How Do You Get Out Of Paying U.S. Taxes?

That is not easy, but we have some suggestions
BY: ORLANDO GOTAY

Some U.S. citizens who have migrated to Mexico have gone beyond residente temporal or even permanente inmigrado status. There are those who have chosen to acquire Mexican nationality, and there are more than a few of those out there. It pays homage to the country that has welcomed us.

 Mexican law allows dual nationality for Mexicans who acquired another nationality elsewhere, but that may not be the case when a non Mexican acquires Mexican nationality.  Mexico requires express renunciation to other nationalities held by the newly naturalized Mexican national.

This becomes an issue because of differences in Mexico and United States nationality law. U.S. law deems U.S. citizenship as a highly valued condition. Therefore, it has established a correspondingly high burden for it to be lost. If you want to no longer be an American citizen, you must establish that you did that with the specific intent of actually relinquishing citizenship. As in, are you sure you’re wanting to do this?

Why, you ask, would a tax lawyer be writing about this?  Because citizenship does matter when it comes to U.S. taxation. The IRS is relentless. And there may be some out there who think they may have let go of their U.S. citizenship at the moment they acquired Mexican nationality, but it may not be so. Unknown to them, both countries may consider them as citizens. Ignoring this in the U.S. context could have disastrous consequences.

One wishing to relinquish U.S. citizenship must do so through a renunciation process administered by State Department officials, at consular offices outside the United States.  The extensive process requires interviews and a hefty $2,350 renunciation fee. And the cermony is a big damn deal, enough to make you think twice, which is their intent.

Until a person completes the process, documented by a Certificate of Loss of Nationality, (See? How spooky is that?) he will still be considered a citizen by U.S. authorities.  And that requires—you guessed it—filing federal income tax returns.  The “express renunciation” before Mexican authorities does not strip you, under U.S. law, of citizenship and all corresponding federal tax obligations.

If a person intends to renounce, it is critical that accounts are squared with Uncle Sam beforehand. 

If you cannot certify that you’re all square with the IRS for the five years preceding the renunciation, you become a “covered expatriate”.  From a tax perspective, that’s a really bad label to have.  It taints you and your U.S. heirs. Most gifts or bequests from the covered expatriate to U.S. persons will have to pay gift or estate taxes (at the highest rate), simply because of the label.

If you have too many assets when you renounce, or if your average federal tax bill is too high, you also become a covered expat.  Luxury problems, I say.  Special tax calculations must be done for covered expats.

What really troubles me is ending up as a “covered expat” because of unfulfilled tax obligations one did not know about.

In matters of nationality, it pays to understand the true nature of your status, enabling you to fulfill your tax obligations in a timely way.

Orlando Gotay is a California licensed tax attorney (with a Master of Laws in Taxation) admitted to practice before the IRS, the U.S. Tax Court and other taxing agencies.  His love of things Mexican has led him to devote part of his practice to the tax matters of U.S. expats in Mexico.  He can be reached at tax@orlandogotay.com.