Who Is a Green Card Holder and Why Does It Matter 
For U.S. Taxation Purposes? 
by Linda Dodd-Major 
Tax rules, guidance, ...
status for non-LPRs, a green card can be thought of as 
imposing on those foreign-born persons to whom it is 
issued a lif...
authorized to live and work in the United States indefi-nitely 
(including permanently). In the discussion that 
follows, ...
the United States, with the result that he is admitted to 
the United States as a refugee. An asylee, on the other 
hand, ...
Too Long? It is not uncommon for LPRs to live and 
work outside the United States and they are not re-stricted 
from doing...
minor children, and unmarried adult children over 21 
years of age). Since waiting times for visa availability 
vary drama...
he had no U.S. tax status unless he earned income that 
was U.S. source26 even if he was not or never was in 
the United S...
the SPT is applied to determine U.S. tax residency 
based on accumulated physical presence in the United 
States (payers a...
I-407 includes options for abandonment at the time of 
filing (‘‘am abandoning’’) and for earlier abandonment 
(‘‘have aba...
United States on worldwide income. In the case of an 
LPR who departed from the United States years or 
decades ago and ha...
1, 2014.40 For eligible U.S. taxpayers residing outside 
the United States, including LPRs who can substanti-ate 
abandonm...
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This is a general interest regarding IRS Tax issues relating to LPRs who actual "reside" and/or "work" outside the U.S. It cites to my contributions in footnote 34 on page 7. Enjoy!

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Who is the green card holder...article

  1. 1. Who Is a Green Card Holder and Why Does It Matter For U.S. Taxation Purposes? by Linda Dodd-Major Tax rules, guidance, lawyers, and withholding agents care whether foreign-born payees have green cards1 because determination of U.S. tax resi-dency is required for tax compliance. Although under immigration law these persons are understood to be lawful permanent residents (LPRs) of the United States (a status that can be achieved in various ways), tax law identifies them as U.S. tax residents2 by operation of law. The distinction between U.S. tax residents and non-residents is important for two (among many) tax pur-poses. First, a tax resident is taxable to the United States on income of any type and from any source worldwide. For example, a U.S. tax resident working in the United States owes income taxes to the United States not only on income sourced in the United States, but on income earned or received from any for-eign source, such as rental income from a property out-side the United States or profit from a business that the individual owns abroad. In contrast, U.S. tax nonresi-dents owe U.S. income tax only on U.S.-source income. Since a green card holder or LPR is a statutory U.S. tax resident,3 regardless of accumulated physical pres-ence in the United States that determines tax residency 1‘‘Green card’’ is the popular name for the document issued by the Department of Homeland Security (and formerly the Im-migration and Naturalization Service) to lawful permanent resi-dents of the United States. Other terms used for the same docu-ment are ‘‘alien registration receipt card,’’ ‘‘resident alien card,’’ ‘‘permanent resident card,’’ and ‘‘Form I-551.’’ While an earlier version of the document (Form I-151) was green, more recent versions have been issued in different colors and combinations. 2IRC section 7701(b)(1)(A) provides in part that a foreign-born person who becomes an LPR (that is, a green card holder) at any time during a calendar year becomes a U.S. tax resident for that calendar year and thenceforth. For tax purposes, an indi-vidual is an LPR of the United States, and therefore a U.S. tax resident, until or unless such status has been administratively or judicially determined to have been revoked or abandoned. Tax residents are different for U.S. tax purposes from nonresidents, a term that in a tax context does not necessarily correspond to the immigration term ‘‘nonimmigrants’’ (aliens lawfully authorized to be in the United States for a temporary period and purpose) or the descriptive term ‘‘non-immigrants’’ (aliens, including non-immigrants and migrants, who are not lawful immigrants be-cause they are not authorized to reside permanently in the United States and work without restriction). 3Section 138 of the Deficit Reduction Act of 1984 first de-fined LPRs of the U.S. as U.S. tax residents. On September 10, 1987, proposed amendments were published (52 FR 34230 [INTL-55-86, 1987-2 C.B. 946]) to income tax regulations (26 CFR part 1, sections 871, 904, 953, 1301, 1441, and 6013), em-ployment tax regulations (26 CFR part 31, sections 3121 and 3306), and procedure and administration regulations (26 CFR part 301, section 7701(b) of the Internal Revenue Code of 1986). These amendments conformed regulations under section 7701(b) to section 138 of the Deficit Reduction Act of 1984 (98 Stat. 672 [Pub. L. 98-369, 1984-3 C.B. (Vol. 1) 1, 180]) and section 1810(1) of the Tax Reform Act of 1986 (100 Stat. 2830 [Pub. L. 99-514 1986-3 C.B. (Vol. 1) 1, 747]) and amended regulations under sec-tions 871, 904, 953, 1303, 1441, 6013, 3121, and 3306 to reflect the addition of section 7701(b) by the Deficit Reduction Act of 1984. Following public comments and a public hearing on June 15, 1988, the amendments were revised and adopted by Treasury decision. Linda Dodd-Major is a business immigration attorney in Washington. She created and for-merly directed the U.S. Immigration and Natu-ralization Service’s Office of Business Liaison. Copyright 2014 Linda Dodd-Major. (Footnote continued in next column.) TAX NOTES INTERNATIONAL AUGUST 18, 2014 • 549 (C) Tax Analysts 2014. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
  2. 2. status for non-LPRs, a green card can be thought of as imposing on those foreign-born persons to whom it is issued a lifetime obligation to pay U.S. income taxes on worldwide income. Like U.S. citizens, who are also statutory U.S. tax residents,4 LPRs remain obligated to pay U.S. income tax on worldwide income5 unless or until they formally lose their LPR status or citizenship. Abandonment, discussed in detail below, is a formal process that is critical to termination of individual tax obligation. While in some respects it is a simple matter to dis-tinguish an LPR from a non-LPR, and therefore to identify an individual as a U.S. tax resident with in-come tax obligations on worldwide income, there are situations in which this determination is not clear. Given relatively recent attention to LPRs and citizens of the United States by foreign financial institutions asked by the U.S. government to reveal holdings of these individuals outside the United States for purposes of U.S. tax (on worldwide income) compliance, the identification of LPRs6 has taken on prominent U.S. tax significance. The following questions and answers were devel-oped from decades of questions from tax and payment professionals to clarify when and how LPR status — and correspondingly U.S. tax resident status — begins and ends, as well as why it matters for compliance pur-poses. Since the questions approach the issues from different perspectives, they are cross-referenced to facili-tate comprehension by a wide range of individuals, advisers, and practitioners of critical interdependencies between tax and immigration law. 1. How Does a Foreign-Born Person Become an LPR? Al-though a given foreign-born person7 may be eligible for lawful permanent residency by operation of law, no person is or becomes an LPR automatically. Each case requires a determination of eligibility and either official approval of an application for adjustment of status8 or formal admission of a foreign-born person to the United States as an LPR based on an immigrant visa9 issued by a U.S. consulate abroad. The most common means by which an individual becomes an LPR is to be sponsored by an employer or family member under a preference system of categories under which eligibil-ity is established in a petition filed with the U.S. Citi-zenship and Immigration Services. Less common paths to permanent residency are the Diversity Visa (DV) lottery system,10 the decision of a U.S. immigration court, and application of an asylee or refugee and de-pendents for LPR status after one year.11 2. Is the Term ‘Immigrant’ SynonymousWith the Term ‘LPR’? The term ‘‘immigrant’’ can be confusing. To interpret a given use of the term correctly, it is neces-sary to understand the meaning of the term intended by the speaker or writer. Media and political sources, for example, often use the term ‘‘immigrant’’ expan-sively to refer to any person who is present or residing outside his birth country. That use of the term does not distinguish among unauthorized aliens, temporary lawful aliens, LPRs, transient aliens, naturalized citi-zens, or nonresidents for U.S. tax purposes. As used in this article, the term refers to any foreign-born person 4U.S. citizen individuals are ‘‘U.S. persons’’ under U.S. tax law, taxable to the United States on worldwide income regardless of their place of residence or activities. In contrast, although the definition of ‘‘person’’ at IRC section 7701(a)(1) includes com-panies and corporations and such business entities are U.S. per-sons for some purposes under U.S. Supreme Court decisions in Citizens United v. Federal Election Commission (558 U.S. 310 (2010)) and Burwell v. Hobby Lobby Stores, Inc. (573 U.S. _____ (2014)), their obligations to pay income tax on worldwide income (and how obligations they do have are terminated) are not as clear. In fact, the practice of inversion has increased more or less parallel to abandonment of status by individuals to avoid U.S. taxation of their worldwide income. 5An exception exists under tax law for LPRs to whom tax treaties with the United States give the opportunity to pay taxes as nonresidents in spite of their statutory tax residency. These LPRs, many of whom achieved LPR status via investments in the United States but continue to work and reside primarily abroad, may run afoul of immigration law and call bona fide LPR status into question if their primary ties are perceived to be outside the United States. In fact, whether an individual has filed U.S. tax returns as a tax nonresident is routinely examined in the process of determining if primary ties to the United States have been maintained by an LPR. 6A corresponding analysis of U.S. citizenship is outside the scope of this article. 7Statutes, regulations, and guidance under immigration law refer to foreign-born persons as ‘‘aliens’’ unless or until they naturalize and become U.S. citizens. ‘‘Alien’’ is a term used throughout immigration law to refer to a foreign-born person who has not become a naturalized U.S. citizen. Since the term can be perceived as pejorative, the alternative term ‘‘foreign-born person’’ is used in this article where possible. 8The term ‘‘adjustment’’ refers to an immigration process by which eligibility for a change from any temporary status to LPR status is adjudicated. Upon approval of adjustment of status, the applicant becomes an LPR. 9The term ‘‘visa,’’ although often used loosely, should not be confused with proof of U.S. immigration status. A visa is a travel document issued to an eligible immigrant or nonimmigrant that permits the holder to travel to the United States and to ap-ply for admission to the United States as an LPR or for a tempo-rary purpose under a classification that corresponds to the visa classification. While a visa is required in most cases for the holder to be admitted to the United States, it does not guarantee that the holder will be admitted. While immigrant visas are ad-dressed in some respects at Question 6 below, more detailed dis-cussion of visas is beyond the scope of this article. 10The Immigration Act of 1990 established the DV program, under which 55,000 immigrant visas would be available in an annual lottery as of fiscal year 1995. The purpose of this pro-gram was to diversify the immigrant population in the United States by selecting applicants from countries with low rates of immigration to the United States in the previous five years. 11See discussion at Question 5 below. FEATURED PERSPECTIVES 550 • AUGUST 18, 2014 TAX NOTES INTERNATIONAL (C) Tax Analysts 2014. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
  3. 3. authorized to live and work in the United States indefi-nitely (including permanently). In the discussion that follows, although other categories of foreign-born per-sons such as asylees and refugees meet the criteria above of authorization to reside and work indefinitely and without restriction in the United States, the term ‘‘immigrant’’ generally refers to a foreign-born person who has become an LPR and been issued a green card. 3. Who Is Not an ‘Immigrant’? As discussed above at Question 2, the answer depends on the intended mean-ing of the writer or speaker. For purposes of this ar-ticle, three categories of foreign-born persons are not ‘‘immigrants’’ (non-immigrants). Nonimmigrants12 are authorized to visit, reside, and/or in some cases to work, in the United States for a specific temporary period of time under one of dozens of specific tempo-rary classifications of U.S. immigration law that desig-nates the individual’s nonpermanent immigration ‘‘sta-tus’’ (most foreign students, for example, have F-1 status, whereas tourists have B-2 status). Migrants, in contrast, are foreign-born persons who are not autho-rized to be present or work in the United States for any of three reasons. Most commonly, they entered the United States informally without inspection (smuggled, for example). Almost as commonly (about 40 percent of the unauthorized U.S. population), they entered the United States in temporary status lawfully, but re-mained without authorization after that status expired (overstayed). Less understood or acknowledged, they violated the terms and conditions of their temporary status even though documents issued to them had not expired. Non-immigrants, a term that is not commonly or officially used but is useful for understanding tax implications, include members of either of the two lat-ter categories (nonimmigrants and migrants).13 4. What Is an ‘Undocumented’ Immigrant? Although use of the term ‘‘undocumented’’ may be understood to mean that a foreign-born person to whom this label is applied has suffered or committed some administrative oversight that can be resolved by better (or any) paper-work, the real meaning is synonymous with ‘‘unauthor-ized.’’ For better or worse, Congress determined the means by which foreign-born persons can lawfully visit, reside, study, and work in the United States. If and when a particular foreign-born person does not fit one of the categories set forth by Congress and thereby is not eligible to enter and function in the United States as a lawful nonimmigrant or immigrant, or the process involved to do so is possible but lengthy and/or costly, that person may choose to gain or retain access to the United States unlawfully. In many such cases, unauthorized aliens are actually documented, but the documentation is expired or invalid. In most cases, aliens referred to as ‘‘undocumented’’ were never is-sued U.S. immigration documents because they by-passed the formal system of admissions. This last group of persons, sometimes labeled EWIs because they entered without inspection, comprises the largest group of persons to whom the term ‘‘undocumented’’ generally applies. Because of poor economic conditions in countries south of the United States and accessibil-ity to the United States by land from or through Mexico, most such aliens come from Latin America. 5. Is There a Difference Between Being ‘Illegal,’ ‘Unauthor-ized,’ or ‘Undocumented,’ and Being ‘Unlawfully Present’ in the United States? Does the Difference Matter? As popularly used, the terms ‘‘illegal,’’ ‘‘unauthorized,’’ and ‘‘un-documented’’ have the same meaning as applied to aliens (but see the distinction discussed above at Ques-tion 4). A foreign-born person to whom any of the terms is commonly (unofficially) applied may be ‘‘un-lawfully present’’ or not. As provided by Congress in the Illegal Immigration Reform and Immigrant Re-sponsibility Act of 1996, aliens who enter the United States without inspection (EWI) are unlawfully present upon entry (in other words, if never documented, they were never lawfully present). Initially authorized tem-porary aliens who remained in the United States be-yond an authorized period of stay specified on a Form I-94 (‘‘overstays’’) become unlawfully present by opera-tion of law (technical exceptions may apply) once the expiration date has passed. Temporary aliens who vio-late the terms and conditions of their status before ex-piration of their authorized periods of stay (or whose periods of stay are indefinite, as with some foreign stu-dents and exchange visitors in F-1 and J-1 status) be-come unlawfully present only if or when their applica-tions to change status or stay are refused for failure to maintain the temporary status that they wish to change or extend or an immigration judge or Board of Immi-gration Appeals determines that they have breached their status. ‘‘Unlawful presence’’ is significant because unauthorized aliens who have accumulated 6 to 12 months of unlawful presence are barred from reentry to the United States for three years and unauthorized aliens who have accumulated more than a year of un-lawful presence are barred for 10 years. An alien who has accumulated aggregated unlawful presence of more than one year, is subsequently removed (deported) from the United States, and reenters or attempts to reenter the United States thereafter, becomes permanently barred from legal admission to the United States. 6. Is a Foreign-Born Person Who Has Entered the United States as a Refugee or Been Granted Political Asylum an LPR? The official difference between an asylee and a refugee is that a refugee’s eligibility for political asylum in the United States was determined before his admission to 12Tax and payment practitioners must be careful to distin-guish the immigration terms ‘‘nonimmigrant’’ and ‘‘non-immigrant’’ from the tax term ‘‘nonresident’’ (since the only tax residency terms are ‘‘resident’’ and ‘‘nonresident,’’ the only ‘‘non-resident’’ is a ‘‘nonresident’’). 13For more information about nonimmigrant categories and their related tax rules, see Linda Dodd-Major and Paula N. Singer, ‘‘When Immigration and Tax Converge,’’ Tax Notes Int’l, Mar. 19, 2012, p. 917. FEATURED PERSPECTIVES TAX NOTES INTERNATIONAL AUGUST 18, 2014 • 551 (C) Tax Analysts 2014. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
  4. 4. the United States, with the result that he is admitted to the United States as a refugee. An asylee, on the other hand, has physically reached the United States (law-fully or unlawfully) and applied for political asylum. Asylum claims may be pending for a long time before they are approved or denied. If approved, the applicant becomes an asylee and is thenceforth essentially equivalent to any alien who entered as a refugee. A key difference between the two categories is that refugees must apply for LPR status one year after admission as a refugee. An asylee, on the other hand, may apply more than one year after approval of asylum, but risks if he waits that the source of persecution in the home country that supported the claims for asylum may dis-appear and call the continued basis for asylum into question. In summary, although asylees and refugees count as ‘‘immigrants’’ for purposes of this discussion because they are entitled to reside and work in the United States indefinitely and without restriction, they do not become LPRs until they apply and documenta-tion of LPR status is issued to them. In terms of U.S. tax residency, aliens who are granted asylum or enter as refugees are not U.S. tax residents by operation of law. Rather, their U.S. tax residency is determined by the substantial presence test (SPT).14 Newly admitted refugees are U.S. tax nonresidents until they accumu-late sufficient physical presence to become tax resi-dents. Since asylees have been present in the United States while their applications for asylum were proc-essed, most will have become tax residents under the SPT by the time a decision is made on their applica-tions. 7. Is an Individual With an Immigrant Visa15 an LPR? The answer to this question depends on the location and stage of the immigration process of the immigrant visa holder. All holders of immigrant visas have been adjudicated as eligible for a particular category of per-manent residents (family, employment, or lottery-based DV). Thereafter, immigrant visa holders do not become LPRs until they are formally admitted to the United States as such based on their immigrant visas (as long as an immigrant visa holder remains abroad and is not officially admitted to the United States, he never actu-ally becomes an LPR). Since a policy was implemented several years ago to accommodate delays in production of green cards for new LPRs, however, immigrant visas have also served as temporary evidence of LPR status following their initial admissions to the United States as well as employment authorization and travel docu-ments until their green cards are received. 8. How Should the Status of an Individual Who Is ‘in the Process of ’ Becoming an LPR Be Understood for Immigration and Tax Purposes? In general, the LPR process has two stages. The first stage involves a determination of eligi-bility, in most cases via an immigrant petition filed by an employer or relative. If and when the petition is approved at stage 1, however, the beneficiary (foreign-born person being sponsored) is not yet an LPR and in many cases may have years to wait. The second stage, which commences only when an immigrant visa be-comes available to the beneficiary,16 involves one of two alternative processes. Either the approved benefi-ciary can apply to adjust status from temporary to per-manent and become an LPR if and when the adjust-ment is approved or can apply for an immigrant visa at a U.S. consulate abroad and subsequently be admitted to the United States on the basis of that visa as an LPR. Once LPR status is effective, the individual be-comes a U.S. tax resident by operation of law. 9. Is an LPR Entitled to Live orWork Outside the United States? Does an LPR Automatically Lose Immigration and/or Tax Residency Status by Remaining Outside the United States 14The substantial presence test, introduced by the Deficit Re-duction Act of 1984, is a formula by which U.S. tax residency status of foreign-born persons who are not statutory tax residents by operation of law (such as LPRs) is determined. While there may be exceptions and exemptions involved in a given case, the general formula requires a payer obligated to make a tax resi-dency determination to gather from the payee a history of physi-cal presence in the United States during the current tax year and previous two tax years. If the sum of the following exceed 183 days, the individual is taxable as a resident (if not, a tax nonresi-dent): • countable days of physical presence in the tax year; plus • countable days of physical presence in the previous tax year, divided by 3; plus • countable days of physical presence in the second previ-ous tax year, divided by 6. 15‘‘Visa’’ is a widely misunderstood term. A nonimmigrant or immigrant visa issued at a U.S. consulate abroad generally serves two purposes. First, it allows the visa holder to board a common carrier bound for a U.S. port of entry (if that passenger needs a visa, as some do not, such as under the Visa Waiver Program that permits citizens of designated countries with low visa refusal rates to travel to the United States as visitors without visas — common carriers are penalized if they debark passengers who need visas for admission to the United States but do not have them). Second, it allows the visa holder to apply for admission to the United States as an immigrant (LPR) or under the tempo-rary classification indicated on the visa. Except for the purpose that an immigrant visa has recently served as temporary evidence of LPR status and work authorization, a visa is not evidence of status or even relevant once the visaholder enters the United States (the Form I-94 or passport stamp serves that purpose). A nonimmigrant visa can expire following the holder’s admission to the United States without consequences (except that if he were to leave the United States, he would have to obtain a new visa in order to reenter). Many nonimmigrants who change from one temporary status to another without leaving the United States do not get (or need) new visas that correspond to the new status until or unless they need to leave the United States and reenter. 16The allotment system for immigrant visas is subject to quo-tas in some preference categories. Accordingly, when the demand for immigrant visas in a given category (or from a given country) exceeds an annual quota for the category for which a prospective immigrant has been determined eligible, a backlog occurs. Back-logs in some preference categories entail decades of delay for immigrant visas. FEATURED PERSPECTIVES (Footnote continued in next column.) 552 • AUGUST 18, 2014 TAX NOTES INTERNATIONAL (C) Tax Analysts 2014. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
  5. 5. Too Long? It is not uncommon for LPRs to live and work outside the United States and they are not re-stricted from doing so. For example, an LPR sponsored by an employer for his combination of credentials, skill, and foreign language and cultural proficiency may be assigned by that employer to represent it in a given target market for which a foreign language profi-ciency represents a competitive advantage for that em-ployer over other foreign companies without intimate knowledge, understanding, and ability to communicate in the foreign locale. A family-based immigrant may also have reason to leave the United States to attend to family or personal matters abroad, and/or may choose for a variety of reasons to return or retire abroad. That said, three issues are important to LPRs in this situa-tion. First, a green card remains valid (regardless of expiration date) for readmission to the United States for six months (LPRs who need for some reason to be outside the United States for longer periods can apply for reentry permits). Second, because absences longer than six months can call into question the primary ties to the United States that an LPR must maintain, LPRs who live and work outside the United States must re-main prepared at all times to substantiate those ties.17 Third, an LPR retains status, whether his green card expired or remained valid for reentry to the United States, until he formally abandons status (files Form I-407) or his status is administratively determined to have been abandoned or revoked.18 Before formal abandonment or revocation, an LPR continues to be a U.S. tax resident (see discussion at Question 11 below). 10. Can an LPR Be a Nonresident for U.S. Income Taxa-tion Purposes? The answer is yes, under provisions of U.S. tax treaties with some countries, but LPRs (and those who advise them) should be aware that a tax ad-vantage could cause an immigration disadvantage. LPRs who used extended absences for personal and/or business purposes to file U.S. tax returns as nonresi-dents under tax treaty provisions, for example, can ex-pect to have difficulty retaining LPR status given that eligibility for that particular treaty benefit must be sub-stantiated by primary ties outside the United States. See further discussion at Question 16 below. 11. Are There Dangers to an LPR of Living orWorking Outside the U.S.? The answer to this question, discussed fully at Question 9 above, depends upon the duration FEATURED PERSPECTIVES of absences from the United States, whether the indi-vidual’s green card remains both unexpired and valid for readmission to the United States, and primary ties to the United States that the individual retains. Note, however, that if any of these requirements are not sat-isfied, and even if the LPR never intends or tries to return to the United States, LPR status is not automati-cally extinguished by physical absence or lack of pri-mary (or any) ties to the United States. LPR status must be officially abandoned (via filing of Form I-407) or revoked in order for responsibilities incidental to LPR status (such as a U.S. tax resident’s obligation to pay U.S. income tax on worldwide income) to be ter-minated. See the discussion of different aspects of abandonment at questions 20-30 below. 12. Is the Spouse or Dependent Child of an LPR Also an LPR? Although a dependent spouse or child of an LPR may be eligible for LPR status by virtue of the rela-tionship, status does not change by operation of law. Spouses of LPRs who are not U.S. citizens or LPRs already may attain derivative LPR status from their LPR spouses on the basis of sponsorship by those spouses (filing of immigrant petitions with USCIS). If and when that petition is approved and eligibility of the beneficiary to become an LPR is established, a foreign-born non-immigrant spouse can apply to adjust status from whatever temporary status he has main-tained in the United States to permanent resident sta-tus as soon as an immigrant visa becomes available.19 If the foreign-born spouse is outside the United States or prefers consular processing to adjustment for any legal or personal reason, he can obtain an immigrant visa from a U.S. consulate abroad (based on approval of the petition) once an immigrant visa is available and subsequently be admitted to the United States as an LPR (LPR status that results from adjustment or con-sular processing is identical). For dependent children, the answer to this question depends on the birthplace. If an LPR’s child is born in the United States, that child is a U.S. citizen by operation of law. If an LPR’s child is born outside the United States, that child must be sponsored by the LPR parent for permanent resi-dency under category FB2 (LPRs’ spouses, unmarried 17An LPR (or conditional resident subject to removal of con-ditions after two years before final approval of LPR status) who has remained outside the United States for longer than one year, or beyond the validity period of a reentry permit, requires a new immigrant visa to enter the United States and resume permanent residence. A returning resident special immigrant visa (SB-1) may be available to an LPR who remained outside the United States due to circumstances beyond his control and can substan-tiate continuing ties to the United States. 18Revocation is set in motion in many cases by an application for naturalization that causes LPR basis and maintenance of sta-tus to be scrutinized. 19Immigrant visas are typically not available to dependent spouses and children of LPRs, who are subject to limits under the Second Preference Family-Based Category. Accordingly, de-pending on demand, availability of immigrant visas are back-logged based on priority dates. As of the July 2014 State Depart-ment Visa Bulletin posted at http://travel.state.gov/content/ visas/english/law-and-policy/bulletin/2014/visa-bulletin-for-july- 2014.html, prospective dependents from the Philippines may apply for adjustment or immigrant visas based on May 1, 2012, priority dates, dependents from Mexico based on March 15, 2011, priority dates, and dependents from all other chargeability areas based on May 1, 2012, priority dates. Since processing dates are constantly adjusted forward and backward, these dates suggest that a dependent deemed eligible on July 1, 2014, can expect to wait 22 months for an immigrant visa to become avail-able. TAX NOTES INTERNATIONAL AUGUST 18, 2014 • 553 (C) Tax Analysts 2014. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
  6. 6. minor children, and unmarried adult children over 21 years of age). Since waiting times for visa availability vary dramatically within the family-based second pref-erence category, unmarried minor children and spouses may have to wait two years or less, while unmarried adult children can expect to wait for up to a decade or longer. In summary, despite a foreign-born individual’s eligibility to immigrate to the United States on the ba-sis of a persistent family relationship, he does not actu-ally become an LPR until formal adjustment of status or admission to the United States with an immigrant visa. 13. At What Point in the Process of ‘Sponsorship’ to Be an LPR Does the Individual Actually Obtain LPR Status? As discussed above, there are important distinctions among the following stages of the process.20 A green card is not issued until after stage 3: 1) eligibility for LPR status (for example, having a qualifying relationship to a U.S. citizen or LPR); 2) official determination of eligibility for LPR status (usually via approval of a petition filed by an employer or family member and approved by USCIS); and 3) beneficiary of an immigrant petition approved by USCIS officially becomes an LPR through one of two alternative means: a) approved application for adjustment of sta-tus in the United States based on the approval notice; or b) issuance of an immigrant visa based on the approval notice and subsequent admission to the United States based on that immigrant visa as an LPR. 14. Does the Spouse or Dependent Child Born Abroad of a U.S. Citizen or LPR Automatically Become an LPR by Opera-tion of Law? Discussion of this issue regarding LPRs appears above at Question 12. For foreign-born spouses of U.S. citizens who are not naturalized U.S. citizens or LPRs independent of the marriage, the preference system for family-based immigration established by Congress provides that an immigrant visa is always immediately available for the spouse of a U.S. citizen21 once eligibility is established via the petition (sponsor-ship) process. This means that a foreign-born spouse of a U.S. citizen residing in the United States can adjust status and become an LPR once the U.S. citizen’s peti-tion for him has been approved. Alternatively, if the foreign-born spouse resides outside the United States or prefers consular processing for any reason, that spouse can apply for an immigrant visa based on the petition approval notice and become an LPR once he is admit-ted subsequently to the United States as an LPR. For children of U.S. citizens born abroad, U.S. citizenship is available at or following birth, if eligible as follows: • A foreign-born child of two U.S. citizen parents is a U.S. citizen at birth if the parents were married at the time of birth and at least one parent lived in the United States before the birth.22 • A child born outside the United States on or after November 14, 1986,23 to a U.S. citizen and non-citizen who were married at the time of birth is a U.S. citizen by birth if the U.S. parent had been physically present in the United States for at least five years before the birth, of which two of the qualifying years must have been after that parent’s 14th birthday.24 • An LPR child under age 18, born outside the United States after February 27, 2001, and resid-ing in the United States in the physical and legal custody of a U.S. citizen parent who sponsored him for admission to the United States as an LPR. • An LPR child under age 18, born outside the United States between December 24, 1952, and February 26, 2001, if both parents naturalized before his 18th birthday.25 • A child born outside the United States was adopted by a U.S. citizen parent, resides legally in the United States in the legal and physical custody of that U.S. citizen parent, and met or meets the following conditions after February 27, 2001: — qualifying adoption took place before the child’s 16th birthday (in some cases the 18th birthday) and the adoptive parent(s) had legal custody of the child and resided with the child for at least two years; or — the child was admitted to the United States as an orphan (IR-3) or convention adoptee (IH-3) whose adoption by his U.S. citizen par-ent( s) was fully completed abroad before his 16th birthday (18th birthday in the case of an IR-4 orphan or IH-4 convention adoptee). 15. Do Particular U.S. Tax Consequences Apply to LPRs? Yes. LPR status, once effective, immediately confers U.S. tax resident status on every LPR by operation of law. In some cases when a prospective LPR resided outside the United States before admission as an LPR, 20Judicial determinations of LPR eligibility are outside the scope of this discussion. 21This eligibility has evolved to apply to same-sex spouses with valid marriages. 22Special rules apply to births out of wedlock. 23Births abroad before this date are subject to longer U.S. resi-dency periods and qualifying ages for the U.S. citizen parent. 24Exceptions apply in the cases of military service, U.S. gov-ernment or international organization employment, and births out of wedlock. 25Exceptions apply in the event of the death of one parent, separation of parents, and out-of-wedlock situations. FEATURED PERSPECTIVES 554 • AUGUST 18, 2014 TAX NOTES INTERNATIONAL (C) Tax Analysts 2014. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
  7. 7. he had no U.S. tax status unless he earned income that was U.S. source26 even if he was not or never was in the United States. For a second subset of LPRs, they were U.S. tax nonresidents (as non-immigrants27 in the United States) before becoming LPRs. For a third sub-set of LPRs with a sufficient history of physical pres-ence in the United States, they were already U.S. tax residents under the SPT (see discussion below at Ques-tion 20). In this third case, tax status did not change but became permanent until or unless LPR status is formally abandoned or revoked. 16. What U.S. Tax Consequences Apply to LPRs? As statutory U.S. tax residents, LPRs owe income tax to the United States on their worldwide income, of any type and from any source, paid in any currency or in kind. In order for income outside the United States to be taxed, however, it must be reported to the U.S. In-ternal Revenue Service as LPR taxpayers are required to do under penalty of law. U.S. persons, including LPRs, are required to report foreign accounts.28 In or-der to identify and collect U.S. tax from foreign ac-count holders, the Foreign Account Tax Compliance Act requires foreign financial institutions to report overseas accounts of U.S. persons to the IRS starting July 1, 2014. See discussion at Question 19 below. 17. Do Exceptions Apply to LPRs’ Obligation as Tax Resi-dents to Pay U.S. Income Tax on Worldwide Income? As dis-cussed briefly above at Question 10, a relatively narrow exception is available to non-citizen U.S. tax residents who live and work in countries that have tax treaties with the United States29 under treaty tiebreaker clauses that treat tax residents as nonresidents for purposes of qualifying for tax treaty benefits. Under those treaty provisions, U.S. non-citizen taxpayers that qualify as tax residents both of the United States (due to LPR status, for example) and the treaty partner country have the opportunity to prove that their primary residence and business or investment activity are outside the United States in the tax treaty partner country of which they also qualify as tax residents. If the claim is FEATURED PERSPECTIVES substantiated, a non-citizen who is otherwise a U.S. tax resident owes income tax to the United States only on U.S.-source income (income from outside the United States that is not U.S. source, in other words, is not taxed) and files a U.S. tax return as a nonresident.30 18. WhyWould Any U.S. Tax Resident Choose Not to Take Advantage of a U.S. Treaty Provision That Reduces His U.S. Tax Burden (Is This Not a ‘No Brainer’)? Although U.S. citizens may not use tax treaties to reduce their U.S. tax obligations (filing U.S. income tax returns as non-residents under a treaty tiebreaker provision), non-citizen individual taxpayers who are U.S. tax residents under the SPT would have no reason to choose not to take advantage of this benefit. Some danger exists, however, for LPRs who must maintain primary ties to the United States in order to maintain LPR status. For them, the proof necessary to qualify for taxation as U.S. tax nonresidents may seriously undermine their eligibility to do so because they must have proven pri-mary ties outside the United States in order to qualify. 19. HowWould the IRS Find Out About a Tax Resident Taxpayer’sWorldwide Income if That TaxpayerWere Igno-rant of This Requirement or Chose Not to Report the Income? The IRS determines whether noncompliance is inten-tional as well as whether a given taxpayer is eligible for mitigation of penalties. Recently, however, both the legislative and executive branches of the U.S. govern-ment have come to realize that huge uncollected tax revenue could substantially narrow the U.S. tax gap and set out to close loopholes through which U.S. tax residents were concealing foreign-source income and thereby avoiding U.S. taxes. Two measures intended to reduce or close loopholes were FATCA, enacted in March 2010, and the Report of Foreign Bank and Fi-nancial Accounts required since February 2011 under the Bank Secrecy Act. These two complex and detailed provisions (both of which include many exceptions) were intended to force disclosure of sources and ad-ministration of income that had theretofore avoided detection by the IRS if not disclosed on annual tax returns filed by U.S. tax residents including LPRs. The reach of these measures has been successful enough, in fact, to provide incentives for FFIs to report accounts of U.S. tax residents that had previously been confiden-tial (and therefore undetectable by U.S. tax authorities). See discussions at questions 26-30 below. 20. Is Eligibility for LPR Status Enough for the Eligible Individual to Be Taxed as an LPR? The confusing answer to this question is maybe, but this answer is independ-ent of the individual’s U.S. immigration status or eligi-bility. If a foreign-born person is physically present in the United States but is not a U.S. tax resident by op-eration of law as an LPR or naturalized U.S. citizen, 26IRC section 861 provides, in summary, that income from interest, dividends, personal services, rentals and royalties, dispo-sition of real property income, sale or exchange of inventory property, underwriting income from insurance or annuity con-tract, Social Security benefits, and guarantees in the United States is U.S.-source income for U.S. taxation purposes. 27Non-immigrants in this context are nonimmigrants or mi-grants with a history of physical presence in the United States that did not make them U.S. tax residents under the SPT before adjustment of status or applying for immigrant visas. 28See generally http://www.irs.gov/Businesses/Small- Businesses-&-Self-Employed/Report-of-Foreign-Bank-and- Financial-Accounts-FBAR. 29In all countries but the United States and Eritrea, tax resi-dency is based on physical presence or domicile rather than citi-zenship. A U.S. tax resident may be eligible for a tax treaty ben-efit based on tax residency in a country of which he is not and never was a citizen. 30Although tax residents may be relieved of income tax on worldwide income under treaty tiebreaker rules, they may con-tinue to have disclosure obligations as residents that are not cov-ered by the tax treaties. TAX NOTES INTERNATIONAL AUGUST 18, 2014 • 555 (C) Tax Analysts 2014. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
  8. 8. the SPT is applied to determine U.S. tax residency based on accumulated physical presence in the United States (payers are obligated to make this determination, on the basis of the payee’s U.S. immigration history, or to withhold 30 percent of the payment for U.S. tax purposes as if the payee is a U.S. tax nonresident). Un-til a foreign-born person becomes an LPR via adjust-ment or admission to the United States with an immi-grant visa, he is not a U.S. tax resident by operation of law. That same individual, however, may have already become a U.S. tax resident for the tax year at issue un-der the SPT (the individual may just as well, however, be a U.S. tax nonresident under the SPT). Note: Form W-9, ‘‘Request for Taxpayer Identification Number and Certification,’’ and Form W-8BEN, ‘‘Certificate of For-eign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals),’’ request in-formation that many prospective payees may not un-derstand. For example, standard 3 within the Form W-9 Part II certification states, ‘‘I am a U.S. citizen or other U.S. person (defined below).’’ While definition of ‘‘U.S. person’’ does appear within the general instruc-tions below the certification, the explanation is lengthy, technical, detailed, complex (if read at all), and argu-ably counterintuitive to an individual’s understanding of his immigration status. Regarding Form W-8BEN (for individuals), the concept of ‘‘beneficial owner’’31 may be equally unknown, incomprehensible, and/or easily confused by a foreign individual asked to com-plete it. A foreign lecturer or performer, for example, may believe that an agent that arranged the lectures or performances being compensated is the beneficial owner of the income. 21. What Happens to LPRs Who No Longer Live in the United States and May Even Believe That They Have Lost LPR Status (and Thereby U.S. Tax Residency)? The short answer is that LPRs remain LPRs until they formally abandon LPR status (or their status is administratively or judicially terminated). As such, they remain U.S. tax residents. While it is not uncommon for LPRs who left the United States to assume that they lost LPR status (and U.S. tax residency) as soon as their green cards expired or were no longer valid for readmission to the United States, or because of absences longer than six months, these assumptions are inaccurate. When foreign-born persons retain LPR status because they never abandoned it, even if their absences exceed six months or even one year, their ties to the United States can be questioned if they attempt readmission to the United States even with unexpired green cards.32 If and when that happens and an LPR does not file an application for abandonment (Form I-407) at the port of entry, he can be scheduled for an immigration hear-ing at which his ties to the United States will be scruti-nized. That hearing can result in a finding of abandon-ment that terminates LPR status as well as U.S. tax residency status (but a finding of permanent ties to the United States might also result, depending on facts and circumstances). Finding of abandonment in an admin-istrative court proceeding terminates LPR status and statutory U.S. tax residency33 (but the SPT may still apply). 22. How Does an LPR Voluntarily Abandon LPR Status? An LPR voluntarily abandons status by filing Form I-407.34 The form may be filed in person at a U.S. con-sulate or at a U.S. port of entry. As submitted, a Form 31While there has been debate about the definition of the term ‘‘beneficial owner’’ under some circumstances, the term refers here to the individual who enjoys the possession and/or benefits of ownership (such as receipt of income). Persons who perform independent personal services, for example, are benefi-cial owners of payments that compensate their services. An agent, custodian, or trustee does not change the actual owner. 32Unexpired green cards include a white background version of the resident alien receipt card (the green card or Form I-551) issued in the late 1980s without an expiration date. While that particular card does not expire, its continued use for U.S. admis-sion purposes becomes invalid after six months (unless the ab-sence is undetected). More significantly, since lack of an expira-tion date means that the document is not renewed periodically, the photo on the card is likely so outdated after many years that the cardholder can no longer be recognized from it (the same can be true for U.S. passports and their holders if their appear-ances have changed). 33It may be useful to introduce a distinction between aban-donment as an action or intention and ‘‘administratively or judi-cially determined to have been abandoned’’ as provided in the Deficit Reduction Act of 1984 and 26 CFR 301.7701(b)(1). While an immigration judge’s termination of LPR status unques-tionably meets this standard, it seems questionable that mere fil-ing by an LPR of Form I-407 does so until or unless a substan-tive and authoritative determination is made that information on the form is substantiated and consistent with U.S. immigration records. See discussion of this issue at questions 22 and 24-27 below. 34The history of Form I-407 is unclear. The current version of DHS Form I-407 indicates a revision date of March 3, 2006. Federal Register announcements show publication of a 60-day re-quest for comments on the ‘‘new’’ form on September 20, 2013. In response to this notice, a single comment was received, dated September 19, 2013. The commenter, former INS adjudicator Joseph P. Whalen, noted that Form I-407 had existed for many years under Legacy INS, but ‘‘fell through the cracks.’’ Accord-ing to Whalen, although the State Department had altered the old form and continued to use the altered form, it was unclear what had been used by any of the DHS agencies. The Federal Register published notice of an additional 30-day comment period on January 24, 2014. (See http://www.uscis.gov/laws/uscis-federal- register-announcements?topic_id=All&field_rule_date_ published_value%5Bvalue%5D%5Bmonth%5D=&field_rule_ date_published_value_1%5Bvalue%5D%5Byear%5D=&combine =abandonment&items_per_page=10.) A search of the Federal Register online archives did not produce links to any earlier ver-sions of Form I-407 published by DHS or the Department of FEATURED PERSPECTIVES (Footnote continued on next page.) 556 • AUGUST 18, 2014 TAX NOTES INTERNATIONAL (C) Tax Analysts 2014. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
  9. 9. I-407 includes options for abandonment at the time of filing (‘‘am abandoning’’) and for earlier abandonment (‘‘have abandoned my status as a lawful permanent resident of the United States because’’). Thereafter, the form requests the date of abandonment (presumably consistent with the one of two alternatives checked above). At the bottom of the applicant’s part of the form, a date is provided for the submission and appli-cant’s signature. In the ‘‘For Government Use Only’’ section at the bottom of the form, the two required dates indicate referral of the form to a ‘‘Files Control Office’’ (for inclusion in the alien’s file) and the date on which a copy of the form was provided to the ap-plicant. Note: None of the four dates on a Form I-407 described above seem to meet the requirement of the Deficit Reduction Act of 1984 or 26 CFR 301.7701(b)(1) that the abandonment be administra-tively or judicially determined if no adjudication of claims made on the form takes place and information is basically accepted as presented, without question unless a consular officer who signs the form in section 6(d) happens to include comments (that seems unlikely, since this section relates to notice to the applicant of future hearing options). Not only does no determination appear to take place in the normal sense of the word, but no distinction is made or even addressed as to whether the date of abandonment is the filing date (as deemed by IRS) or an earlier date of abandonment that the applicant claimed on the form and presumably substantiated during the abandonment interview. 23. Do U.S. Citizens Formally Abandon Citizenship in the Same Way as LPRs? No. A U.S. citizen who does not have or no longer has ties to the United States must formally renounce or abandon U.S. citizenship via a five-part process if renunciation is a matter of choice. State Department Form DS-4079, from which determi-nation of voluntary or involuntary loss of U.S. citizen-ship is made (section 1 requests information that could result in loss of citizenship;35 section 2 facilitates vol-untary renunciation), is submitted to a U.S. consulate. At a subsequently scheduled personal interview at the consulate, the applicant completes Form DS-408036 to affirm renunciation of U.S. nationality, Form DS-4081 to confirm his understanding of the consequences and ramifications of renunciation, Form DS-4082 to record witnesses to the applicant’s renunciation, and Form DS-4083 to certify loss of nationality of the United States. In cases of voluntary renunciation, both the date of expatriation and the date on which a consular officer executes the form are recorded on the official Form DS-4083 returned to the applicant. Based on the processing involved, an executed Certificate of Loss of Nationality of the United States seems to constitute a determination that U.S. citizenship has been aban-doned (voluntarily or involuntarily), but does not dis-tinguish between a previous renunciation date and cir-cumstances (Form DS-4079, questions 16 and 17) and the later date on which certification of loss of nation-ality is officially recorded on Form DS-4083. Accord-ingly, unless one of these dates is arbitrarily chosen to apply in all cases regardless of circumstances, a U.S. citizen retains U.S. tax residency until that date. On IRS Form 8854, ‘‘Initial and Annual Expatriation Statement,’’ item 5 identifies the ‘‘Date of notification of expatriating act for a US citizen’’ as ‘‘Date notifica-tion given to Department of State.’’ Given the array of dates described above in the abandonment process, it is difficult to know which date is actually intended.37 24. What Is the Date of Abandonment, and Why Does It Matter? Both the multi-step process for U.S. citizens and the Form I-407 for LPRs provide for a date of fil-ing for abandonment and separately for a date of ac-tual abandonment (which may result from involuntary abandonment by operation of law) that preceded filing (if applicable). While in many cases and for many rea-sons the date may not particularly matter, it may be of great consequence to those former citizens or LPRs who seek to prove termination of their obligation as statutory U.S. tax residents to pay income tax to the Justice, Immigration and Naturalization Service. If an earlier or original official version of this form existed before the effective date of Deficit Reduction Act of 1984 provisions in which Con-gress identified LPRs as U.S. tax residents, or before IRS regula-tions implementing the statute became effective in 1993, LPRs who became LPRs and/or left the United States earlier than one or both of those dates with the intent to terminate residency may be subject to different analysis. 35A finding of loss of U.S. nationality may result from any one or combination of the following: • obtaining naturalization in a foreign state; • taking an oath, affirmation, or other formal declaration to a foreign state or its political subdivisions; • entering or serving in the armed forces of a foreign state engaged in hostilities against the United States or serv-ing as a commissioned or noncommissioned officer in the armed forces of a foreign state; • accepting employment with a foreign government if (a) one has the nationality of that foreign state or (b) a dec-laration of allegiance is required in accepting the posi-tion; • formally renouncing U.S. citizenship within the United States (but only ‘‘in time of war’’); or • conviction for an act of treason. 36Unlike Form I-407 for abandonment of LPR status, which may be submitted with both a date of filing or submission and a separate date of abandonment if actual abandonment preceded the date of filing, Form DS-4080 for abandonment of U.S. citi-zenship provides only the date of filing. Accordingly, a determi-nation of abandonment of citizenship status that effectuates abandonment for U.S. taxation purposes could be either the fil-ing date or the date of an earlier expatriating act described in section 1 of Form DS-4079 (presuming that the date has been substantiated and accepted by consular officials). 37The Form 8854 instructions are not much clearer: ‘‘Citizen. Check this box if you are a former U.S. citizen, and enter the date on which you gave notice of your expatriation to the De-partment of State.’’ FEATURED PERSPECTIVES (Footnote continued in next column.) TAX NOTES INTERNATIONAL AUGUST 18, 2014 • 557 (C) Tax Analysts 2014. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
  10. 10. United States on worldwide income. In the case of an LPR who departed from the United States years or decades ago and has not maintained primary (or per-haps any) ties to the United States in the interim, the difference between the actual date of abandonment and the I-407 filing date, as well as the U.S. tax liability during that period, could be huge. 25. Can a Former LPR Who Has Filed Form I-407 but Supplied an Earlier Abandonment Date That Can Be Substan-tiated by Facts and Circumstances Assume That the Date of Actual Abandonment Provided to DHS on Form I-407 Also Triggers Termination of U.S. Tax Resident Status? Although the IRS issued clarifications intended to ‘‘ease the bur-den and help more taxpayers come into compliance,’’ it has not yet changed the trigger date for termination of tax residency status. Pending clarification about the effective date that may change, the effective date for U.S. taxation purposes is the date of filing Form I-407.38 26. Does USCIS or Any U.S. Immigration Authority Issue Any Documentation to Confirm Abandonment of LPR Status, Including the Effective Date? Apparently not. Although abandonment of LPR status is an immigration issue over which the U.S. immigration authority has jurisdic-tion, the difference that may exist between an actual (earlier) abandonment date and the Form I-407 filing date is not currently resolved by USCIS or any other U.S. immigration authority in a form that can be pre-sented to the IRS to dispute its position that for tax purposes over which it has jurisdiction, at this time the termination date for U.S. tax residency is the Form I-407 filing date. Although it is common if not pro forma for applications and petitions to be adjudicated by USCIS, a process that includes scrutiny of informa-tion provided on any application, petition, or other form that may differ from data in official immigration records (such as exit or entry) or not meet standards of proof, it appears that there is no such adjudication of dates or other information provided on a Form I-407 or to an official who receives the form. Until or unless this happens and a date of abandonment is officially confirmed by the U.S. immigration authority, a former LPR lacks substantial support for arguing that an aban-donment date preceding the Form I-407 filing date should be accepted by the IRS for purposes of termi-nating U.S. tax residency. Given widespread misunder-standing of when and how abandonment of LPR sta-tus occurs, ignorance of the concept or responsibilities of U.S. tax residency, and potentially huge tax conse-quences of misunderstanding and ignorance, it seems arguable if not compelling in the interests of fairness for the process to be improved and clarified by the agencies involved (separately or together). 27. Which U.S. Authorities Have Jurisdiction Over the Process and Determination of Abandonment, and How Does This Relate to U.S. Tax Liability? Although naturalization of a foreign-born person to become a U.S. citizen is under jurisdiction of the U.S. immigration authority, jurisdiction of U.S. citizens abroad is generally under U.S. State Department authority and abandonment of citizenship is accordingly deemed to be a State Depart-ment matter (see discussion at Question 23 above). Al-though LPRs may also file for abandonment at a U.S. consulate, they use DHS Form I-407 and a copy of the form is referred to the applicant’s ‘‘Alien File’’ main-tained by DHS. Presumably, if an official who receives a Form I-407 is satisfied that abandonment is voluntary and substantiation seems at face value to be satisfac-tory, he endorses the bottom section of the form and confirms filing by providing a copy of the endorsed form to the applicant. If information and documenta-tion provided on or with the form is not consistent with official immigration records (for example, the ap-plicant entered the United States as an LPR after the date of actual abandonment claimed on Form I-407), however, such problem does not seem to be discovered through this process. Note: Understanding this actual or potential loophole in the system, the IRS may have decided to tie abandonment of LPR status for U.S. taxation purposes to the Form I-407 filing date even when an earlier abandonment date is possible and pro-vided for on the form. If the IRS could be certain that the form would be adjudicated by USCIS as happens with other immigration forms, it would seem reason-able for the IRS to defer to the U.S. authority with ju-risdiction over immigration matters. If adjudication does not occur, however, the IRS’s intention to avoid the consequences of the self-interest of LPRs moti-vated to claim earlier abandonment dates in order to avoid U.S. taxes on worldwide income may be reason-able. 28. What Is the Exposure to U.S. Income Taxes of LPRs Who Never Formally Abandoned LPR Status but Believe That They Abandoned Their LPR Status Much Earlier Than a Form I-407 Would Be Filed? The answer to this question depends on the liability of the individual for U.S. taxes on worldwide income. This liability can vary from al-most zero to millions of dollars, depending on the amount of income on which U.S. tax was owed but unpaid. Penalties and interest may also be imposed, although the IRS has made changes in its offshore compliance programs39 for taxpayers whose failure to disclose offshore assets was non-willful before the new FATCA rules and procedures went into effect on July 38An interesting related issue is the effect of LPR status ac-quisition and abandonment that preceded the effective date of provisions in section 138 of the Deficit Reduction Act of 1984 that first made LPRs U.S. tax residents by operation of law. 39See June 18, 2014, release at http://www.irs.gov/uac/ Newsroom/IRS-Makes-Changes-to-Offshore-Programs;- Revisions-Ease-Burden-and-Help-More-Taxpayers-Come-into- Compliance. FEATURED PERSPECTIVES 558 • AUGUST 18, 2014 TAX NOTES INTERNATIONAL (C) Tax Analysts 2014. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
  11. 11. 1, 2014.40 For eligible U.S. taxpayers residing outside the United States, including LPRs who can substanti-ate abandonment of LPR status, penalties will be waived. 29. Are There Other Tax Consequences of Abandoning LPR Status Via the Form I-407 Process Besides the Termination of Obligation to Pay U.S. Income Tax onWorldwide Income? The Heroes Earnings Assistance and Relief Tax Act of 2008 and U.S. Treasury Notice 2009-85 apply to long-term U.S. permanent residents who abandon LPR sta-tus (referenced as green card holders) that they have held for eight of the last 15 years. They are subject to an immediate exit tax on unrealized gains on all their assets both in the United States and worldwide (includ-ing grantor trusts), and on any future gifts or bequests to U.S. citizens and residents. The exit tax applies to any covered expatriate41 who meets the following cri-teria: • net worth of at least $2 million dollars; and • average net U.S. income tax liability of greater than $139,000 (thereafter indexed for inflation; $155,000 for people expatriating in 2013) for the five-year period before expatriation; or the covered expatriate files to certify that he has complied with all U.S. federal tax obligations for the preced-ing five years.42 30. How Is the Exit Tax Calculated? An exit tax is ap-plied to net unrealized gains on covered expatriate as-sets estimated on a mark-to-market basis (as if the as-sets were sold at their fair market value on the day preceding expatriation43). The tax base includes any interest in property that would have been taxable as FEATURED PERSPECTIVES part of his gross estate for federal estate tax purposes for an individual who is a U.S. citizen or LPR, and assets are valued according to the rules governing es-tate tax computation. The first $600,000 (indexed for years after 2008; $668,000 for 2013) in gains are ex-empt from expatriation tax.44 The tax payment is due within 90 days after giving up U.S. citizenship.45 De-ferred compensation, depending on its nature, is either subject to 30 percent withholding tax at the moment of payment, or is included in the personal income of the expatriate subject to exit tax. 31. Are There Immigration Consequences to Abandoning LPR Status Via the Form I-407 Process Besides the Termina-tion of Eligibility to Enter, Live, and/orWork in the United States as an LPR? Theoretically, a foreign-born person can change from temporary to permanent U.S. immi-gration status or from permanent back to temporary status. But abandonment of LPR status that is attrib-uted to avoidance of U.S. income tax is not viewed favorably. Congress amended the grounds of ineligibil-ity for visas and of admissibility to the United States in 1996 (the ‘‘Reed Amendment’’) to make U.S. citizens who abandon U.S. citizenship for the purposes of avoiding U.S. taxation (as determined by the attorney general of the United States) ineligible for U.S. visas and admission to the United States.46 While this amendment does not apply to former LPRs, it sends a strong signal. 32. Can a Former LPR Come and Go Following Formal Abandonment as a Non-Immigrant for U.S. Visa and Immi-gration Purposes, as if He Had Never Been an LPR? As indi-cated in the answer to Question 31, the answer is theo-retically yes. However, abandonment for purposes of avoiding taxation is such a sensitive issue, and the mo-tives for establishing a new type of relationship with the United States as a non-immigrant are so likely to be scrutinized, that it behooves a former LPR to pro-ceed with caution. ◆ 40This is the IRS’s third voluntary compliance program since 2009. Earlier programs yielded compliance by 45,000 taxpayers who paid about $6.5 billion in taxes, interest, and penalties. 41Exceptions apply to dual nationals from birth who have not lived in the United States for more than 10 of the last 15 years and persons under age 181⁄2 who have not lived in the United States for more than 10 years. 42See IRS Publication 519, U.S. Tax Guide for Aliens (for use in preparing 2013 returns), pp. 22-24. 43If DHS clarifies an official abandonment date when a Form I-407 claims a date of abandonment that precedes the date of filing, the exit tax applicable to covered expatriates would pre-sumably be calculated as of that official date or covered by exit tax provisions in effect on that date. Unless or until the DHS clarifies, covered expatriates who can substantiate earlier aban-donment dates to the IRS will correspondingly owe exit tax based on that earlier date. 44See IRS Publication 519, U.S. Tax Guide for Aliens (for use in preparing 2013 returns), p. 24. 45Expatriation is considered effective for tax purposes even if the covered expatriate has not filed Form 8854, ‘‘Expatriation Information Statement.’’ 46The Reed Amendment has never actually been implemented because it would require determination of motive that is highly fact sensitive and requires input of U.S. tax authorities that must keep tax records confidential until or unless Congress changes that general restriction. TAX NOTES INTERNATIONAL AUGUST 18, 2014 • 559 (C) Tax Analysts 2014. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.

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