I will be in Indonesia from March 18 to 25, then in Dubai from March 26 – 29.  I am speaking at the STEP Arabia Branch 2012 Conference in Dubai as well as doing the regular business stuff.

The Indonesia portion of this tip is fully committed.  I have no time availability.  I will be returning to Asia in the near future, so let me know if you would like to meet next time I am there.  Almost every trip I make to Asia will include stops in Jakarta and Singapore; other locations are added as needed.

I will have limited availability in Dubai.  I am staying at the Ritz-Carlton in the DIFC.  Email me or SMS me if you would like to meet.  My email address is:

phil

at

the domain name of this website

You will be able to reach me while I am in Dubai at 050 1729183 (from outside the country, dial +971-50-1729183), which is my mobile number there.  Or you can always use my U.S. mobile which is +1-626-999-4000.

This will be an interesting trip–it is an ‘around-the-world’ flight.  Los Angeles to Jakarta to Dubai to Los Angeles.  Jet lag, anyone?

Reader (G)ee posted a comment with follow-up questions on expatriation if you’ve never filed tax returns on my post “The Exit Tax Paperwork for People Who Have Never Filed.”  That post was triggered by her question, too.  :-)

Question #1

I want to put her questions in a blog post or two because, well, it will make it easier to find and collect these thoughts rather than just putting an answer in the comment thread.

Thanks for posting my question as a blog.  This has brought significant clarity thus far.  

However, in regards to your comments regarding leaving “Unnecessary Open Loops”, I have a couple of further questions.

First, doesn’t being subject “to the exit tax” on the basis of “failing to certify” compliance close the loop because the individual is no longer a US citizen because they have both renounced and filled out the 8854 form as a ”covererd expatriate” as the law requires?  

Why would the option to be a “covered expatriate” be offered to a “failed to certify” dual at birth unaware citizen if it did not adequately deal with the final exiting process?  Are they not coming into compliance by being subject to the “exit tax”?  In some cases, filing 5 years of 1040′s (with no tax owing) may expose the dual/born abroad to various reporting penalties even if they never owed the US any real tax monies.

Fail Certification Test? You’re a Covered Expatriate

You (not (G)ee but the “you” who is the would-be expatriate trying to figure out what to do) can fail the certification test for two reasons:  you don’t certify you’re up to date and paid up on your last five years of income tax, or you DO certify that you’re up to date, but you file the paperwork (Form 8854) late.

That makes you a “covered expatriate.”

That treats you as if you sold all of your stuff on the day before you cancelled the passport.  You decanted all of your IRAs.  If you have pensions, etc., you have to do whatever Section 877A tells you do to with them.  Ditto for beneficial interests in foreign trusts.

You have that status no matter what your net worth.  If all you have in the world is a peanut butter and jelly sandwich, the IRS wants it to be marked to market and capital gain calculated.

The Resulting Open Loop:  ”Hit Me Here.  In the Jaw.  Hard.”

Your life now has an open loop.

The open loop here is an unsatisfied (and probably uncalculated) tax liability to the U.S. Treasury Department.  They know you cancelled your citizenship.  They know you are a covered expatriate (you filed Form 8854, remember?).  They know you didn’t file tax returns for the prior years.

So what is a government to do?  Answer:  rain on your parade.

Just filing that exit year tax return and Form 8854 and saying “Sorry, Uncle Sam, in fact I haven’t filed tax returns for the prior five years” will make you technically comply with the exit tax paperwork filing requirements.  But it shines a gigantic searchlight on a gaping hole in the rest of your life’s work — filing of annual tax returns going back.  In other words, you showed up and said “Guilty, Your Honor.”  On paper.

You haven’t filed tax returns.  Therefore the statute of limitations is still open for all of the years. The government can pursue you as far and as hard as it chooses.  The government will (sooner or later) make up an imaginary number of what they think you had in taxable income, assess a very real tax liability based on their imaginary income number for you, and tell you to pay or die.

You can solve the problem by running away and never coming back to the United States as a tourist or anything else.  As long as you live in a place that is not too thrilled to help the U.S. government collect U.S. taxes, you’re probably safe.  Or you will solve the problem by going to the IRS and dealing with the mess.

Question #2

A second question:  what did you mean by “if you want to re-enter the USA”?  Are you referring to whether one would  ever want to establish a residency in the US as a now alien or are you referring to just crossing the border?

I mean “crossing the border.”  The immigration people at the border are even grumpier than the IRS.  Why put your head in the lion’s mouth?

Question #3

A third question:  even if the US changes the expatriation process once again, thus changing the rules for the now non US citizen “covered expatriate”, can this be done retroactively, re-exposing a now ex US citizen to future risk?

In general the Constitution is supposed to protect against retroactive application of laws.  What you think is legitimate under the Constitution may be very different from what Congress thinks is legitimate, and what the Supreme Court thinks is legitimate.

E.g., under the old expatriation rules, you could give up your passport but until you filed all of  your paperwork, the IRS considered you to be a U.S. taxpayer.  So if you gave up your passport in 2005 and you never filed Form 8854, as far as the U.S. government is concerned you’d be a U.S. taxpayer out of compliance with everything.  Even though you’re not a citizen.  Although this is not “apply the law backwards in time” I give you this example to show how the U.S. government cheerfully assumes it owns you.

Proving the contrary would require hundreds of thousands of dollars litigating constitutional issues in Federal Court.  If you lose, you risk total financial destruction or imprisonment.

Yesterday, the Senate passed a bill which — if the House agrees and President Obama signs it — will give the government the power to cancel your passport if you owe $50,000 or more in tax.

Own your own life.

A frequent visitor, commenter, and email buddy (hi, Don) left a comment last night on the “Crowdsourced Expatriation Data” post. The Isaac Brock Society has been collecting information about the numbers of people terminating U.S. citizenship. But anecdotal evidence about waiting time is scarce. The Vancouver Consulate, from reports I have had, is a bit backed up, or at least it was at year-end 2011.

Interesting stuff. He’s a one-man data gatherer. Does anyone else have information like this? Leave comments here if you like. Perhaps one of the Isaac Brock Society contributors will start to collect this data as well — that would seem to be a better place to centralize this extremely useful information.

One take-away for would-be expatriates: do not leave this job until late in the year. There is no guarantee that you will get that appointment before the end of 2012. If you DO want to cancel your citizenship in 2012, either do it at the first possible opportunity or be prepared to call all the Embassies and Consulates in the world and fly anywhere if you’re running close to December 31, 2012.

Here is the comment. Thanks Don.

I had a bit of spare time so I rang some US Embassies around Europe for a straw poll asking how long to wait for a first interview to renounce.

Here are the results:

• Belgium – 23/3
• France – 5/4
• Italy – 2 – 4 weeks
• Portugal – 2 weeks
• Russia – 26/3

The reaction is quite interesting when you ring up.  The embassies in France and Italy the line dropped or I was hung up on, only to ring back and be put through. The tone of people’s voices change suddenly when you mention the dreaded “R” word.

If you say you’re the person who wants to renounce, they can become somewhat unhelpful, but if you say that you’re an attorney representing a client, the tone of the conversation becomes matter of fact.

US Embassies often only take phone calls for a few hours during the afternoon for Consular Services such as renunciations.

US Embassies are closed both US and local holidays and one working day a month.

The embassy in France told me their appointment times had suddenly changed 2 days ago from August 2012 to April 2012 while another embassy told me the whole process can take up to a year.

What’s going on?  Have they moved up the first renunciation interviews to “as soon as possible” and then crawl through the process over the next 12 months because it gives the impression the US Government is happy to process renunciations – no sour grapes.

Has State Department told the embassies to tell the public “only a couple of weeks?” for the first interview?

Another embassy reminded me that it will cost me $450.

In general the subject of renunciation continues to be a somewhat touchy subject even among locally employed staff at the embassies.  Obviously there have been emails or discussions that have taken place on renunciations inside the State Department.

Your Phase II will prove more interesting how long the process takes from start to finish and if the only thing that has changed is the first interview date is not only a couple of weeks waiting time.

I agree with Don’s bemusement. A “two weeks to get your appointment” timeline is staggeringly efficient. That’s not been my experience, nor the experience of most of my clients. Something must have happened upstairs at the State Department.

Interesting post this afternoon.  There is an informal attempt to collect expatriation activity data on the Isaac Brock Society website.  This is all self-reported stuff.  I would encourage any of you out there who are cutting ties with the USA to report your experiences.  Let’s get some information about what is happening so it can be cross checked against the official data from the U.S. government.

Leave a comment on the site with details about your situation.  If you are uncomfortable with that, please send me an email and I will connect you with one of the people at the site.

Also, another plug for the site:  this is a great place to go and read war stories about real experiences that people have when they go to the U.S. Embassy to terminate their citizenship.

A reader sent me an email (hello G!) that raised a question that comes up fairly frequently. I gather this question applies to G’s children. It is worth a blog post.

Situation

You are a dual citizen. USA plus another country.

You have never filed a U.S. tax return, most probably because you haven’t lived in the United States. You may not have a Social Security Number issued to you.

You’ve decided to jettison the U.S. citizenship, for whatever reason. What tax hoops do you need to jump through?

My correspondent put the question as follows:

Can a U.S. dual citizen at birth, born abroad and never having lived in U.S., expatriate as a “covered citizen”, deal with the “exit tax” as long truthfully stating that they are not in compliance for the past 5 years? OR do they still have to fie income tax forms for the past 5 years even if they exit as a “covered expatriate” and pay the “exit tax” (which will be nil as this person has no financial assets)?

Do they have any other filing obligations other than filing out their last year 1040 and the expatriate form as a “covered expatriate”?

Exit Tax – Procedures

In order to properly log out of the U.S. tax system, you need to do two things. One is to get an “expatriation date.” This is the date on which you did something that caused you to exit the USA. For a citizen, this means terminating citizenship. Make an appointment at the Embassy. Do some paperwork.

Then you have to do some tax paperwork. The critical element is the “certification” requirement. You certify (on Form 8854) that you are all up-to-date with your U.S. tax obligations for the 5 years prior to the expatriation year. In other words, if you terminate your citizenship in 2012, you have to tell the IRS that all of your U.S. tax stuff is up to date for 2007-2011.

What if you can’t certify?

What if you can’t certify that everything is all up-to-date?

Simple answer. You will be a “covered expatriate” as far as the exit tax law is concerned.

You become a “covered expatriate” if you have $2,000,000 or more in net worth, you paid $151,000 or more in income tax over the prior five years–this is the 2012 number, or you fail to certify that you’re in good shape for the prior five years of tax obligations.

So what?

OK. You’re a covered expatriate. So what?

You’re subjected to all of the exit tax rules and you have to pay the tax no matter what your net worth happens to be. That means we pretend that you sold all of your assets on the day before you relinquished your citizenship. Other fun stuff happens with your pensions, trusts, and other stuff. All of this is designed to cause you to pay tax to the U.S. government.

OK. So you have no assets, no pensions, etc. So no harm can come to you — the sale of nothing yields zero capital gain, right?

Unnecessary open loops

It seems to me that your exposure is limited. You probably don’t want to re-enter the USA. But aside from that all you have is a giant open loop in your life. Paperwork can close that loop.

But why leave open loops in your life? Laws change. U.S. laws get weirder and weirder. What works now might not work in future.

Do the paperwork

Do the paperwork. File the last five years of tax returns. Terminate your citizenship. File the correct tax paperwork for the year you terminate your citizenship (Form 1040NR, Form 1040, and Form 8854).

You will NOT be a “covered expatriate” with all of the future tax baggage that status might create. (Congress and the appointed Defenders of Virtue at the Treasury Department have a habit of adding gunk to the system regularly.) You will be a regular, ordinary noncitizen of the United States.

Move about the planet as a free person.