Many tax practitioners think they are prohibited from discussing with a taxpayer the probability or likelihood that a tax return, tax position or a form (e.g., IRS Form 8854, Initial and Annual Expatriation Statement) will be audited by the IRS.
Many practitioners think such a statement is somehow taboo – and cannot be answered when a client asks the question: “Will my tax return get audited?”
Someone who has become a “covered expatriate” might want to know – whether the IRS audit of expatriate tax returns is high or low? What if I do not even have a social security number (e.g., as a U.S. citizen born outside the U.S.) from my date of birth, and I have lived outside the U.S. almost all of my life? Will that impact the chances of tax audit? Can answers be provided to these logical questions raised by taxpayers?
First, no one ever knows whether any tax return or position will get audited. The answer necessarily requires the ability to peer into the future.
Second, TIGTA has already answered many of the specific questions about expatriate tax audits in their public report discussed below. Their report noted: The SSN is vital for tax compliance. Figure 3, for instance of that report reflects 9,463 tax expatriate cases cases where the IRS did not research for a SSN.
Third, the IRS discloses much of their basic methods, number of correspondence examinations and field examinations regarding conducting tax audits and collecting taxpayer information. For instance, the IRS reports in its own Compliance Presence report made available to the public the following factual details:
The IRS gathers independent information about income received and taxes withheld from information returns, such as Forms W–2 and 1099 filed by employers and other third parties. The IRS uses this information to verify self-reported income and tax on returns filed by taxpayers. With its Automated Underreporter Program, the IRS matches these information returns to tax returns and contacts taxpayers to resolve discrepancies. In the Automated Substitute for Return Program, the IRS uses information returns from third parties to identify nonfilers; construct tax returns for certain nonfilers based on that third-party information; and assess tax, interest, and penalties based on the substitute returns. To further verify the accuracy of reported information, the IRS also checks for mathematical and clerical errors before refunds are paid.
IRS’s Criminal Investigation function conducts investigations of alleged criminal violations of the tax code and related financial statutes, which may in turn lead to prosecution, fines, and imprisonment.
Some tax practitioners may be confused about what they can or cannot say (or should or should not say) to their clients because of amendments to Circular 230 that were added in 2004: 10.34; SSTS No. 1(4), (5).
Circular 230, Section 10.37(a)(2) states that “the Practitioner must not, in evaluating a Federal tax matter, take into account the possibility that a tax return will not be audited or that a matter will not be raised on audit.” This does not say the practitioner cannot answer the client’s questions about probabilities of IRS tax audits.
Indeed, as explained above the IRS themselves provides detailed records about audits, field examinations, correspondence examinations and Automated Underreporter program cases closed.
These are logical questions for taxpayers to ask. The answer is always elusive as it means someone has to be able to predict the future.
Certainly, the lack of a potential tax audit should not embolden anyone to intentionally violate the tax law, including the “expatriation tax” provisions. Indeed, the federal government has had a number of high profile international “expatriate” tax cases where individuals have been criminally indicted or at least brought under criminal investigation. Here, we have reported on the following ones:
In addition to these cases, the Department of Justice has been actively involved in pursuing other criminal charges against various individuals associated with tax expatriation cases. See the U.S. Supreme Court that took up a criminal case – Regarding an Unnamed Law Firm that Advises International Tax & Expatriation Matters. A petition for a writ of certiorari to the U.S. Supreme Court was unsealed regarding the 9th Circuit case, In re Grand Jury, case Nos. 21-55085, 21-55145. In that case a law firm and a company was held in contempt of court: Re: a Grand Jury Subpoenas –
Finally, an indictment in the Central District of California was announced publicly in April, 2024, tied to the individuals renunciation of U.S. citizenship years earlier. This case will be discussed in more detail in an upcoming post.
The point is to distinguish between good faith questions of risks of tax audits, understanding of the law, what are the filing requirements under the law, what are the likelihoods of a tax audit, how to prepare for a tax audit; and those who cross over the line to evade the tax and/or evade legal filing requirements.
Patrick Martin of Chamberlain, Hrdlicka, White, Williams & Aughtry, who represents Aroeste, exuded confidence in statements made to Tax Notes.
“The government will lose on appeal before the Ninth Circuit on the substantive tax treaty issue if they push it. I am confident the Ninth [Circuit] will rule consistently with the federal judge,” Martin said. “The worst outcome for the government is that the Ninth Circuit rules in favor of our cross-appeal on the invalid assessment issue and leaves standing the thorough, technical, and analytical opinion of the federal district court on the application of United States income tax treaties.”
Martin added that he doubted that the government would pursue its appeal beyond its filing of a protective notice of appeal. He recognized that the solicitor general’s office hadn’t yet weighed in on the matter and presumably hadn’t examined the case in detail.
“Like they say in Spanish, vamos a ver,” Martin said.
In Aroeste v. United States, No. 24-338, the government is represented by Paul Andrew Allulis and Christina T. Lanier of the Justice Department Tax Division.
This 1998 U.S. Treasury report was written before the IRS and the Department of Justice started enforcing what has now become numerous international information reporting penalty provisions in the law. The author watched the change over these years, and the introduction of some new statutory penalties (e.g., 26 USC § 6039F in 1996; § 6039D in 2010; § 6039G in 1996; and major modifications in 2010 to § 6048, among others and increased FBAR penalties). Most importantly, the biggest change was how international individual taxpayers can (and often are) severely penalized by the IRS.
This 1998 report is full of sensible ideas. The Treasury explains the complex tax laws applicable to United States citizens (“USCs”) and lawful permanent resident (“LPR”) residing outside the U.S. The report has suggestions on how to best educate international taxpayers living overseas who are impacted by these laws.
Fast forward more than 25 years later (post 9/11/2001; post USA Patriot Act of 2001; post Swiss Bank scandals 2009+; post FATCA 2010+, etc.) and we are in a world of international tax penalties galore.
The U.S. international tax world in 2024 is a very different world, even though the core of the U.S. international tax law of how much tax is owing has largely remained the same for individuals. The calculation of income taxes for USCs and LPRs living overseas in 2024 is largely the same as it was in 1998. Plus, the IRS reports that only 10,684 resident income tax returns (IRS Form 1040) were filed by these individuals living overseas in the last year the IRS Office of Statistics reporting tax returns with IRS Form 2555 (Foreign Earned Income).
What has changed over these years is the IRS enforcement and easy found money on penalty collections. One example is the penalty for reporting tax-free gifts and inheritances. The reporting requirement of that law (26 U.S. Code § 6039F – Notice of large gifts received from foreign persons) was adopted in 1996.
The IRS has been increasingly aggressive in asserting international tax penalties: The available data shows . . . there were over 4,000 penalties assessed against individuals and businesses, totaling $1.7 billion [just for this penalty under 6039F]. During this period, the average penalty was . . . $426,000 . . .
Taxpayer Advocate Report (2023): Most Serious Problem #8 – The IRS’s Approach to International Information Return Penalties Is Draconian and Inefficient
The IRS assessed US$1.7 billion of penalties for this simple 6039F reporting violation over the four years of 2018-2021. The 2018 amounts tripled or quadrupled in subsequent years (e.g., $77M v. $238M v. 282M). Not all of these taxpayers are residing overseas, but certainly USCs and LPRs residing outside the U.S. are likely to encounter foreign gifts and foreign bequests, simply because their lives are foreign!
On the flip side, there have been few favorable changes to the U.S. citizen and lawful permanent resident (“LPR”) living outside the U.S. over these 25 years.
The most favorable developments have come in the last year or so. Importantly, the U.S. Supreme Court rejected the IRS interpretation of multiple per year non-willful FBAR penalties inUnited States v. Bittner, 143 S. Ct. 713 (2023). The author of this blog worked on the ACTEC amicus brief in Bittner, cited by the majority opinion (Justice Gorsuch) and the dissent (Justice Sotomayor).
Also of significance for individuals living in tax treaty countries is the case of Mr. Aroeste. The author of this blog represents the Mexico City resident who had not formally abandoned his LPRs. The case law provides significant relief for different groups of international taxpayers pursuant per the ruling by the federal district court in Aroeste v United States, 22-cv-00682-AJB-KSC (20 Nov. 2023). That case had over $3M of penalties assessed for IRS Forms 5471, 3520 and FBAR filings.
Plus, the DOJ conceded the penalty assessed against a Polish immigrant for a foreign gift in Wrzesinski v. United States, No. 2:22-cv-03568, (E.D. Pa. Mar 7, 2023) for not filing IRS Form 3520 based upon reasonable cause. Finally, the U.S. Tax Court decision in Farhy v. Commissioner of Internal Revenue (2023) concluded the IRS could not automatically assess penalties for not filing IRS Form 5471.
Indeed, the international tax world has changed much over this past quarter century since the 1998 U.S. Treasury report. These recent string of cases in favor of international taxpayers is starting to look like a positive trend. See, Six Weeks, Three International Information Reporting Decisions (18 Sept. 2023).
No, not talking about Texas-Style Chili as reported in the – NYT Cooking Recipe.
Chile, the country in South America and the newest country to have an income tax treaty go into force with the United States. The U.S.-Chile Tax Treaty (in the works for more than a decade) went into force at the end of 2023, on 19 December 2023.
The question is how many “LPRs” are residing in a tax treaty country that are impacted favorably (presumably all of them) by the federal district court decisions we successfully handled against the IRS and DOJ, Tax Division: Aroeste v United States, 22-cv-00682-AJB-KSC (20 Nov. 2023)?
As previously explained, the Aroeste decision will affect potentially millions of “Green Card” holders (a subset of the 3.89M estimated by the government) living outside the U.S. Those who have not formally abandoned their lawful permanent residency status. See, “LPR Tax Limbo” – Formal Abandonment of LPR (Form I-407) – (2020). This “LPR Tax Limbo” is no longer the case after the Aroeste decision.
These individuals who are living in tax treaty countries are not in “LPR Tax Limbo” any more since the Court clarified when the individual is not a United States tax resident. The Court explained, that filing a “late” tax treaty position, does not cause the non-U.S. citizen to have waived the benefits of the income tax treaty. It is the tax treaty with each of the 66 countreis that has the potential of unlocking the “escape hatch” described by the Court.
The Court agrees with Aroeste. Although Aroeste gave untimely notice of his treaty position, the Court finds this does not waive the benefits of the Treaty as asserted by the Government. Rather, I.R.C. § 6712 provides the consequences for failure to comply with I.R.C. § 6114, namely a penalty of $1,000 for each failure to meet § 6114’s requirements of disclosing a treaty position.
The court in Aroeste outlined a 5-step analysis that becomes crucial for the 3.89 million LPRs residing abroad in one of the 66 tax treaty countries, in determining whether they are “United States persons” under the law. This will be covered in Part II.
Millions of LPR Individuals Living in 66 Different Countries Could Be Impacted by Aroeste vs. U.S.
The United States has a total of 58 income tax treaties that covers 66 countries. See, Countries with U.S. Income Tax Treaties & Lawful Permanent Residents (“Oops – Did I Expatriate”?) (2014); ironically reflecting the same tax treaties in force in November 2023 as of 2014 (until the Chile treaty came into effect). The 1973 U.S. – U.S.S.R. income tax treaty applies to Armenia, Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, and Uzbekistan.
Importantly, anyone in these circumstances would be remiss, if they did not consider carefully the “mark to market” tax implications to them if they were to become a “covered expatriate” as defined in the law. These “mark to market” tax consequences can have potentially devastating consequences, including to U.S. beneficiaries in the future if not properly planned and considered.
The U.S. tax law is complex, including when an individual (i) becomes and (ii) ceases to be, a U.S. income tax resident (USITR). USITR is not a technical term used under the tax law. The U.S. tax and information reporting requirements are very different depending the status of an individual. Anyone who is not a United States citizen, is either a –
“Resident alien“, or a
“Nonresident alien” as the tax law defines both of these categories.
You can’t be both.
“Resident aliens” are generally also “United States persons” (both technical terms in the federal tax law).
“Non-resident aliens” as defined are necessarily not “United States persons.”
Being one versus the other has huge U.S. tax and reporting consequences.
An individual who is a “lawful permanent resident” as referenced in the tax law (Section 7701(b)(6)) cross-references the U.S. immigration law. The first requirement of that statutory tax rule in § 7701(b)(6)(A)) is that “(A) such individual has the status of having been lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws [such status not having changed]. . .[emphasis added]” This means the tax definition is dependent upon the immigration laws, which are found in Title 8, Immigration and Nationality Act. Importantly, the last part of that sentence (i.e., [such status not having changed] is a requirement in the immigration law (Title 8), but does not appear in the tax definition.
The term “lawful permanent resident” cannot be found in Title 8 as a noun or object (i.e., the individual). Instead, the immigration law defines the status of a person in 8 U.S. Code § 1101(a) as follows:- “. . . (20) The term “lawfully admitted for permanent residence” means the status of having been lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws, such status not having changed.“
This analysis is fundamental to be able to determine whether an individual who holds a “green card” in their pocket even has the status of being “lawfully admitted for permanent residence. . . such status not having changed.” It’s a fundamental legal question under immigration law that must be answered first, to then be able to answer the tax question.
Each form an individual files or does not file (e.g., IRS tax form 1040 v. 1040NR; 8833, 5471, 8854, 8621, 3520, 8864, 8858 and FinCEN forms 114; and immigration forms, e.g., I-485, I-407, etc.) can have a potential impact on the tax residency status of an individual.
The immigration law and when forms, such as Form I-485, Application to Register Permanent Residence or Adjust Status are submitted to the U.S. federal government can have an impact on this determination. The government can use it against the individual as they did unsuccessfully in Aroeste (see below – Pages 9 and 11 of 17); asserting that Mr. Aroeste waived the treaty by not submitting certain forms.
The tax residency analysis for those who have kept their “green card” in their pocket, can be even more complex as was analyzed by the Court. There are additional provisions of the law that must be considered including old Treasury Regulations that pre-date many provisions of various U.S. income tax treaties.
For instance, each of the following federal tax statutory rules, which will be considered in more detail in later posts (II and III):
Additional posts will review the impact of these provisions in the law and how various immigration forms (including I-485 and I-407, Record of Abandonment of Lawful Permanent Resident Status) and tax forms (including 1040 v. 1040NR; 8833, 5471, 8854, 8621, 3520, 8864, 8858) and FinCEN form 114, can impact the determination of whether someone who has a “green card” in their pocket is or is not a United States person.
Bienvenido, ex Commissioner del Internal Revenue Service, Charles “Chuck” Rettig, al mejor despacho de abogados especializado en impuestos de América del Norte. Sabemos que serás excepcionalmente valioso para nuestros clientes internacionales en todo el mundo, y especialmente en América Latina y México, en lo que respecta a sus asuntos fiscales.
Huge news for all of us in the tax world, including those of us with a California connection. Chuck Rettig is the most accomplished tax lawyer, to come out of the state of California in my lifetime. It is a true honor for us at a tax focused law firm Chamberlain Hrdlicka, with nearly 80 trained tax lawyers, to have the likes of Chuck Rettig join us.
I was fortunate to follow, about a decade after Chuck, to also serve as the chair of the tax section of the State Bar of California. He has no peers in what he has accomplished professionally in the tax field.
Here’s part of our firms press release of today:
Former IRS Commissioner Charles Rettig Joins Chamberlain Hrdlicka
ATLANTA/HOUSTON/SAN ANTONIO/PHILADELPHIA/LOS ANGELES, March 4, 2024 – Chamberlain Hrdlicka is pleased to welcome former IRS Commissioner Charles “Chuck” Rettig to the firm as a Shareholder. Rettig served as the Commissioner of the IRS from 2018 to 2022, where he oversaw the nation’s tax system and managed an agency of over 83,000 employees with an annual budget of $13.4 billion. He will join the firm’s Tax Controversy & Litigation practice, comprised of attorneys experienced in advising and representing taxpayers before federal, state and local taxing authorities and in federal and state courts throughout the country. Rettig will be based in Los Angeles, California, extending the firm’s national presence for clients.
“To say we are honored to have Chuck Rettig join our firm would be an understatement,” says Larry Campagna, Managing Shareholder at Chamberlain Hrdlicka. “Chuck’s addition to Chamberlain is a testament to our work within the tax controversy market and our clients. His incredible experience at the IRS, focusing on improving service to taxpayers and deep consideration for his employees, makes him a pivotal and instrumental addition to the team.”
“This move to Chamberlain Hrdlicka is a natural progression from my tenure as the IRS Commissioner,” expressed Rettig. “It just makes sense following my work at the biggest tax agency to then join the preeminent tax and tax controversy firm in the country. I am excited to collaborate with longtime friends and colleagues within the firm, collectively dedicated to delivering unparalleled service. I am privileged to have many friends and colleagues in the tax profession and look forward to this opportunity to again work closely with them going forward.”
This is a question that concerns those non-U.S. citizens who are aware of the IRS prior position in pursuing tax penalties and adverse tax positions against the millions of “LPRS” residing outside of the United States. The concern stems from the way the government handled cases such as Mr. Alberto Aroeste where more than $3M of information penalties were assessed when very little income tax was assessed and the U.S.- Mexico income tax treaty was ignored. See, 2023 report to Congress by the Taxpayer’s Advocate and footnote 10, reported in Most Serious Problem #9 – COMPLIANCE CHALLENGES FOR TAXPAYERS ABROAD.
Footnote #10: For a recent case illustrating the complexity of applying statutory requirements and treaty provisions, see Aroeste v. United States, No. 3:22-cv-00682, 2023 WL 8103149 (S.D. Cal. Nov. 20, 2023) (holding that a Mexican citizen with U.S. lawful permanent residency status was not a “U.S. person” required to file a Report of Foreign Bank and Financial Accounts).
Depending upon the factual circumstances of each individual, they may be able to benefit from the international tax treaty law articulated by the U.S. Federal District Court in Aroeste v United States – Order (Nov 2023). Future posts will explore the legal relevance of some of the following questions to consider:
Has the individual filed any U.S. federal income tax returns since leaving the United States?
Was a professional tax return preparer hired or consulted about the filing of a federal income tax return (e.g., a certified public accountant, an enrolled agent, a full time tax return preparer, ta tax attorney, etc.)?
Has the individual been filing IRS Form 1040 Resident Tax Returns in the same way Mr. Aroeste was filing – based upon the advice (that turned out to be erroneous -although given in good faith) from their U.S. tax return preparer?
What steps if any have been taken to notify the U.S. federal government (irrespective of the agency) regarding their physical residency outside the United States?
This information is intended to provide general information about tax expatriation legal concepts under U.S. law to help readers better understand often very complex issues within the U.S. international tax field for citizens and lawful permanent residents. General legal information is not the same as legal advice, that is, the concrete application of law to a specific case with unique and particular facts.
Legal advice also should include strategic planning and advice to a particular case. A legal adviser should be able to assist an individual in taking important decisions and steps, related to the specific goals of the individual, while understanding the legal and tax consequences of each step. There are a range of consequences that the “U.S. tax expatriation” laws impose upon different types of transactions, transfers, reorganization of assets, etc. None of these items are discussed in this Tax-Expatriation.com This is not legal advice.
1. **Saturday, February 17th: Celestún Nature Reserve **
⁃ Travel to the biosphere and nature reserve of Celestún
⁃ Explore Celestún by boat, home to a myriad of wild birds, including flamingos.
⁃ Enjoy a fresh seafood lunch on the beach.
2. **Sunday, February 18th: Uxmal Exploration **
⁃ Embark on a full-day journey to the Mayan archaeological site of Uxmal.
⁃ Enjoy a guided tour of the ruins and their history
⁃ Relish a late afternoon lunch at the restored Hacienda Mucuyche
2(b). – Private evening reception for speakers and law school employees – including Dean Robert Schapiro (starting @ 7:00 PM) in the historic part of the city of Mérida next to the archeological museum – Palacio Cantón
– live music with symphonic musicians and hors d’oeuvres and cocktails
February 19: Monday night reception for all of the attendees and speakers (and significant others: with a maximum attendance of 200) at an amazing venue. Held with special permission from the Mexican Federal Government (INAH) at the archeological museum – Palacio Cantón. All within the same general area, at the historic portion of the city with live symphonic musicians. All near the convention center.
ar case. A legal adviser should be able to assist an individual in taking important decisions and steps, related to the specific goals of the individual, while understanding the legal and tax consequences of each step. There are a range of consequences that the “U.S. tax expatriation” laws impose upon different types of transactions, transfers, reorganization of assets, etc. None of these items are discussed in this Tax-Expatriation.com This is not legal advice.
