Good morning. This is John Richardson speaking with you from Toronto, Canada. Today is Saturday morning, November the 23rd, 2024. And one of the things about doing podcasts about US tax issues is that, well, the issue is never end. And I'm joined again today by US tax lawyer, Virginia Latora Chaker, and my God, and we got some interesting updates to talk about today. So Virginia, how are you? Hey, John, I'm doing very well. And I hope you are too. I am fine. Well, you know, shut off press news from this week. You know, I saw this amazing thing in tax notes. So this, this woman from China, I received a bunch of wedding gifts at a point where she was not a US tax resident at that point. Then comes to the United States and later in the year because of the substantial presence test becomes a US tax resident to her surprise. And that presumably goes to some tax quote professional end of quote, who tells her that, oh my God, her wedding gifts are like her husband, you know, in the family, they weren't US persons. These are filthy gifts. They are gifts from foreigners. And because they exceed $100,000, they must be reported. And at this point, she's late, right? So, so, you know, being the law abiding person that she immediately rushed out to comply and file a form 3520 part four on approximately $280,000 worth of gifts. And can you believe it? She got hit with a 25% penalty on this. Am I got that right, Virginia? Yes, unfortunately, you do. And as I recall, John, the whoever filed these things for her, the form 3520 part fours, they did include the reasonable cause statement. Am I correct as to why they are late? Well, that was the way I read it. Yeah. And this was this was of course before the recent announcement. They've decided to read the reasonable cause letters. But, you know, it's pretty clear that it was an automatic penalty assessment of 25%. You know, but the IRS that are the reasonable people, right? They're reasonable people and they reduced it to only a 20% penalty. So, so here we have a woman who doesn't live in the United States. She lives in China. Okay. She's getting married to a non US citizen. Okay. And she receives gifts from her non US citizen family. She receives these gifts. Clearly, the gifts, nor the money to buy the gifts were ever supposed to be subject to US taxation. The context, a wedding, clearly gifts. And she gets hit with this stuff. I mean, this is just about the most egregious, insane thing I've ever seen. It was quite surprising. It was quite surprising that it got this far. Now we'll see what's going to happen. Her council is challenging this IRS assessment of the foreign gift reporting penalties in litigation. And let's see how this is going to turn out. But I think the IRS is looking so bad with this case that that they did not accept her reasonable cause argument, if indeed one was separately filed. And if it wasn't separately filed, when they've discussed the matter with with her, that it wasn't dropped, I don't understand why this this has gone to this level. And it's got to be in court now. It just, I think the IRS should be somewhat embarrassed that this has gone this far. I think the whole US government should be embarrassed by this. It's simply so outrageous. I don't think I've found the interesting about, and I'd like to get your take on this, is I don't see any, when I read 6039F, it's mandatory language shall pay a penalty of 25 up to 25, unless there's reasonable cost. Where did they get the jurisdiction to reduce the penalty to 20% anyway? Huh, don't know. I mean, I always, I don't know. There are no regulations issued, but you know, they are giving the IRS has given authority to issue regulations under section 6039F regarding this penalty. We don't have any that I have ever found. So maybe they're looking at it. Well, you know, we could, could always say in our regulations that depending on the circumstances, we have discretion to reduce the penalty or, or you know, forgive it depending on whatever. So it could be within that general element of, if you have reasonable costs. No, we're getting, I'm not so sure that it's true. First of all, maybe, you know, maybe you want to pull the statute up all the time and confirm this. But I think the statute requires them to issue regulations, not that they may, but that they're required to, and they haven't, interestingly. You know, all these years, right, if I'm right on that, and I think I'm right on that, they're actually required. Yes, the secretary shall prescribe such regulations as maybe necessary or appropriate to carry out the purposes of this section. But yes, they have not been issued as of today. And read the penalties section. Am I writing the saying that it's 25%, it's not up to 25%, but it's at, you know, 5%, I'm up to 25%. I don't see any discretion there. You know, I changed the penalty on that at all. I mean, I think the, you know, it's, it's a digital choice, right? It's either you get the penalty or you don't based on reasonable costs. Okay, the United States person shall pay an amount equal to 5% of the amount of such foreign gift for each month, for which the failure continues not to exceed 25% of such amount in the aggregate. Do you read that as giving them any discretion to impose a lesser penalty? No, but we don't know. Do we know here when she filed, I mean, is it possible? It was only four months late. I don't know. Well, it was only four months late. They were, they couldn't impose the 25%, could they? Because it's 5% up to 25% maximum. But I mean, I raise these things because, you know, it's pretty clear the IRS is acting very abusively. And they're also, you know, I think acting outside with the law requires them to do, interestingly. But, you know, which leads me, I mean, you know, we've seen so much of this now, right? I mean, we're going to be off base if I were to say that with this type of stuff, it's gone to the point where it's more risky to comply than not. Well, it is very risky to to comply if you've been late because you don't know what will happen. I mean, this poor woman now has been paying professional fees to bring this, these lawsuits. And to my mind, this, it should never have gotten this far. One reason you really want to make sure you are following and being fully compliant, if you've got any foreign gifts, even if you have filed the form 3520 late, is if you are going to expatriate because you don't want to end up being treated as a covered expatriate because you were not fully tax compliant in the five year period prior to your expatriation. So people who are expatriating have a greater, you know, a bigger amount of skin in the game. Let's put it that way. Then someone who may say, well, I'm going to just take my chances. It's late. I'm not going to file if they come after me, then I'll deal with it. We know that in the area of expatriation, one can be treated as a covered expat if they haven't been fully tax compliant. And that includes filing any foreign information returns such as the form 3520. And I think that's Title 26. So for people who are expatriating, they're really caught between a rock and a hard place. Of course, the certification is for five years, right? So a lot of this depends on, you know, of course, when it was, etc. But moving over, I mean, I don't know, I just honestly, Virginia, when I look at the at the facts as laid out in that claim, this is quite possibly the most abusive, egregious example of the best that I think I've ever seen. Yes, it's been absolutely no tax interest in this, none, just a penalty interest. That's correct. That's correct. And, you know, I believe, given the commissioner's recent announcement just about a month ago, that they will no longer, the IRS will no longer automatically be assessing penalties for late filings of the form 3520 for foreign gifts. They will read the reasonable cause statements. It's not a change in the substantive application of penalties, but it is a change in their procedure because before they weren't reading the reasonable cause statements, the penalty would be assessed and the tax payer would have to really jump through hoops to try and get the penalty abated. And they even had to pay first. So they had to bring a lawsuit to get a refund of their penalty amount if they felt they had reasonable cause. I think given that IRS announcement, this case makes them look just terrible. I know this case came down probably before the announcement and so forth, but it's in the spotlight for the IRS, okay, this 3520 foreign gift penalties that are being assessed. This has been brought to the attention of the IRS many, many times over years by the national taxpayer advocate. Finally, something is happening that's positive. You know, the commissioner announces we won't assess the penalty without reading the reasonable cause statement. And here you have this case, it just looks so bad. Yeah, but I mean, as we've discussed before, Virginia, that's a procedural change. I mean, that's not saying they're going to widen up on the reasonable cause issue. But John, what greater reasonable cause can you have than this woman's case? Well, I think that you're right, okay, you know, assuming that, you know, one were to buy into the idea that relying on turbo tax and stuff, you know, met, met the standard of business like behavior, etc. I mean, I agree with you totally. This is simply, this is simply a member as well. You look not only to oh, she used turbo tax. That's not a professional in the way you and I might think of professional advice. This woman was a Chinese national. She was not a green card holder. She knew nothing about the US. It just so happened, she married a US citizen. And no, no, she did not marry. Was he wasn't a US citizen, was he? I thought he was. Maybe it was. Well, I don't think someone and as a result, she went to the US to see him at some point. And because she had a certain number of days in America, she met what we call the substantial presence test. And due to the operation of the way those rules work in the internal revenue code, the code says your first day of tax being treated as a tax resident when you meet that substantial presence test is your first day of physical presence in the United States. And her first day made her, you know, a US taxpayer for the first day of America was before the days of receipt of the days of receipt of the gifts. That's the point. Yes, she received the gifts well before. She was, she received the gifts before she became a US tax resident. But by operation of law, once she became a US tax resident, she was deemed to be resident from a date before the receipt of the gifts. That's right. That's right. So it was like this retroactive application of her US tax residency. I think that's exactly what it is, retroactive US tax residency. I mean, that's an interesting, you know, it's a separate discussion, which it was interesting. But moving over to the expatriation, you know, Virginia, there's a lot of action in the expatriation area lately. Okay, I mean, we've got, you know, a new DS4079 and we've got some modifications to the 2024 48854, right? Well, we have a draft. And if that's the indication of what's what's happening for the final form, yes, we have a significant change there. So you want to take us through that? What can we expect? Well, okay. I just want to go back one second to our listeners and make sure they understand what you said about the change in the form DS4079. That's a state department form and that form is now 18 pages long and it's assessing one's intent to give up US citizenship. So that's a big change in the department of state form. Now moving over to form 8854, that's a form that everyone who expatriates has to fill out and it's part of their final tax return filing. It's filed the year, calendar year after the calendar year of expatriation. And one of the things we've noticed in the draft for the 2024 48854 is there is a new question and it asks, I would love to pull it up precisely. Let me just get it for you. I don't want to give the wrong wording. Okay. So it says on the draft form at question three, have there been significant changes in your assets and liabilities for the five years ending before the date of your expatriation and it tells you to see the instructions and if you answer yes to attach an explanation. Now, this issue used to be solely mentioned in the instructions to the form 8854. Most people probably never even noticed them, but you know, diligent tax professionals did and we were saying to ourselves, what's a significant change? They're not giving us any guidelines. Well, now in the explanation of the instructions to the form, the draft, it says, check the yes box. If there have been significant changes in your assets and liabilities during the five years preceding your expatriation date, if your net worth was $2 million or more, at any point during the five years preceding your expatriation date, but was less than two million on your expatriation date, there has been a significant change in your assets and liabilities. You must bold letter, must attach a statement to form 8854 that explains the changes. And then they give an example of someone who during the five years preceding expatriation had a net worth that exceeded two million after she made a gift of real property to her child. Maria's net worth decreased. So it was less than two million on her expatriation date. Maria reported the gift on a gift tax return. Maria must check the yes box. Maria must also attach a statement that explains that her net worth decreased because she made a gift of real property to her child. And that she reported the gift on a gift tax return. So they're making it clear. If at any time in that five year period, your net worth went below two million, they want to know about it. And of course, it does also say significant changes in your assets and liabilities. So you know, you may have had great liabilities arise. They will also want to know about that. You don't need to file a gift tax return, obviously, for that situation. But it's clear to me they are focusing very strongly now with everything we've seen happening with expatriation. They've got a campaign going to audit people who are expatriating that campaign has been ongoing for a few years. We've got, you know, the change in the Department of State form on intent. I don't know what impact that may have on any of this. And now we have this draft form 8854 question three and instructions, which are quite significant. So, you know, they're just saying the whole is often greater than the sum of the parts. We do say in this case that collectively this indicates a heightened interest and expatriation that is greater than the individuals parts. I would say yes, John. And I think the heightened interest has been ongoing. Okay. They started the campaign against, you know, to audit more people who are expatriating. That was an indication. Now we're seeing this. Yes, it's always been in the instructions. But as I said, people were not paying attention to it. So now, one, you have to address it. All right. So they're trying to get some, you know, they're trying to get more information. None of this is relevant to the plain text of the law at all. Okay. There's little doubt about that. So somebody, you know, transfers half of their house of their spouse or their half of the house of their spouse, in your view, to get below the two million and your view does that in any way. Alter the veracity, the truthful mass of their being below the two million and therefore not a covered expatriate or the irons. Absolutely not. I mean, people make gifts to their spouses all the time. Okay. And, you know, they could have many other reasons other than not tax reasons for, for making that kind of gift of half the home over to the other spouse. You know, for example, it could be, you know, if let's say you have a case where the person is living abroad and they want to transfer half their house over to the other spouse, it could be because that may grant the spouse a greater chance of obtaining, you know, a visa to remain there. I mean, that's the case here in the UAE. All right. We have, if you own a property, you have an ability to get a longer term visa to remain in the UAE based on the property you own here. So it could be very often a non-tax reason. Maybe, you know, they're worried about health issues and they're saying, look, I want you to have the whole house. Let's not deal with this and let it go to probate or who knows what. So, we just don't know. But I think, I don't think people should necessarily panic. But I think someone that's well over the $2 million amount and needs to use the gifting idea that has been going on for decades to get below the $2 million, that now they may be challenged if it's, if it's a huge, you know, gift and what a gift I'm looking back at five years. So if you have this, I don't know. Well, you're gifting, you're gifting. Yeah, the IRS may challenge you. It doesn't mean they're going to win. Challenge on what exactly? Well, they could say, we don't think these are bonafide gifts. We think they would need to be these transfers. Well, let's say they're transfers to get below the $2 million for tax reasons. I mean, that's a legitimate reason. People do it all the time. You know, they're just required to file the form 709 in certain circumstances. Okay. That's well. But where I see an issue and I don't want to overdo this, right? But where I see a possible issue and I sort of warn certain people about this for years is making sure these things really are valid gifts according to the law of the place where they're living. You know, so, you know, different places have different rules for what constitutes a gift. And I think it's extremely important that people make very sure that they follow the law of gifting. Okay. You know, that if X, Y, and Z are components that are required for it to be a valid gift, then they have to make sure they comply with X, Y, and Z. That's right. If they don't, we know the IRS always looks too well, you know, was this valid under local law? Right. And it wasn't a gift. Oh, too much ammunition to strike that gift down for federal tax purposes. Well, I think absolutely it means that it wasn't a gift. I mean, that's the problem, right? So I think that I think that what this does is it's a reminder that in addition, there's always a tendency to, you know, look at these U.S. laws and too much and perhaps not look enough at local laws. But I think this is an important reminder to pay attention to local laws, you know, like what's going on with this transfer, you know, doesn't meet the requirements of a gift, et cetera, et cetera. So I think that's perhaps the message here. But I don't see anything. Absolutely, John. Absolutely. And I have to say, years ago, I wrote a blog post on how does foreign law affect my U.S. tax transaction? And this is exactly what we're talking about. And I did follow up in more detail on, you know, Shadia impacts when they collide with U.S. law. So for example, under our rules here in the UAE, or at least the ones that I know about, you cannot transfer UAE real estate if you're a Muslim, you can't transfer it to a non-Muslim. So if you have a marriage between a Muslim and non-Muslim person, let's say, and the Muslim spouse wants to transfer UAE real estate to the non-Muslim spouse and files a gift tax return and so forth and so on. And let's say that's done to get under the two million or not, doesn't even matter. That gift will not be recognized under the laws of the UAE. Okay, so they probably won't even, they won't even register the real estate in the name of the non-Muslim spouse. So when are we with that kind of situation, you know, what's going to happen? It doesn't qualify as a gift. Well, I think that then we talk and then we have to look at evidence, you know, and I think it's very, very important that if there's a transfer of assets, income earning assets, for example, that in the country of residence that, you know, this is consistent with subsequent tax returns that are fucked, right? Yes. You know, I said for et cetera, but where I see this is, I don't think it changes anything in terms of the landscape legally at all, not a bit. You know, you can still make gifts, you know, obviously you get under the two million, but I think it's one, a reminder that they're starting to get more interested in expatriation. They're authorized to make regulations and they haven't done that yet after all these years. And I expect that once they do make regulations, they're going to be a lot tougher. But I think it's also a reminder that people need Andersonly in addition of these U.S. rules to pay very close attention to compliance with local untransfers and subsequent, you know, tax treatment and stuff, right? I agree, John, absolutely. Well, you know, there we are. There we are. I would say that the IRS is more and more interested in this. I think it's probably only a matter of time before they get really, really interested. I mean, if the renunciation if he ever does fall, I think it's probably going to be more people renouncing, et cetera. Would you agree with the following statement I'm about to make? Those who want to renounce, probably should get on with it ASAP. Oh, yes. I've been following that mantra for quite some time. He who hasn't teach is lost, John. I think that's exactly right. And we're seeing this on both the immigration citizenship side with the new DS4079. We're now seeing this on the tax side, you know, with the fatriation and moving back for a minute to be the citizenship side. I may have asked you this on our last podcast, but I said, you know, you noted that the purpose of the DS4079 is to really probe the issue of intention, right? Yes. And under the immigration nationality Act 349B or 1481B, if you're looking in the US code, right, the person asserting the intention to expatriate as the burden of proof, right? That's right. So my reading of that form is that it's designed to sort of draw factors that have a bearing on intention, I think. You would agree with that? Yes, yes. Do you think that we may see the first group of renunciations that are actually denied because somebody has not met the burden of proof on intention? I think if someone is renouncing John, that's that's a different kettle of fish than the person who has, for example, served in the foreign army and says, at the time I served in the foreign army, I had the intent to relinquish my US citizenship. Because we, as we all know, there are certain acts that can potentially result in loss of US citizenship. If you had the intention to give it up at the time you wanted to took that act, like serving in the foreign army, serving in the foreign army. Well, let's say you want a basic one. How about naturalizing as a citizen of another country? That's a former economy. Yes, naturalizing as a citizen of another country, I think that's very common. What you would have to show there when they're probing the intent is, yeah, at the time I took on my whatever Canadian citizenship, I did intend to lose my US citizenship. All right. They'll want evidence. Well, prove to me that you had that intent. And what can you show? Can you show that you didn't file tax returns after that? You filed the dual status return. I don't know. What do you show? The only thing I can think of is, you know, hard and fast as well, I filed the form W8 Ben E with my financial institutions. I'm not Ben E, W8 Ben, immediately after I took on my Canadian citizenship because I considered myself non-American then. So I filed the form W8 Ben. I filed my final income tax return. And after that, I only filed the form 1040 NR because maybe I had some US source income. Concrete things of that nature can help prove and serve as evidence that, yeah, I really did when I took on Canadian citizenship, I really did intend to give up my US. Other than that, they can't get into your head. What do you do? Oops. I've been talking to myself. Johnny, you there? Yeah, I am. Let's just figure it out. My words of wisdom. I did. So we're recording now, so just continue on from where you were. Okay. So you had said to me, what happens when someone gives up their US citizenship? Well, we were talking about, we were talking about the burden of proof on intent and I think where you were going, and I think this is correct, is that intention is easier to assert on the basis of a preponderance of the evidence, if it's a renunciation, harder, if it's another kind of relinquishing act. I think that's where we were, right? That's right. And you had said, what if the person takes on another citizenship? How do they prove that they had the intent to give up their US citizenship when they took on the other one? And I said to you, gee, I think there's only certain concrete items they can point to, for example, as soon as I took on Canadian citizenship, and I did have the intent to give up my US, I went to my financial institutions and I gave them all a form, W8, Ben, to say, hey, now I'm Canadian. I'm not US and maybe, you know, whatever else you need to say on that. Going forward, they said, look, I've only filed form 1040 NR because I had US source income that wasn't withheld. I never filed a form 1040 again because I didn't treat myself as a US citizen. I intended to give it up the day I took on Canadian. So you do have certain concrete things you can probably point to, but other than that, I mean, they can't get into your head and see what your intent was. Right. Well, and also on a more obvious basic level, you know, you don't want to do something like try to vote or, you know, apply for a US passport or a nexus application or something, you know, indicating you're a US citizen and such. All right. Well, this has been an interesting discussion today. I think we've kind of, from one perspective, maybe we've been all over the place, but from another perspective, it's all tied into the same theme, isn't it? But, you know, I'm being subject to the internal revenue code is definitely a problem. And there's more and more interest in its patriation and the those who want to rid themselves of the problem probably ought to get on with it, right? Yeah, sooner rather than later because I just see it tightening up further and further. Yeah, I think that I think it certainly has and I think it will continue to do so. Okay. Well, let's call it for today. It's been a great discussion. I thank you for it as we always do. Where would people read your blog and your Forbes contributions and stuff and all that good stuff? Right. Well, they can find my US tax blog at www.us-tax.org. And Forbes, they just can Google my name and Forbes will show up and they can find all my articles there that I've contributed to Forbes. Perfect, perfect. Well, thank you very much.
