One of the most controversial policy issues in the U.S. international tax law is the application of U.S. taxes to “accidental Americans.” The term is often used to describe individuals who were born in the U.S. and who therefore became U.S. citizens at birth, moved abroad at an early age and maintained little contact with the U.S. thereafter, but who never formally renounced their U.S. citizenship or otherwise expatriated.
Suppose that a whistleblower learns that a wealthy foreign citizen residing abroad may well be such a U.S.-born accidental American. If the whistleblower provides this information to the IRS Whistleblower Office in an Application for Award claim form—Form 211—may the IRS Whistleblower Office reject that claim?
This was the issue in Whistleblower 15977-18W v. Commissioner, decided by the U.S. Tax Court in December 2021. In sustaining the IRS rejection of the claim, the opinion seemed to conclude that the target’s U.S. birth certificate was not “specific and credible information” that the target acquired U.S. citizenship at birth. The Tax Court later noted that even assuming that the target acquired U.S. citizenship at birth, the apparent absence of a formal renunciation of U.S. citizenship by the target was not “specific and credible information” regarding the whistleblower’s assertion of the U.S. target’s continued U.S. citizenship.
This is in sharp contrast to Walby v. U.S., where the U.S. Court of Federal Claims, in a more thorough analysis, pointed out that U.S. birth to foreign parents who were not diplomats, and lack of formal renunciation—at least in the absence of proof of both another expatriating act and the inapplicability of Internal Revenue Code Section 7701(a)(50)—caused any assertion of lack of U.S. citizenship since birth, for U.S. tax purposes, to be “frivolous.”
In Walby, a tax protester case, the Court of Federal Claims noted the high evidentiary bar that an individual who was born in the U.S. must meet in order to avoid being characterized as a U.S. citizen for U.S. tax purposes. Walby notes that under the immigration law, a person can avoid acquisition of U.S. citizenship for immigration law purposes at birth only if the individual demonstrates she was born in the U.S. to a foreign diplomat.
Walby also observes that if the individual acquired U.S. citizenship at birth but never renounced her U.S. citizenship, she has remained a U.S. citizen for purposes of the U.S. immigration law unless certain other expatriating acts have occurred. For example, under 8 U.S.C. Section 1481(a)(4)(A), an individual may have lost her U.S. citizenship if she has become an official of a foreign government of which she is a citizen. However, for 8 U.S.C. Section 1481(a)(4)(A) to trigger her loss of citizenship acquired at birth, Walby notes that 8 U.S.C. Section 1481(a) requires that she must have accepted the foreign government post with the intention of relinquishing U.S. citizenship.
Walby points out that under 8 U.S.C. Section 1481(b), the burden of proof to establish loss of U.S. citizenship is upon the party claiming that such loss occurred. For example, in Kahane v. Schultz—a non-tax case in which the U.S. government showed that the U.S.-born individual who became a citizen of a foreign country voluntarily became a member of that country’s parliament, but the U.S. government did not, by a preponderance of the evidence, demonstrate that the individual thereby intended to lose his U.S. citizenship acquired at birth—the district court held that the U.S. government could not treat the individual as having lost his U.S. citizenship.
Moreover, under Section 7701(a)(50), cited in Walby, loss of U.S. citizenship for tax purposes because of a prior loss of U.S. citizenship for U.S. immigration law purposes by reason of 8 U.S.C. Section 1481(a)(4)(A), except to the extent provided in as-yet-unissued Treasury Regulations concerning dual citizens at birth, generally requires the former U.S. citizen to obtain a certificate from the U.S. Department of State confirming her prior loss of U.S. citizenship. The American Bar Association Section of Taxation has requested that the IRS concede that expatriations described in 8 U.S.C. Section 1481(a)(4)(A) that occurred before June 17, 2008, be excepted from the Section 7701(a)(50) requirement of obtaining such a certificate. No such concession has been issued by the IRS to date.
In Walby, the Court of Federal Claims found that the individual was born in the U.S., that there was no evidence that one of the individual’s parents was a diplomat, that there was no evidence that the individual renounced her citizenship, that there was no preponderance of the evidence present showing the individual committed another expatriating act voluntarily with an intent to expatriate, and, even if there hypothetically had been such voluntary expatriating act, there was no evidence that Section 7701(a)(50) would have made such an act ineffective to remove her status as a U.S. citizen for U.S. tax purposes. Thus, the Court of Federal Claims concluded that any assertion by that individual that such individual was not a U.S. citizen, U.S.-taxable on her worldwide income, was “frivolous.”
In Whistleblower 15977-18W, the informant provided to the IRS Whistleblower Office a copy of the target’s U.S. birth certificate. The informant also provided the IRS with information about the target’s parents’ U.S. activities. Nothing in the Tax Court’s opinion indicates that the target’s parent was a foreign diplomat whose U.S. activities would have deprived the target of U.S. citizenship at birth.
The informant also emphasized there was no public record, presumably including the quarterly list of expatriates published by the IRS under Section 6039G(d), that the target ever renounced U.S. citizenship. The informant could also find no public record that the target had ever obtained a U.S. Social Security number. Treasury Regulation 301.6109-1(a)(1)(ii)(A) and the Social Security Administration website indicate that to comply with IRS individual tax obligations, a U.S. citizen living abroad generally should obtain a Social Security number. To do so, U.S. citizens living abroad are directed to designated U.S. embassies or consulates.
No evidence was presented showing that, after the IRS rejected the whistleblower’s claim, the IRS proceeded against the target.
In Part II, we will delve further into judicial approaches to whistleblowers and the potential consequences.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Alan S. Lederman is a shareholder at Gunster, Yoakley & Stewart, P.A. in Fort Lauderdale, Fla.
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