Tax on Inheritance by U.S. Citizen from Canadian Resident - Section 2801

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lawman3966
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Tax on Inheritance by U.S. Citizen from Canadian Resident - Section 2801

Post by lawman3966 » Mon Oct 07, 2019 9:21 pm

I originally posted about this issue in June of 2018. Circumstances now warrant an update of that older post.

The relative (my mother) of whom I wrote then has passed away at the age of 98.

The purpose of this post is to determine the best approach at this point to respond to the possibility of the 40% "expat tax" being imposed on my share of the estate under 26 Section 2801 of the U.S. code. Below, I have tried to include as much relevant information as possible to help respondents answer my questions.

The estate is worth a total of about One million $ U.S., to be split equally between her three children. The value of this estate is overwhelmingly invested in real property (condo), with perhaps 10% or so in financial accounts. I believe that the estate includes about $50K in U.S. IRA accounts, with the remainder being in Canada (Real estate and financial accounts). This will be subject to verification over the coming months as we go through her papers.

My mother was a Canadian citizen and lived in Canada from infancy (born in USSR in 1920s) until 1979. In 1979, she moved, along with our family, to the U.S. She became a U.S. Permanent Resident around the early 1980s. She returned to Canada permanently around 1996 (she commuted for a time between Ontario and Wisconsin between 1996 and 1998, so I don't know her official national residency dates during that period with greater precision than that. She married in 1950 and divorced in 1998.

She worked and paid taxes in the U.S. between about 1980 and 1993.

I have not been able to access her files since June 2018 and have not been able to determine whether she filed the documents needed to formally end her U.S. Green card status, or otherwise stated, U.S. "person-hood" either with the INS or the Treasury Dept. It's likely best that any guidance provided herein be provided on the assumption that the relevant documents (I-407 and the like) were NOT filed.

I think it's highly likely that (a) the expatriation documents (I-407 etc) intended for the INS and IRS were NOT filed at any time; and that (b) U.S. tax returns were not filed between 1999 and her passing in 2019. (This is subject to verification over the coming months as we (the kids) get access to her files, but for now, it would be best for respondents to assume that the relevant documents and tax returns were not filed.

Questions:

Q1: What can I do to minimize or avoid the imposition of a Section 2801 tax on my inheritance?

Q2: Is there anything I should be doing now to comply with Section 2801, even in view of the fact that it has not been fully implemented?

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Re: Tax on Inheritance by U.S. Citizen from Canadian Resident - Section 2801

Post by lawman3966 » Tue Oct 08, 2019 5:50 am

Bump.

ivk5
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Re: Tax on Inheritance by U.S. Citizen from Canadian Resident - Section 2801

Post by ivk5 » Tue Oct 08, 2019 6:16 am

My guess is there are not many posters on BH with relevant knowledge/experience. Either way, you’ll want professional advice from someone with cross-border tax compliance experience.

student
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Re: Tax on Inheritance by U.S. Citizen from Canadian Resident - Section 2801

Post by student » Tue Oct 08, 2019 6:29 am

I echo the suggestion above in talking to an accountant who practices in this area.

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Re: Tax on Inheritance by U.S. Citizen from Canadian Resident - Section 2801

Post by TedSwippet » Tue Oct 08, 2019 1:10 pm

lawman3966 wrote:
Mon Oct 07, 2019 9:21 pm
I think it's highly likely that (a) the expatriation documents (I-407 etc) intended for the INS and IRS were NOT filed at any time; and that (b) U.S. tax returns were not filed between 1999 and her passing in 2019. (This is subject to verification over the coming months as we (the kids) get access to her files, but for now, it would be best for respondents to assume that the relevant documents and tax returns were not filed.
Sorry for your loss.

I seem to recall that some of the discussion at the time revolved around your mother perhaps having filed the I-407 to surrender the green card, but not having tied the ribbons with the IRS using form 8854.

Now, if neither of these has happened, then your mother is (was) technically still a US permanent resident, and so a US taxable person. In that case, she could not logically -- although logic and US taxes are barely on nodding terms -- be a covered expat, because she is not any form of expat at all. Rather, she is (was) a US taxpayer living outside the US and simply massively delinquent on her income tax returns to the US.

The ever-reliable Phil Hodgen analyses a late-filed 8854 case here: link. According to this analysis, late-filing doesn't automatically result in covered expat status. And I believe estates can use the IRS's foreign streamlined procedure, if things come to that.
lawman3966 wrote:
Mon Oct 07, 2019 9:21 pm
Q1: What can I do to minimize or avoid the imposition of a Section 2801 tax on my inheritance?
From the facts given, it still seems unclear, as it did in our last discussion and as outlined above, that your inheritance would be subject to section 2801 tax in any way. Part of the reason for this is that the law and the regulations around it have been so poorly drafted that cases like this simply fall into grey areas that cannot be resolved into any determinable outcome.

If for some strange reason it definitely is taxable under section 2801 though, there are no mitigating actions I know of that you could take at this stage of things.
lawman3966 wrote:
Mon Oct 07, 2019 9:21 pm
Q2: Is there anything I should be doing now to comply with Section 2801, even in view of the fact that it has not been fully implemented?
Aside from budgeting for it, should it really be due, nothing clear. More than eleven years have elapsed since this spiteful tax law passed, and the IRS has still not come up with a route to compliance. Maybe they never will. They are probably as aware as the rest of us just how nonsensical and self-defeating this particular piece of tax law idiocy really is. You cannot possibly file a 'protective' form 708, as suggested by the only IRS "guidance" so far on this, while form 708 does not exist.

One other thought -- are you absolutely certain that you never once heard your mother mention that she had filed the necessary forms to check out of the US completely? You say it's 'highly likely' they were not, but do you really know that they were not? There is a sleeping dog here that it may be possible to leave undisturbed. IRS form 3520 requires you to "describe" property valued above $100k received as a gift or bequest from a 'foreign person', but does not specifically or explicitly require any details about the source of the bequest.

Finally, please remember that I am just a random person on the internet. Given the sums involved here, you may well want to get some paid professional help. Unfortunately, this is likely to be eye-wateringly expensive. Sorry.
Last edited by TedSwippet on Wed Oct 09, 2019 2:31 am, edited 1 time in total.

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Re: Tax on Inheritance by U.S. Citizen from Canadian Resident - Section 2801

Post by lawman3966 » Tue Oct 08, 2019 6:14 pm

T. Swippet:

Thank you for your reply.
My siblings and I will have to review as many relevant files as we can access, whether they're in my later mother's files, at an acountant's or lawyer's office, or at the INS or IRS.

I recall your mentioning the desirability of getting her file at the INS. She fell ill not long after that discussion, and I suppose her consent would be needed to access her INS file. If you happen to know what is needed to access her INS file, a reminder would be great. I will of course check into this on my own as well.

I will expect to file form 3520 when the time comes, likely in about three years or so.

Regarding Section 2801, I guess I'll just keep an eye out for any developments on that front, since there doesn't seem to be anything I can do about it.

Thanks again for your reply.

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Re: Tax on Inheritance by U.S. Citizen from Canadian Resident - Section 2801

Post by TedSwippet » Fri Oct 11, 2019 5:00 pm

lawman3966 wrote:
Tue Oct 08, 2019 6:14 pm
Regarding Section 2801, I guess I'll just keep an eye out for any developments on that front, since there doesn't seem to be anything I can do about it.
A recent SSRN paper on Section 2801 that might be of some interest, if you haven't already seen it:

How IRS Guidance Makes it impossible to Comply with Section 2801 in 2 Hours or Less by Fabio Ambrosio :: SSRN
Abstract
In 2008 Congress added Section 2801 to the Internal Revenue Code. This section targets those individuals who, by relinquishing citizenship or residency, could potentially escape the gift or estate tax. While the legislative intent is clear, the mechanics of how Section 2801 should function have troubled the IRS for the last 11 years. In 11 years the IRS has neither issued a publication nor released a form. The only administrative guidance to this date remains a set of proposed regulations issued in 2015. While the proposed regulations contain provisions which will cause taxpayers to face nearly insurmountable compliance obstacles, the IRS estimates that a taxpayer should be able to comply in 2 hours or less! This article will outline the five most glaring miscalculations the IRS has made in the proposed 2801 regulations.

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Re: Tax on Inheritance by U.S. Citizen from Canadian Resident - Section 2801

Post by lawman3966 » Sat Oct 19, 2019 6:31 pm

TedSwippet wrote:
Fri Oct 11, 2019 5:00 pm
lawman3966 wrote:
Tue Oct 08, 2019 6:14 pm
Regarding Section 2801, I guess I'll just keep an eye out for any developments on that front, since there doesn't seem to be anything I can do about it.
A recent SSRN paper on Section 2801 that might be of some interest, if you haven't already seen it:

How IRS Guidance Makes it impossible to Comply with Section 2801 in 2 Hours or Less by Fabio Ambrosio :: SSRN
Abstract
In 2008 Congress added Section 2801 to the Internal Revenue Code. This section targets those individuals who, by relinquishing citizenship or residency, could potentially escape the gift or estate tax. While the legislative intent is clear, the mechanics of how Section 2801 should function have troubled the IRS for the last 11 years. In 11 years the IRS has neither issued a publication nor released a form. The only administrative guidance to this date remains a set of proposed regulations issued in 2015. While the proposed regulations contain provisions which will cause taxpayers to face nearly insurmountable compliance obstacles, the IRS estimates that a taxpayer should be able to comply in 2 hours or less! This article will outline the five most glaring miscalculations the IRS has made in the proposed 2801 regulations.
As stated somewhere above, it remains to be determined whether my mother ever renounced her long-term permanent residency status. My sister is the executor and I currently have no access to the financial and legal documents relevant to this issue (i.e. immigration, tax, investments).

My highest priority at present is to have all outstanding taxes, fees, and penalties paid from the estate (due to my mother having been a Can citizen and U.S. permanent resident) before disbursement so that the costs are split three ways, rather than being borne by me alone.

typical.investor
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Re: Tax on Inheritance by U.S. Citizen from Canadian Resident - Section 2801

Post by typical.investor » Sat Oct 19, 2019 7:03 pm

Wouldn’t her green card have expired? If so, wouldn’t her residency have been terminated?

Even is she maintained it, I think it’s highly likely that the US would have viewed her as having abandoned her residency unless she was visiting the US regularly. Every six months didn’t cut it in my wife's experience.

With 20 years outside the US, I really don’t see how she could still have a green card. My experience tells me there is no way. I think it wouldn’t have been renewed if it weren’t automatically terminated..

So I would assume she was not now a US person (immigration status) at death.

The only question I have is about IRS notification requirements in order to get out from ongoing US tax obligations. I really don’t know for cases where the US terminated residency (which surely happened I think if she didn’t abandon), but would look into that. Or I would ask a lawyer 1) she’d most likely have had her residency terminated by the US right? And 2) if so, can the US still view her as a tax resident after doing so?

We gave up my wife’s green card because every visit (6 months) immigration with marines interrogated her in the back office and warned she’d be denied re-entry in the future without a re-entry permit. The permits are hard to get though because suddenly you need to be at an office in the US for biometrics. Can’t pick the date or location. How does that work with work schedules.

I really don’t see how your mom could have kept hers through 20 years without frequent visits. The US would have terminated it. Perhaps you can inquire about it.

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Re: Tax on Inheritance by U.S. Citizen from Canadian Resident - Section 2801

Post by trueblueky » Sat Oct 19, 2019 8:27 pm

Maybe post this on the Canadian forum.
https://www.financialwisdomforum.org/forum/

Edit: I see you did that already.

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Re: Tax on Inheritance by U.S. Citizen from Canadian Resident - Section 2801

Post by TedSwippet » Sun Oct 20, 2019 3:32 am

typical.investor wrote:
Sat Oct 19, 2019 7:03 pm
The only question I have is about IRS notification requirements in order to get out from ongoing US tax obligations. I really don’t know for cases where the US terminated residency (which surely happened I think if she didn’t abandon), but would look into that. Or I would ask a lawyer 1) she’d most likely have had her residency terminated by the US right? And 2) if so, can the US still view her as a tax resident after doing so?
The answer to your question 2) is, unfortunately, yes. A green card and permanent residency can expire after a time for immigration purposes, but not for tax purposes. To terminate US person tax status, you have to affirmatively surrender the status, form I-407. Harsh and unfair, certainly, but then that's true of most US tax law for nonresidents anyway.

From the IRS:
https://www.irs.gov/individuals/interna ... -card-test
You are a resident, for U.S. federal tax purposes, if you are a Lawful Permanent Resident of the United States at any time during the calendar year. This is known as the "green card" test.
...
You continue to have U.S. resident status, under this test, unless:
- You voluntarily renounce and abandon this status in writing to the USCIS,
- Your immigrant status is administratively terminated by the USCIS, or
- Your immigrant status is judicially terminated by a U.S. federal court.
And an article describing the problem:
https://intltax.typepad.com/intltax_blo ... ir-wo.html
U.S. lawful permanent residents ("green card holders") who live outside the U.S. continue to be subject to U.S. tax on their worldwide income until the green card has been revoked or has been administratively or judicially determined to have been abandoned. Code §7701(b)(6). We posted about this issue over five years ago, and it is important enough to warrant a reminder.

In a recent case, a green card holder claimed that he informally abandoned his U.S. resident status when he sold his home in the U.S. and moved to Germany in 2003. The court held that the taxpayer continued to be a U.S. resident until 2010, when the taxpayer formally abandoned his green card by filing a USCIS (formerly the INS) Form I-407 (Abandonment of Lawful Permanent Resident Status). In reaching its holding, the court not only relied upon Code §7701(b)(6), but cited the legislative history behind the law:
...
Green card holders who live outside the U.S. and simply allow their green card to expire therefore continue to be subject to tax on their worldwide income, because there has not been a revocation or an administrative or judicial determination of abandonment. Such green card holders may only be treated as U.S. nonresident aliens under the so-called “tiebreaker” rules of the income tax treaties to which the United States is a party. The taxpayer must generally take the treaty residency position on a timely filed U.S. tax return (Form 1040NR). See Treas. Reg. §301.7701(b)(7)(b).

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Re: Tax on Inheritance by U.S. Citizen from Canadian Resident - Section 2801

Post by typical.investor » Sun Oct 20, 2019 4:09 am

TedSwippet wrote:
Sun Oct 20, 2019 3:32 am
From the IRS:

https://www.irs.gov/individuals/interna ... -card-test
You are a resident, for U.S. federal tax purposes, if you are a Lawful Permanent Resident of the United States at any time during the calendar year. This is known as the "green card" test.
...
You continue to have U.S. resident status, under this test, unless:
- You voluntarily renounce and abandon this status in writing to the USCIS,
- Your immigrant status is administratively terminated by the USCIS, or
- Your immigrant status is judicially terminated by a U.S. federal court.
And an article describing the problem:

https://intltax.typepad.com/intltax_blo ... ir-wo.html
U.S. lawful permanent residents ("green card holders") who live outside the U.S. continue to be subject to U.S. tax on their worldwide income until the green card has been revoked or has been administratively or judicially determined to have been abandoned. Code §7701(b)(6). We posted about this issue over five years ago, and it is important enough to warrant a reminder.

In a recent case, a green card holder claimed that he informally abandoned his U.S. resident status when he sold his home in the U.S. and moved to Germany in 2003. The court held that the taxpayer continued to be a U.S. resident until 2010, when the taxpayer formally abandoned his green card by filing a USCIS (formerly the INS) Form I-407 (Abandonment of Lawful Permanent Resident Status). In reaching its holding, the court not only relied upon Code §7701(b)(6), but cited the legislative history behind the law:

You omitted the relevant, and I dare to say critical, quote.
In reaching its holding, the court not only relied upon Code §7701(b)(6), but cited the legislative history behind the law:

The [House Ways and Means Committee] believes that aliens who have entered the United States as permanent residents and who have not officially lost or surrendered the right to permanent U.S. residence should be taxable as U.S. residents. These persons have rights that are similar to those afforded [U.S.] citizens (including the right to enter the United States at will); equity demands that they contribute to the cost of running the government as much as citizens. [H.R. Rept. No. 98-432 (Part 2), 1984 U.S.C.C.A.N. 697, 1163.]
TedSwippet wrote:
Sun Oct 20, 2019 3:32 am
Green card holders who live outside the U.S. and simply allow their green card to expire therefore continue to be subject to tax on their worldwide income, because there has not been a revocation or an administrative or judicial determination of abandonment.
I understand some have interpreted this to mean that when your green card expires and is not renewed, that you are still liable for US taxes.

I do not share such a view. I wouldn't volunteer to pay US estate taxes in such a situation. I would find a lawyer who agree with me that the legislative history behind the ruling explicitly states the reasoning as being that:
These persons have rights that are similar to those afforded [U.S.] citizens (including the right to enter the United States at will); equity demands that they contribute to the cost of running the government as much as citizens
I would find a lawyer to advise me that my mother didn't have the rights afforded a US citizen due to the expiration of the card. I wouldn't file estate taxes and I would fight if they came after me.

Why should someone who doesn't have the rights afforded to a US citizen continue to pay for those rights? I see no basis for that claim and would ask my lawyer to challenge the IRS on the basis of legislative intent. And I would Canadian press involved and BASH US overreach.

If the estate is $1M, it's worth fighting. They will happily take 40% of your money if you send it to them.

Anyway, the IRS notes indicate to me indicate that if the green card is still valid, that a determination of abandonment may not take place until an attempt to re-enter years later. OK. However, I disagree with opinions that there is no determination of abandonment if the card expires. If the IRS says there isn't one, I would have my lawyer argue -"YES there is as evidenced by expiration". And that expiration means the green card holder doesn't not have the same rights and does not meet the legislative intent behind the law of their being considered a tax payer. In any case it is absolutely clear that green card expiration means you DO NOT have the rights of a US citizen.

Is there any case law where someone was actually held to be a US tax payer after they moved out of the US and their card expired?

Also note that:
The purpose for this requirement of revocation or determination is to prevent aliens from attempting to retain an apparent right to enter or remain in the United States while attempting to avoid the tax responsibility that accompanies that right.
It's clear I think that someone who's green card expired 10 or 20 years ago clearly isn't trying to "retain an apparent right to enter or remain in the United States while attempting to avoid the tax responsibility that accompanies that right", and I would ask my lawyer to fight it and see if I can get a gofundme page or something to help defray the cost.

And if anyone claims my advice is somehow promoting tax evasion, I will point out that many here use tax-loss harvesting into funds that may or may not be substantially identical depending on how the term is interpreted. There hasn't been a clear ruling on the definition. Similarly, I think that there hasn't been a clear ruling on whether green card expiration meets the criteria of a "determination" that status has been abandoned. In fact, looking at legislative intent, I would suggest that my green card advise is on stronger footing that the use of very similar index funds when tax-loss harvesting when, in-effect and by design, returns won't be noticeably different.

In any case, I firmly believe the OP's mother is not liable for US estate tax years after she lost the privilege's afforded to those required to pay US taxes. Any claim to the contrary defies the legislative intent behind the law and is administrative overreach in my opinion.

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Re: Tax on Inheritance by U.S. Citizen from Canadian Resident - Section 2801

Post by TedSwippet » Sun Oct 20, 2019 4:37 am

typical.investor wrote:
Sun Oct 20, 2019 4:09 am
I would find a lawyer to advise me that my mother didn't have the rights afforded a US citizen due to the expiration of the card. I wouldn't file estate taxes and I would fight if they came after me.

Why should someone who doesn't have the rights afforded to a US citizen continue to pay for those rights? I see no basis for that claim and would ask my lawyer to challenge the IRS on the basis of legislative intent. And I would Canadian press involved and BASH US overreach.
I agree with -- and completely share -- your outrage at this. Unfortunately, US courts have upheld the IRS's position here. And the IRS's position is consistent with the law, as (arguably, entirely unreasonably) written by congress. In the US, justice is expensive. Fighting this through the courts will significantly erode or even exhaust the inheritance, with little probability of prevailing.

For a non-US estate, even one in a country as closely associated with the US as Canada is, ignoring any potential US tax Kafkaesque nightmare entirely would probably be safe. Except that is for the fact that here one of the estate beneficiaries, the topic author, is a US resident.

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Re: Tax on Inheritance by U.S. Citizen from Canadian Resident - Section 2801

Post by typical.investor » Sun Oct 20, 2019 4:45 am

TedSwippet wrote:
Sun Oct 20, 2019 4:37 am
typical.investor wrote:
Sun Oct 20, 2019 4:09 am
I would find a lawyer to advise me that my mother didn't have the rights afforded a US citizen due to the expiration of the card. I wouldn't file estate taxes and I would fight if they came after me.

Why should someone who doesn't have the rights afforded to a US citizen continue to pay for those rights? I see no basis for that claim and would ask my lawyer to challenge the IRS on the basis of legislative intent. And I would Canadian press involved and BASH US overreach.
I agree with -- and completely share -- your outrage at this. Unfortunately, US courts have upheld the IRS's position here. And the IRS's position is consistent with the law, as (arguably, entirely unreasonably) written by congress. In the US, justice is expensive. Fighting this through the courts will significantly erode or even exhaust the inheritance, with little probability of prevailing.
Can you cite a case where tax liability was upheld by a court after the green card expired? I don't think the German case you cited was that.

In fact, it's not applicable here.

The German person's green card was still valid. Also, they were not filing or paying taxes in Germany where they claimed to be a resident because the tax authorities didn't consider them a resident there. I mean, it seems clear they were using their green card to claim residency in the US when the German tax authority came knocking, but then claiming German residency and green card abandonment when the US tax authorities came knocking.

I think this case actually is why the IRS requires a ruling of abandonment. Otherwise people use their green card to avoid taxes at home, but still say they are not in the US.

https://moskowitzllp.com/formal-abandon ... d-u-s-tax/
https://www.thetaxadviser.com/issues/20 ... t-tax.html

I don't see that case as similar to the OP's mom's situation.
TedSwippet wrote:
Sun Oct 20, 2019 4:37 am
For a non-US estate, even one in a country as closely associated with the US as Canada is, ignoring any potential US tax Kafkaesque nightmare entirely would probably be safe. Except that is for the fact that here one of the estate beneficiaries, the topic author, is a US resident.
That wouldn't make me pay.

I would get a lawyer to vouch I have a legal argument, and I would pay any taxes due. But I wouldn't consider my mother a US resident years after she had lost that privilege, and I wouldn't have her estate file a US estate tax if my lawyer advised it wasn't necessary.

It's common knowledge among immigration lawyers that if your green card is expired and you have been out of the country for more than a year after that, that you aren't going to be able to renew it. I would argue after that point, the US has administratively declared your residency is abandoned. That is their practice anyway according to the 20+ immigration opinions I read, and for the IRS to claim no declaration has been made when in practice it effectively has, seems fightable. I don't think the IRS would actually try to claim that though.

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Re: Tax on Inheritance by U.S. Citizen from Canadian Resident - Section 2801

Post by TedSwippet » Sun Oct 20, 2019 6:08 am

typical.investor wrote:
Sun Oct 20, 2019 4:45 am
Can you cite a case where tax liability was upheld by a court after the green card expired? I don't think the German case you cited was that. In fact, it's not applicable here.
Topsnik seems to turn not on whether the green card was or was not expired, but rather on whether the green card holder followed the US's specific procedures and regulations for surrendering permanent resident status. There is a paper here than analyses the decision:

https://www.chamberlainlaw.com/assets/h ... olders.pdf
typical.investor wrote:
Sun Oct 20, 2019 4:45 am
That wouldn't make me pay. ... I would get a lawyer to vouch I have a legal argument, and I would pay any taxes due. But I wouldn't consider my mother a US resident years after she had lost that privilege, and I wouldn't have her estate file a US estate tax if my lawyer advised it wasn't necessary.
If you like. But this is a sufficiently, ...er, minority position that you might not find a lawyer to back you up. Both US tax law and the IRS are pretty clear on this, for example publication 519:
Green Card Test
You are a resident for tax purposes if you are a lawful permanent resident of the United States at any time during calendar year 2018. (However, see Dual-Status Aliens , later.) This is known as the "green card" test. You are a lawful permanent resident of the United States at any time if you have been given the privilege, according to the immigration laws, of residing permanently in the United States as an immigrant. You generally have this status if the U.S. Citizenship and Immigration Services (USCIS) (or its predecessor organization) has issued you an alien registration card, also known as a "green card." You continue to have resident status under this test unless the status is taken away from you or is administratively or judicially determined to have been abandoned.

- Resident status taken away. Resident status is considered to have been taken away from you if the U.S. government issues you a final administrative or judicial order of exclusion or deportation. A final judicial order is an order that you may no longer appeal to a higher court of competent jurisdiction.
- Resident status abandoned. An administrative or judicial determination of abandonment of resident status may be initiated by you, the USCIS, or a U.S. consular officer.

If you initiate the determination, your resident status is considered to be abandoned when you file either of the following documents with your USCIS Alien Registration Receipt Card (green card) attached with the USCIS or a U.S. consular officer.
- USCIS Form I-407 (Record of Abandonment of Lawful Permanent Resident Status), or
- A letter stating your intent to abandon your resident status. When filing by mail, you must send by certified mail, return receipt requested (or the foreign equivalent) and keep a copy and proof that it was mailed and received.

Caution:
Until you have proof your letter was received, you remain a resident alien for tax purposes even if the USCIS would not recognize the validity of your green card because it is more than 10 years old or because you have been absent from the United States for a period of time.

If the USCIS or U.S. consular officer initiates this determination, your resident status will be considered to be abandoned when the final administrative order of abandonment is issued. If you are granted an appeal to a federal court of competent jurisdiction, a final judicial order is required.

Under U.S. immigration law, a lawful permanent resident who is required to file a tax return as a resident and fails to do so may be regarded as having abandoned status and may lose permanent resident status.
As it turns out, in this specific case an unwanted and unreasonable but clinging US personhood could potentially be a good thing.

Someone who is still a US person cannot possibly be a 'covered expat', and here they would likely have no actual US tax liability under 'offshore streamlined' or other US annual tax filing catch-up process.

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Re: Tax on Inheritance by U.S. Citizen from Canadian Resident - Section 2801

Post by TedSwippet » Mon Oct 21, 2019 3:20 am

typical.investor wrote:
Sun Oct 20, 2019 4:45 am
It's common knowledge among immigration lawyers that if your green card is expired and you have been out of the country for more than a year after that, that you aren't going to be able to renew it. I would argue after that point, the US has administratively declared your residency is abandoned. That is their practice anyway according to the 20+ immigration opinions I read, and for the IRS to claim no declaration has been made when in practice it effectively has, seems fightable. I don't think the IRS would actually try to claim that though.
Just to unpack this further, for the benefit of any future readers ...

An expired physical green card actually means nothing in particular, except that if you are living in the US you need to get round to obtaining a new one. The green card is physical proof of your permanent resident status, but it is not the status itself. That persists. Just like your bank or ATM card expiring does not mean that you no longer own the money in the accounts that ATM card represents.

Something similar is true for permanent resident status itself if you live outside the US for an extended period. After a year or two, depending perhaps on a 'reentry visa', your US permanent residency falls into a limbo state. If you do not abandon it formally with an I-407, it is still technically valid until you try to use it, at which point the determination is made as to whether you can still enter the US on it, or not. This is when you apparently get the chance to argue your case before an immigration judge (according to USCIS documents, but I have never heard of this actually happening), or when the border officer declares your status abandoned for you. The chances of you regaining US residency will diminish with time then, but never reach 0% until one of these two happens. And this lurking tiny percentage of a possibility you could argue that you actually retained permanent resident status and so live in the US again is what the US justifies to keep you fully taxable.

As already noted, there is nothing fair about this process. It requires people with effectively no chance at becoming US residents again, and of course no vote, to pay full US tax as if US citizens -- US immigration policy is written to be as exclusive as possible, but US tax policy to be as inclusive as possible. But it is documented, and it does not cause any particular problems if you follow it. Unfortunately, it does not operate as most people would expect it to. Nor is it documented at all clearly, and never in places where people might look -- I would argue it should be printed in big red bold letters on the physical green card itself. And so huge numbers of people living outside the US will now have unused but un-abandoned US permanent resident status that they assume is lost but is not.

For most, this will probably never cause issues because they can safely ignore it, either knowingly or otherwise. For an unlucky few though, it only comes to light when problems such as the topic author's arise.

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Re: Tax on Inheritance by U.S. Citizen from Canadian Resident - Section 2801

Post by Pacific » Mon Oct 21, 2019 3:55 am

TedSwippet, I just want to thank you for your numerous thoughtful contributions to this forum. I almost always read anything that you or Bruce Steiner post as it is always much more informative than were my classes in law school.

I would love to employ a law firm such as Swippet & Steiner (or, Steiner & Swippet?) if I ever needed estate or tax advice. You two would be the antithesis of Mossack Fonseca!

Thanks again.

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Re: Tax on Inheritance by U.S. Citizen from Canadian Resident - Section 2801

Post by Valuethinker » Mon Oct 21, 2019 4:04 am

Pacific wrote:
Mon Oct 21, 2019 3:55 am
TedSwippet, I just want to thank you for your numerous thoughtful contributions to this forum. I almost always read anything that you or Bruce Steiner post as it is always much more informative than were my classes in law school.

I would love to employ a law firm such as Swippet & Steiner (or, Steiner & Swippet?) if I ever needed estate or tax advice. You two would be the antithesis of Mossack Fonseca!

Thanks again.
Seconded re Ted Swippet & Bruce Steiner.

I have heard from many that other than First Year (which teaches one the essentials of law, how to read a case, etc.) much of North American law school is a waste of time. I met a corporate lawyer who had studied at San Diego U (? I think) and said that only the course by Frank Partnoy (an immensely entertaining writer, ex Morgan Stanley derivatives guy, excoriating critic of the financial services industry) on corporate law had been relevant to his subsequent career.

Law academia has become devoted to the pursuit of obscure points and subjects in search of publication, it appears. I was told the optimum background for a law school academic is an undergrad degree in philosophy & economics, and a Phd in Economics. In fact one of the law school professors I know has precisely that background, Phd in Econ at Harvard (he then qualified as a lawyer, though, in Canada).

typical.investor
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Re: Tax on Inheritance by U.S. Citizen from Canadian Resident - Section 2801

Post by typical.investor » Mon Oct 21, 2019 5:17 am

TedSwippet wrote:
Sun Oct 20, 2019 6:08 am
typical.investor wrote:
Sun Oct 20, 2019 4:45 am
Can you cite a case where tax liability was upheld by a court after the green card expired? I don't think the German case you cited was that. In fact, it's not applicable here.
Topsnik seems to turn not on whether the green card was or was not expired, but rather on whether the green card holder followed the US's specific procedures and regulations for surrendering permanent resident status. There is a paper here than analyses the decision:

https://www.chamberlainlaw.com/assets/h ... olders.pdf
typical.investor wrote:
Sun Oct 20, 2019 4:45 am
That wouldn't make me pay. ... I would get a lawyer to vouch I have a legal argument, and I would pay any taxes due. But I wouldn't consider my mother a US resident years after she had lost that privilege, and I wouldn't have her estate file a US estate tax if my lawyer advised it wasn't necessary.
If you like. But this is a sufficiently, ...er, minority position that you might not find a lawyer to back you up. Both US tax law and the IRS are pretty clear on this, for example publication 519:
Green Card Test
You are a resident for tax purposes if you are a lawful permanent resident of the United States at any time during calendar year 2018. (However, see Dual-Status Aliens , later.) This is known as the "green card" test. You are a lawful permanent resident of the United States at any time if you have been given the privilege, according to the immigration laws, of residing permanently in the United States as an immigrant. You generally have this status if the U.S. Citizenship and Immigration Services (USCIS) (or its predecessor organization) has issued you an alien registration card, also known as a "green card." You continue to have resident status under this test unless the status is taken away from you or is administratively or judicially determined to have been abandoned.

- Resident status taken away. Resident status is considered to have been taken away from you if the U.S. government issues you a final administrative or judicial order of exclusion or deportation. A final judicial order is an order that you may no longer appeal to a higher court of competent jurisdiction.
- Resident status abandoned. An administrative or judicial determination of abandonment of resident status may be initiated by you, the USCIS, or a U.S. consular officer.

If you initiate the determination, your resident status is considered to be abandoned when you file either of the following documents with your USCIS Alien Registration Receipt Card (green card) attached with the USCIS or a U.S. consular officer.
- USCIS Form I-407 (Record of Abandonment of Lawful Permanent Resident Status), or
- A letter stating your intent to abandon your resident status. When filing by mail, you must send by certified mail, return receipt requested (or the foreign equivalent) and keep a copy and proof that it was mailed and received.

Caution:
Until you have proof your letter was received, you remain a resident alien for tax purposes even if the USCIS would not recognize the validity of your green card because it is more than 10 years old or because you have been absent from the United States for a period of time.

If the USCIS or U.S. consular officer initiates this determination, your resident status will be considered to be abandoned when the final administrative order of abandonment is issued. If you are granted an appeal to a federal court of competent jurisdiction, a final judicial order is required.

Under U.S. immigration law, a lawful permanent resident who is required to file a tax return as a resident and fails to do so may be regarded as having abandoned status and may lose permanent resident status.
Again, if I were in the OP's position, I would challenge.

It's clear that the legislative intent is to a) have people benefiting from US residency to pay for it and 2) requires an administrative judgement in order for tax residency to end so as to prevent false claims of residency abandonment as a tax avoidance scheme.

As pointed out by immigration lawyers everywhere, you do not retain your rights to enter the country after your green card has expired and you have been away for a year.

Does that meet IRS stipulations. No - not per the documents you cite. However, it should be pointed out that there appear to be no rulings on such a case.

Also, the IRS Commissioner
is authorized by section 6404(a) of the Internal Revenue Code to abate assessments of tax, interest, and penalties that are (1) excessive in amount, (2) assessed after the expiration of the statute of limitations, or (3) erroneously or illegally assessed. Section 6404(a) is a long-standing provision in the Code. Since at least 1939, the Commissioner has had the authority to abate taxes and penalties erroneously or illegally assessed:

Except as otherwise provided by law in the case of income, estate, and gift taxes, the Commissioner, subject to regulations prescribed by the Secretary, is authorized to remit, refund, and pay back all taxes erroneously or illegally assessed or collected, all penalties collected without authority, and all taxes that appear to be unjustly assessed or excessive in amount, or in any manner wrongfully collected.34
Not sure if I would litigate to the end, but I would have my lawyer challenge the IRS that when 1) intent to abandon is clear, 2) actual immigration policy means residency rights are not retained and 3) legislative intent is violated by requiring someone who has no benefit to pay for benefits, that a 40% inheritance tax would be both unjustly assessed and excessive in amount. And I would ask for abatement authorized under section 6404(a).

And maybe the lawyer would have to argue that actual immigration practice is in effect an administrative order as resident status is taken away when one is away on an expired green card. I guess the IRS can technically claim it isn't, but if actually immigration policy says it is, and legislative intent is for people with the same rights as citizens to pay, I would take my chances in court (after getting an estimate on lawyers fees and considering there is $400k at stake in this case). And again, I'd try to rally people around me with a gofundme page.

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Re: Tax on Inheritance by U.S. Citizen from Canadian Resident - Section 2801

Post by typical.investor » Mon Oct 21, 2019 6:04 am

Anyway, if the OP's mother (Canadian Resident) is considered to be a US person for taxation due to her permanent residency not having been abandoned, then isn't the OP's mother due the standard estate exemption?
lawman3966 wrote:
Mon Oct 07, 2019 9:21 pm

I have not been able to access her files since June 2018 and have not been able to determine whether she filed the documents needed to formally end her U.S. Green card status, or otherwise stated, U.S. "person-hood" either with the INS or the Treasury Dept. It's likely best that any guidance provided herein be provided on the assumption that the relevant documents (I-407 and the like) were NOT filed.

I think it's highly likely that (a) the expatriation documents (I-407 etc) intended for the INS and IRS were NOT filed at any time; and that (b) U.S. tax returns were not filed between 1999 and her passing in 2019. (This is subject to verification over the coming months as we (the kids) get access to her files, but for now, it would be best for respondents to assume that the relevant documents and tax returns were not filed.

Questions:

Q1: What can I do to minimize or avoid the imposition of a Section 2801 tax on my inheritance?

Q2: Is there anything I should be doing now to comply with Section 2801, even in view of the fact that it has not been fully implemented?
Sorry, I think I misunderstood the question. Let me try again.

Section 2801 tax applies if your mother expatriated. You said she did not file I-407. Did she ever try to re-enter the US on her green card after she left? If so, it's possible she was officially ruled to have abandoned residency. This would involve a court hearing, so I suspect you'd know about it if it happened.

As such, I see no way for her to be a covered-expatriate. Not filing US tax returns will make your a covered-expatriate, but only if you have expatriated.

I see no tax liability for you on your mother's estate. If she is still technically a US person, then Section 2801 does not apply and I believe she should receive the standard US estate exemption. So, there would be no taxes.

If she is not a US person, then her Canadian assets won't be taxed by the IRS.

If she did expatriate, then you should find out if she was current on her tax returns at the time she expatriated. If not, you seem liable for the Section 2801 tax.

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Re: Tax on Inheritance by U.S. Citizen from Canadian Resident - Section 2801

Post by TedSwippet » Mon Oct 21, 2019 7:26 am

typical.investor wrote:
Mon Oct 21, 2019 5:17 am
As pointed out by immigration lawyers everywhere, you do not retain your rights to enter the country after your green card has expired and you have been away for a year. ... Does that meet IRS stipulations. No - not per the documents you cite. However, it should be pointed out that there appear to be no rulings on such a case.
This is where our opinions differ. On my reading of the facts, there is now a ruling on this, and it is Topsnik.

The fact that in Topsnik the physical green card had not expired is irrelevant, because card expiry does not affect permanent resident status. What is relevant, and what this case turned on, is the argument that living outside the US for long enough that permanent resident status would almost certainly no longer be recognised for immigration purposes is enough to terminate US tax liabilities. This is what Topsnik argued, and the court rejected that argument.
typical.investor wrote:
Mon Oct 21, 2019 6:04 am
Anyway, if the OP's mother (Canadian Resident) is considered to be a US person for taxation due to her permanent residency not having been abandoned, then isn't the OP's mother due the standard estate exemption?
Right. This could entirely defuse the spectre of the appalling section 2801 tax, and it is why accepting that permanent resident status was not lost might actually be useful here. If it can be managed so that any tax and penalties from past non-filing can be eliminated, that is.

Much US tax law for nonresidents and NRAs exists on a spectrum running from annoying through unreasonable to atrocious, but section 2801 is well beyond outrageous and nobody should ever pay it.

Topic Author
lawman3966
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Re: Tax on Inheritance by U.S. Citizen from Canadian Resident - Section 2801

Post by lawman3966 » Mon Oct 21, 2019 12:23 pm

typical.investor wrote:
Mon Oct 21, 2019 6:04 am
Anyway, if the OP's mother (Canadian Resident) is considered to be a US person for taxation due to her permanent residency not having been abandoned, then isn't the OP's mother due the standard estate exemption?
TedSwippet wrote:
Mon Oct 21, 2019 7:26 am
Right. This could entirely defuse the spectre of the appalling section 2801 tax, and it is why accepting that permanent resident status was not lost might actually be useful here. If it can be managed so that any tax and penalties from past non-filing can be eliminated, that is.
First, thanks to all who have commented above. As another poster stated, I feel like I'm reading a summary of the current state of Estate Law by Supreme Court litigators.

While the above comments are encouraging, they leave me confused in part due to my knowing little about tax and estate law, and in part because of unclear wording of some of the relevant statutes.

In particular, I'm trying to clarify the interplay of the following issues: (1) Residency; (2) Section 2801; (3) Completion of past U.S. income tax returns; and (4) the Estate Tax exemption.

I worried for some time about the possible imposition of the section 2801 tax. However, as stated above, if the I-407 and IRS form 8854 were not properly filed, and she never lost her U.S. permanent resident status, then Section 2801 would not apply. However, continued residency raises the issue of unpaid U.S. taxes from 1997 to 2019.

For the sake of discussion here, I am assuming that U.S. tax returns were not filed, and U.S. taxes not paid over the relevant period. (It will be a while before I get to see the files and can confirm this). I am not clear on the relation between past taxes that may be due, and the estate tax exemption. Starting with no knowledge of estate law, my assumption is that an estate would first have to pay all past income taxes, and then pay any estate tax (if due, based on the size of the estate). I wouldn't have thought that the estate tax exemption would serve as an upper limit on the amount to be paid to cover unpaid past income taxes.

Example (all hypothetical): Estate size 2 million. Estate exemption is 5 million. Past taxes due: 1 million.
My assumption as to how this would work: The estate pays the past due tax of 1 million. Thereafter, the remaining money in the estate passes to heirs tax-free because the remaining amount is below the exemption level of 5 million.

I would love to hear that my understanding above is incorrect.

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Re: Tax on Inheritance by U.S. Citizen from Canadian Resident - Section 2801

Post by TedSwippet » Mon Oct 21, 2019 3:09 pm

lawman3966 wrote:
Mon Oct 21, 2019 12:23 pm
Example (all hypothetical): Estate size 2 million. Estate exemption is 5 million. Past taxes due: 1 million.
My assumption as to how this would work: The estate pays the past due tax of 1 million. Thereafter, the remaining money in the estate passes to heirs tax-free because the remaining amount is below the exemption level of 5 million.

I would love to hear that my understanding above is incorrect.
That is the general idea here, and your understanding of the order in which the taxes are applied is I believe correct (any past income tax due is not protected by the estate tax exemption). However, my feeling is that the past due tax number you suggest is wildly off, and that it is probably reducible to zero, or close to zero.

As far as I know, the estate would be able to use the 'streamlined offshore disclosure' process to clean up the entire history of past 'noncompliance', by filing six years of past returns. In all likelihood, your mother's income for those six years would skate entirely below the thresholds at which any US tax would be payable, after allowing for things like the FEIE and foreign tax credits for Canadian taxes paid (though any Canadian TFSAs or RDSPs might pose a problem here). Streamlined offshore process details are here:

https://www.irs.gov/individuals/interna ... ted-states

If you were to clean things up this way, the route then seems open to taking the full $11m (current) US estate tax exemption, and entirely sidestepping any threat whatsoever of section 2801. That is (hypothetically): estate size 2 million, estate exemption 11 million, past taxes due zero, 2 million passes to heirs tax-free.

Using unwanted clinging US personhood as a weapon against US taxes appears counter-intuitive, but it does seem like it might work here. If the past due tax to the US is anything above negligible for some reason though, I'd suggest another route. The goal is to pay absolutely no US tax on this money, one way or another -- and letting this sleeping dog lie would achieve this, if it comes to that. What we're considering here are just the cleanest, safest, and most efficient ways to reach that goal.

Finally, I'll just repeat that I am merely a random stranger on the internet, and that although I don't think it is, any or all of the above might be completely wrong. Do be sure to check all of this carefully yourself, ideally with professional advice, before taking any actions. Particularly any irreversible ones.

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Re: Tax on Inheritance by U.S. Citizen from Canadian Resident - Section 2801

Post by TedSwippet » Mon Oct 21, 2019 3:25 pm

Pacific wrote:
Mon Oct 21, 2019 3:55 am
TedSwippet, I just want to thank you for your numerous thoughtful contributions to this forum. I almost always read anything that you or Bruce Steiner post as it is always much more informative than were my classes in law school.
Thanks for your comment.

While it is nice to be able to help a few folk out at times, I do think it is slightly disturbing -- not to mention mildly depressing! -- that I have found myself needing to know so much baroque and convoluted US tax nonsense to these minute levels of detail. The price of having worked in the US and held on to investments there after leaving, I guess. Which probably makes me something of a warning to others ... :-)

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Re: Tax on Inheritance by U.S. Citizen from Canadian Resident - Section 2801

Post by lawman3966 » Mon Oct 21, 2019 4:16 pm

TedSwippet wrote:
Mon Oct 21, 2019 3:09 pm

Finally, I'll just repeat that I am merely a random stranger on the internet, and that although I don't think it is, any or all of the above might be completely wrong. Do be sure to check all of this carefully yourself, ideally with professional advice, before taking any actions. Particularly any irreversible ones.
Thanks again. I meant to add to my post earlier today that this entire matter should be in the hands of an Ontario estate lawyer within a few months. Accordingly, it's unlikely that I will take any legal actions, reversible or otherwise.

The relevance of posting here is to get a heads up regarding what documents I should look out for when reviewing (or directing others to review) my later mother's files and papers, and to promptly take any actions that would be costly if delayed. I can also relay any advice I receive here to my siblings and to any professionals handling the matter in Canada. No doubt, Canadian estate lawyers will have their own thoughts on such matters. However, in case they're missing anything, any additional information should help. It would also have been great for this to have been a simple matter, with a simple clear answer, thereby enabling me to have confidence that the IRS would not unduly pilfer my inheritance. However, this matter seems too complicated for that confidence to materialize quickly.

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Re: Tax on Inheritance by U.S. Citizen from Canadian Resident - Section 2801

Post by typical.investor » Tue Oct 22, 2019 1:50 am

lawman3966 wrote:
Mon Oct 21, 2019 12:23 pm

In particular, I'm trying to clarify the interplay of the following issues: (1) Residency; (2) Section 2801; (3) Completion of past U.S. income tax returns; and (4) the Estate Tax exemption.

I worried for some time about the possible imposition of the section 2801 tax. However, as stated above, if the I-407 and IRS form 8854 were not properly filed, and she never lost her U.S. permanent resident status, then Section 2801 would not apply. However, continued residency raises the issue of unpaid U.S. taxes from 1997 to 2019.

For the sake of discussion here, I am assuming that U.S. tax returns were not filed, and U.S. taxes not paid over the relevant period. (It will be a while before I get to see the files and can confirm this). I am not clear on the relation between past taxes that may be due, and the estate tax exemption. Starting with no knowledge of estate law, my assumption is that an estate would first have to pay all past income taxes, and then pay any estate tax (if due, based on the size of the estate). I wouldn't have thought that the estate tax exemption would serve as an upper limit on the amount to be paid to cover unpaid past income taxes.

Example (all hypothetical): Estate size 2 million. Estate exemption is 5 million. Past taxes due: 1 million.
My assumption as to how this would work: The estate pays the past due tax of 1 million. Thereafter, the remaining money in the estate passes to heirs tax-free because the remaining amount is below the exemption level of 5 million.

I would love to hear that my understanding above is incorrect.
Sorry for getting a little off-track. It's fun to bounce ideas of Ted.

In any case, about past taxes. Are you sure any would be due.

Generally foreign income is excluded under Form 2555* https://www.irs.gov/instructions/i2555# ... 1710411648
It depends on the year, but it's usually around $100,000. If foreign income was above that, then you can also take a housing deduction if she had housing expenses. The amount depends on the cost of living in your area. See the form for details.

So given a standard deduction/personal exemption (depending on year) of around $10,000 +$100,000 FEIE + housing deduction **, I am not sure she'd be liable for anything. You do need to file even if the amount you owe is zero.

My biggest concern for you would be compliance with FBAR which means reporting any foreign financial accounts that exceed $10,000 at any time during the calendar year reported. There are penalties on that. You might look into delinquent or streamlined filing procedures. https://www.irs.gov/businesses/small-bu ... ounts-fbar

I don't think your mother's case would be held as "willful" non-compliance. But do be sure to deal with FBAR when you do back tax reports.

* I ignore the option of taking foreign taxes as a credit but if you are over the exclusion limit, you could look into that option as well. Generally it works better than the FEIE when you are in a high tax country.

**
Housing expenses include rent, utilities (other than telephone charges), real and personal property insurance, nonrefundable fees paid to obtain a lease, rental of furniture and accessories, residential parking, and household repairs.

Don't include deductible interest and taxes, any amount deductible by a tenant-stockholder in connection with cooperative housing, the cost of buying or improving a house, principal payments on a mortgage, or depreciation on the house. Also, don't include the cost of domestic labor, pay television, or the cost of buying furniture or accessories.
Last edited by typical.investor on Tue Oct 22, 2019 2:11 am, edited 1 time in total.

Pacific
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Re: Tax on Inheritance by U.S. Citizen from Canadian Resident - Section 2801

Post by Pacific » Tue Oct 22, 2019 2:04 am

Valuethinker wrote:
Mon Oct 21, 2019 4:04 am
Pacific wrote:
Mon Oct 21, 2019 3:55 am
TedSwippet, I just want to thank you for your numerous thoughtful contributions to this forum. I almost always read anything that you or Bruce Steiner post as it is always much more informative than were my classes in law school.

I would love to employ a law firm such as Swippet & Steiner (or, Steiner & Swippet?) if I ever needed estate or tax advice. You two would be the antithesis of Mossack Fonseca!

Thanks again.
Seconded re Ted Swippet & Bruce Steiner.

I have heard from many that other than First Year (which teaches one the essentials of law, how to read a case, etc.) much of North American law school is a waste of time. I met a corporate lawyer who had studied at San Diego U (? I think) and said that only the course by Frank Partnoy (an immensely entertaining writer, ex Morgan Stanley derivatives guy, excoriating critic of the financial services industry) on corporate law had been relevant to his subsequent career.

Law academia has become devoted to the pursuit of obscure points and subjects in search of publication, it appears. I was told the optimum background for a law school academic is an undergrad degree in philosophy & economics, and a Phd in Economics. In fact one of the law school professors I know has precisely that background, Phd in Econ at Harvard (he then qualified as a lawyer, though, in Canada).
Frank Partnoy! The author of one of my favorite books of all time -- F.I.A.S.C.O.

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