The government maintains that a Treaty-based credit simply cannot exist independently of the [U.S. Internal Revenue Code, or IRC] – the ‘law of the United States’,” the Court writes. “The government contends that the NIIT … precludes the Treaty-based tax credit Mr. Bruyea claims.”
The Court calls the basic interpretive problem “readily apparent. On the one hand, the Canada Tax Treaty plainly provides for a foreign tax credit in Mr. Bruyea’s favor … On the other hand, a literal reading of the U.S. Law Limitation arguably takes back what Article XXIV otherwise giveth (because the IRC, by its terms, certainly does not provide for the Treaty-based tax credit Mr. Bruyea claims).”
The Court noted, though, that Bruyea agreed with the foundational axiom that the IRC does not provide the foreign tax credit he seeks to apply against the NIIT, arguing instead that the IRC cannot and does not answer the critical interpretative question posed by his complaint: “As the NIIT falls outside [C]hapter 1 [of the IRC], the parties agree that no credit is allowed under domestic law, but Plaintiff’s view is that the NIIT is covered by the foreign tax credit rules of the Canada Treaty.
“The government’s interpretation has a glaring consistency problem: The government takes an ad-hoc approach to the U.S. Law Limitation,” Solomson wrote. “The interpretative puzzle is complicated, but ultimately Mr. Bruyea’s approach makes more sense.”

Implications
Observers to Bruyea note that Americans claiming treaty-based foreign tax credits against the NIIT have succeeded in only a few cases and that other cases’ decisions have been against the taxpayer or narrowly applied to the specific language of a U.S. tax treaty with one country.
Bruyea, on the other hand, based a ruling on general language that applies to many tax treaties. The decision could be reversed or modified on appeal, but the case should still encourage Americans who incur foreign taxes on NIIT-related income.
Your tax specialist needs to stay on top of this and many other issues of wealth, foreign income and tax enforcement. If we can help, please let us know.

Please note: This content is intended for informational purposes only and is not a replacement for professional accounting or tax preparatory services. Consult your own accounting, tax, and legal professionals for advice related to your individual situation. Any copy or reproduction of our presentation is expressly prohibited. Any names or situations have been made up for illustrative purposes — any similarities found in real life are purely coincidental.

HOW YOU CAN LOSE A PASSPORT DUE TO TAX DEBT

If you owe enough in delinquent American federal taxes, the U.S. government can take your passport. The Internal Revenue Service certifies “seriously delinquent” tax debt to the U.S. State Department. This is an individual's unpaid, legally enforceable federal tax debt, including interest and penalties, that totals more than $55,000 (that amount is adjusted yearly for inflation).

The State Department generally will not issue a passport to you after receiving certification from the IRS, denying your passport application or revoking your current passport. If you’re overseas, the State Department may issue you a limited validity passport good only for direct return to the United States.

How you’re informed
The IRS will send you when it certifies your to the State Department. (The IRS will send the notice by regular mail to your last known address. Your power of attorney will not receive a copy of the notice.)

Before denying a passport, the State Department will hold your application for 90 days to allow you to resolve incorrect certification issues, or to make full payment or arrange a payment plan or with the IRS.

The IRS may also ask the State Department to revoke your passport if you promise to pay then fail to – or if could use offshore activities or interests to resolve your debt but choose not to. Before doing so, the IRS will send you Letter 6152 asking you to call the IRS within 30 days to resolve your account to prevent this action.

If you're leaving soon for international travel, the IRS will expedite reversal of your certification to the State Department, generally from 30 days to as few as nine. You’ll need to inform the IRS that you have travel scheduled within 45 days or that you live abroad – and you must provide proof of travel showing location and approximate date of travel or time-sensitive need for a passport and a copy of the letter from State denying your passport application or revoking your passport.

You can file suit in the U.S. Tax Court or a U.S. District Court to have the court determine whether the certification is erroneous, or whether the IRS failed to reverse the certification when it was required to do so. If the court sides with you, it can order the IRS to notify the State Department that the certification was incorrect.

The IRS will send you when it reverses certification. This can occur when you pay off your tax debt or becomes legally unenforceable, it’s no longer seriously delinquent or the certification is determined to be erroneous. The IRS will make this reversal within 30 days and notify the State Department.

The IRS will not reverse certification if your request for a collection due process hearing or innocent spouse relief is on a debt that’s not certified. The agency also won’t reverse the certification because you pay the debt below the threshold.

Not all debt triggers this problem, though – and in fact, you have several options for avoiding this situation.

The Internal Revenue Service certifies what it calls “seriously delinquent” tax debt to the U.S. State Department. This is an individual’s unpaid, legally enforceable federal tax debt, including interest and penalties, that totals more than $55,000 (that amount is adjusted yearly for inflation). The debt can include U.S. individual income taxes, Trust Fund Recovery Penalties, business taxes for which you’re liable and other civil penalties.

The State Department may deny your passport application or revoke your current passport. If you’re overseas, the State Department may issue you a limited validity passport good only for direct return to the United States.

Escape clauses
The IRS does not automatically send all debt to the State Department, however.
Some tax debt isn’t even included in seriously delinquent tax debt – significantly, the Report of Foreign Bank and Financial Account (FBAR) penalty.

Also not included:

• Tax debts being paid timely with an IRS-approved installment agreement or with an Offer in Compromise accepted by the IRS or a settlement agreement entered with the U.S. Justice Department;
• debts for which a collection due process hearing is timely requested regarding a levy to collect;
• debt for which collection has been suspended because a request for innocent spouse relief has been made.
• debts of those who have a request pending with the IRS for an installment agreement or with a pending Offer in Compromise or with whom the IRS has accepted an adjustment that will satisfy the debt in full.

 

There are still other ways out of the passport snare. The IRS will not certify anyone as owing a seriously delinquent tax debt who’s in bankruptcy; who’s identified by the IRS as a victim of tax-related identity theft; whose account the IRS has determined is not collectible due to hardship; or who’s within a federally declared disaster area.

The IRS will also postpone certification while an individual is serving in a designated combat zone or participating in a contingency operation.

 

Please note: This content is intended for informational purposes only and is not a replacement for professional accounting or tax preparatory services. Consult your own accounting, tax, and legal professionals for advice related to your individual situation. Any copy or reproduction of our presentation is expressly prohibited. Any names or situations have been made up for illustrative purposes — any similarities found in real life are purely coincidental.

 

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A TALE OF TWO CITIZENSHIPS:  TAXATION OF AMERICAN CITIZENS WITH DUAL CITIZENSHIP LIVING ABROAD

          

  According to a recent New York Times article*, the current pandemic in the US has created an uptick in the number of citizens applying for dual citizenship in other areas of the world.  With a focus on Europe, the author of the article notes that the laws for obtaining citizenship in European countries are favorable to those descended even several generations from their original ancestor immigrants.  Nonetheless, individuals contemplating such a move are faced with many challenges and obstacles that need consideration.  Each privilege offered by dual citizenship has a corresponding responsibility.  Complying with two countries’ rules and regulations can be a daunting undertaking.  However, the better informed you are, the better you are able to effectively handle balancing simultaneous allegiances.  A thorough treatment of all the challenges posed by dual citizenship is well beyond the scope of this essay.  Addressed here are solely those tax issues dual citizens from the US need to consider while living abroad.
            Working and owning property in two countries creates extra tax reporting requirements.  The burden posed by double taxation needs to be weighed against the benefits of a second citizenship and residence.  If you consider that the time and outlay associated with your US tax burden is effectively now doubled, you realize that this is a lengthy and complex process.  Bound by the laws of two countries also means being bound by an obligation to pay taxes in two jurisdictions.  An international tax expert can prove to be of great assistance in this area since he or she would be aware of deductions, credits, and tax treaties to help lighten your tax burdens so as not to be overtaxed.  Irrespective of retained professional help, you still need to understand the complexities that being bound by the jurisdiction of two tax systems poses for you.
            The recordkeeping burden can be immense.  If you are travelling to and from the US, you need to divide the time spent in and out of the US for purposes of the foreign earned income exclusion and foreign housing deduction.  (In 2020, the exclusion is $107,600.)  It is vital to maintain a precise and all comprehensive travel calendar for your records.  This is because to meet the requirements for the exclusion requires qualifying for either the bona fide residence (BFR) test or physical presence test (PPT). 
US citizens who establish a bona fide residence abroad for a certain uninterrupted period that includes a full taxable year, while maintaining their tax home in the foreign country, can claim the exclusion.  Further, a dual citizen needs to reference the tax treaty between the US and their resident country because a nondiscrimination clause may exist that qualifies them for the bona fide residence test.  As such, a taxpayer who falls under this treaty clause can claim the benefits of the foreign earned income exclusion.  Parenthetically, a list of these countries appears in Revenue Ruling 91-58, 1991- 2 C.B. 340.  Further, uninterrupted does not necessarily require an actual physical presence.  This is because the taxpayer can make trips back and forth to the US as long as there is a clear intention to maintain the foreign residence.  However, factors such as the nature, extent, and reasons for the temporary absence from the foreign home are taken into account.
One’s intent is measured on a facts and circumstances case by case basis.  A bona fide residence does not include domicile, which is a legal word meaning fixed and permanent.  A dual citizen can therefore maintain a bona fide residence in the second country abroad while retaining domicile in the US.  Other factors considered are the presence of family abroad, whether the US home has been sold or is being rented, US and foreign social ties, and the status of the resident in the foreign country.  Since the dual citizen retains a passport in the resident country, he or she would not be hard pressed to prove intent and as a consequence, qualify for the exclusion.
Qualifying for the physical presence test may pose a greater burden to prove for the dual citizen if they travel back and forth to the US.  This is because the test requires residency in the foreign country for 330 full 24-hour days in a 12-month period.  It is almost definite that a person who obtains dual citizenship and moves abroad will remain there for the requisite period of time.  But it can be very easy to fail the test if the 330-day period is broken up even if the reason is for illness, family problems, a vacation, or an employer’s orders.
Dual citizens who become self employed in their second country may be under the false notion that they will be allowed to include self-employment earnings as income earned abroad to qualify for the earned income exclusion.  Yet, a dual citizen residing abroad and working as a freelancer, independent contractor, or sole proprietor still needs to pay for Social Security and Medicare taxes if earnings are $400 or more.  The main issue affecting the amount of the self-employment tax owed is the country of residence.  Deadlines differ greatly from country to country.  Self-employment tax rates also differ such that if you live as a citizen of United Arab Emirates you owe nothing, and in a country like Sweden your self-employment comes with a 40% tax bill.  It behooves a self-employed dual citizen to investigate whether a totalization agreement exists between the US and the resident country because in such an instance, there is allowance for the coordination of both countries’ social security and benefit payment tax provisions.
Another complicated aspect of moving abroad is the purchase of property.  In general, the purchase of real estate abroad is not a taxable event.  Additionally, an expat can deduct mortgage interest and points as long as the amounts are converted to dollars.  In purchasing the property abroad, a US dual citizen should consider exchange rates of the dollar and the local currency.  This is because money will go further in a country with a weak currency exchange rate against the dollar.  In coordinating the purchase of a property in the foreign country, it is best to retain a local tax expert to work with your tax adviser in the US.  In this way, a correct determination will be made whether such an ownership triggers a filing requirement and needs to have withholdings done.
As presented so far, it can be reasoned that the dual burden of taxation and its associated compliance requirements leaves room for errors.  To that end, the IRS has cracked down on persons holding US passports if they become seriously delinquent on their tax debt.  Passport confiscation can occur if the taxpayer owes more that $52,000 in back taxes.  If a dual citizen should forget to report their foreign accounts by not filing a form called the FBAR, there is the potential to be penalized $10,000 for each violation.  The extra compliance burden for a dual citizen requires a hyper-vigilance in maintaining a high level of acquiescence to both countries’ rules and regulations so as not impair citizenship status in either country.
By way of explanation, FBAR stands for Foreign Bank Account Reporting and was introduced by the Bank Secrecy Act of 1970 with the intent of discouraging tax evasion by taxpayers hiding of their assets overseas.  The form is filed with the Financial Crimes Enforcement Network if assets during the year at any given time in foreign bank accounts exceed $10,000.  Another form, entitled Statement of Foreign Financial Assets Form 8938, and in endearment referred to as the FATCA form which stands for the Foreign Tax Compliance Act, requires reporting of foreign assets to the IRS with the filing of the income tax return if the total value of those assets is more than $200,000 on the last day of the year or $300,000 at any point during the year for a single taxpayer living abroad, there are other thresholds to keep in mind and that is why it’s important you check with an expert in this area.
The precarious time we are experiencing during this pandemic here in the US has prompted individuals to execute their plans to move abroad without further delay.  In making the move abroad, many US citizens are reluctant to give up their US citizenship while at the same time becoming a citizen of their resident country.  There is nothing intrinsically wrong in being the citizen of two countries and this is demonstrated by the fact that countries have allowances for just such arrangements.  Nevertheless, relocating within a global environment has associated logistical, legal, and tax complications that must be considered before making such a move.  The information presented here is a thumbnail’s sketch of the complexity international taxation poses for the dual citizen who is a US citizen and a citizen elsewhere.  Being informed and retaining experienced professional help are the steps necessary to not deter you from fulfilling a desire for global relocation.

Please note: This content is intended for informational purposes only and is not a replacement for professional accounting or tax preparatory services. Consult your own accounting, tax, and legal professionals for advice related to your individual situation. Any copy or reproduction of our presentation is expressly prohibited. Any names or situations have been made up for illustrative purposes — any similarities found in real life are purely coincidental.

 

Offshore Banking: Separating Reality from Fiction

Click here to read it in Spanish

 

Click here to read it in Portuguese

 

How many times have you watched a movie of covert espionage between spies of enemy countries wherein there is at least one scene involving transfer of funds to a secret Swiss banking account? In exchange for the disclosure of secret intelligence to the enemy, the spy expects a handsome deposit of money at a Zurich bank. Presumably, the spy has opened this account to avoid any paper trail sourcing funds to his country’s enemy. The secrecy afforded him/her by Switzerland’s banking laws places an obstacle to whomever among his/her own ranks is investigating his activities under suspicion of defection.

Plots like this make for interesting film, but hardly reflect reality. Gone are the days when US citizens, interested in evading their tax obligations, would deposit funds in offshore accounts located at banks throughout Europe and the Caribbean. The IRS treats money held in foreign banks differently than funds deposited at domestic banks. Recent history has shown a concerted effort by the Treasury as a matter of public policy in tracking these foreign accounts. The concern here is the lack of accessibility the Service will have to these accounts. As such, rules and regulations have been promulgated deterring such offshore banking practices.

Conversely, there has been a long-time trend wherein foreign banks have become wary of accepting US deposits. This reluctance evolved as a consequence of the increased demands made by the Department of Justice and IRS on foreign institutions to comply with US reporting requirements. There is just so much time and energy these banks can devote to complying with these laws. Further, not every foreign bank has the infrastructure to deal with such extensive compliance reporting requirements. As someone who is a US citizen subject to IRS taxation, you can become a liability to a banking institution such that it may even hesitate in marketing and providing its services to you. The best strategy then is to make yourself less of a risk by ensuring you have been in strict compliance with the law.

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FIRST CAME THE MOD SQUAD, NOW COMES THE WEALTH SQUAD: POST-OFFSHORE VOLUNTARY DISCLOSURE PROGRAM

 

Click here to read it in Spanish

 

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There was a popular American crime drama series broadcast in the late 60’s and early 70’s called the Mod Squad. The series focused on three disaffected youths given the choice of incarceration or of serving as undercover, (yet unarmed), detectives for the Los Angeles police force. Their term of service on the force would be in lieu of serving their time in prison. A popular series, it addressed topics that were important to the 70’s counterculture movement, a movement that was gaining in its popularity at that time in the States.

The IRS has recently formed its own squad to address another counterculture movement of sorts, i.e., high-income taxpayers. After having come under fire from critics in recent decades for fixating far too much of their efforts on auditing lower income taxpayers, the IRS decided to form a special investigative group that focuses on audits of high-income taxpayers. The official name of the group is the Global High-Wealth Industry Group. Practitioners in the tax industry have nicknamed it the Wealth Squad. Like the Mod Squad, it too has its own mission objectives. Their mission statement is “to take a holistic approach in addressing the high wealth taxpayer population; to look at the complete financial picture of high wealth individuals and the enterprises they control”. (IRM 4.52.1, Global High Wealth Program, Global High Wealth Program Processes and Procedures, Revised 12/26/2019)


Beginning in January 2017, the IRS announced a new audit strategy, known as “campaigns”, to be undertaken by the Wealth Squad via its Large Business and International division. The goal of the division was to improve the selection process of returns for audit, identify issues representing a risk of noncompliance, and make the greatest use of limited IRS resources. As of November 2019, six new issues were identified by the IRS as a focus for their campaigns. One of these issues is compliance with the post-offshore voluntary disclosure program (OVPD).

Alicea Castellanos, CPA, TEP, N.P.
CEO & Founder
Global Taxes LLC
Tax Advisory & Compliance Services