Matthew Ledvina has many years of experience working as a US tax adviser, having specialised in the area in his positions at the large, multinational law firm Baker McKenzie, and at a boutique law firm that he co-founded in 2011 with other Baker McKenzie colleagues. Through both of these professional positions, Ledvina has become an expert on subjects including US tax compliance, expatriation from the US, FATCA, and cross-border tax planning for US connected families.
Matthew has written a number of articles on cross-border US tax issues for individuals and families on Data Driven Investor.
US citizens who reside outside the US remain fully liable to US taxation. Even in 2018, most US citizens resident outside the US believe (incorrectly) that they only have to pay taxes where they reside. So, a US citizen who resides in France for 365 days a year and never leaves the country still has to pay full US taxes even if the US citizen earns US$20,000 a year. The only way to stop the US taxation is to renounce their US citizenship. US ‘green card’ holders are subject to the same rule, but they have an additional escape valve if they live in a country with a double tax agreement with the US.
With the passage of FATCA in 2010, non-US banks begun to ‘hunt down’ US citizens, which forced many US citizens resident outside the US to regularize their US tax situation. Prior to FATCA’s effective date in 2014, many non-US banks would avoid the uncomfortable topic of asking if the US citizen paid US taxes. Now, non-US banks ask a series of very detailed questions to determine if the individual was born in the US, has a spouse who is a US citizen, or has any other connection to the US.
On top of the FATCA pressure on US citizens, a law, passed by Congress in 2015, came into effect in February 2018 in which the US Internal Revenue Service (IRS) can deny citizens a new passport, or revoke their existing passport, if the taxpayer has ‘sustainable debt’. A US citizen residing abroad without another citizenship could literally be trapped in the US if the IRS pursues the individual.
Currently, there are over 360,000 US citizens who are at risk of losing their American passport because they owe more than $51,000 in overdue taxes.
There are several groups that are exempt from the IRS’s tax payback scheme, including those living in a federally declared disaster zone, victims of identity theft, and people who claim ‘innocent-spouse’ relief.
The IRS does not have the power to revoke citizenship. The IRS can cause a US citizen’s passport to be revoked or not allow the issuance of a new US passport.
So far, more than $11.5 million in overdue taxes has been paid to the IRS by taxpayers who wish apply for, or renew, a US passport, and another 1,400 taxpayers have arranged a payment plan in order to start paying back their debt.
However, more and more American citizens are actually choosing to give up their US citizenship, thanks in part to stricter tax rules for American expatriates – including the Foreign Account Tax Compliance Act (FATCA) of 2010 and the latest IRS payback scheme.
The Foreign Account Tax Compliance Act meant that US citizens that were living abroad were subject to greater scrutiny by their financial institutions and banks. FATCA is thought to have caused many American citizens to give up their citizenship in order to avoid the added financial checks and scrutiny – with data showing that more than 5,000 US citizens living abroad gave up their passports in both 2016 and 2017, with a further 1,099 US citizens renouncing their passports in just the first three months of 2018.
It is only through a thorough analysis of your assets and your particular circumstances that you will be able to forecast the US tax costs involved in moving to the US.
That pre-residency due diligence will also allow you to ascertain the nature and extent of your particular reporting obligations.
Having participated in a pre-residency due diligence, you will find yourself privy to all relevant factors indispensable to making an informed immigration decision.
Below we outline the nature of the pre-residency due diligence screening process we offer.
1. What will we ask of you if you are considering relocating to the US?
We will seek to elicit all pertinent information from you regarding your personal and business assets and dealings, in order to obtain a 360 degree view of your personal and business portfolios. We will also ask you to estimate how long you plan to stay in the US and the extent you intend to maintain personal and economic ties with your home country while you are in the US. We also want to know more about your personal circumstances, such as nationality, domicile, marital status, family members, etc.
2. What will we hope to achieve in eliciting all this information from you?
Our aim will be to ensure that we are in a position to provide you with an accurate assessment of your exposure to US taxation should you determine to relocate to the US. In doing so, we will use the opportunity to flag any onerous reporting requirements which might be applicable to you.
3. What form will our assessment take?
Once we have elicited all relevant information pertaining to your personal circumstances, assets (both personal and business), we will be in a position to provide you with a detailed personal memorandum.
4. Will this advice take account of the tax laws and practices applicable in the specific state you are planning to move to or only US federal tax laws?
Upon request, and should you require specific advice tailored to the particular state that you are considering relocating to, we can provide you with such advice. However, our advice will chiefly involve discussions of US federal tax laws and practices in effect on the date of the memorandum.
5. Will this advice take account of the tax laws of any other country?
Our advice will not take account of the laws of any other country. In rendering our advice, we may consult local counsel, to the extent necessary, regarding any non-US law implications of our advice.
6. In sum, what will our pre-immigration due diligence screening achieve?
Pre-immigration advice will seek to:
1. Initiate any pre-residency asset transfers, by for instance creating any trusts or other entities or through gifting certain assets;
2. accelerate income and gains;
3. defer deductible expenses and losses;
4. reorganize and restructure business structures or financial holdings so as to minimize future taxable income and gains.
7. Will the advice also seek to identify the myriad reporting requirements which might apply to you and your family upon immigrating to the US?
Yes, we will seek to identify all reporting requirements applicable to persons who take up residence in the US, taking account of your particular circumstances.
Given the extensive web of taxation laws and reporting requirements in the US, it would be remiss of anyone seriously considering immigrating to the US to fail to consult us regarding our pre-immigration due diligence screening process.