Case study about an ordinary person--not a lot of money--can can get tangled up in misunderstandings about immigration law and tax law.

"I received my green card in 2006. When I was in the United States I only studied and I had few part time jobs because of my continuous health problems I couldn’t work a lot and therefore I never made a lot of money. I did my tax returns until the year 2010, because I left United States that year and I never came back. A few days ago I figured out I have to filled out an application I-407 (Abandonment of Lawful Permanent Resident Status). I didn’t know that this form was required to legally stop resident status. I always thought that just leaving the States for more than one year it was enough to lose the residence. I filled out the form I-407 on July , 2014 and I went to the U.S. Embassy in my country and filed it. Later I was reading on the internet something about Form 8854. I read that in order to left completely any connection of taxes with the United States its necessary to complete that form. My question is this. Let us say I earned very small amounts of money, perhaps $10,000 while I was in the United States, and after I left the United States I did not work so I did not have any income. Other people have helped me with money. Now what should I do? Am I required to fill out Form 8854 to have no problems with the United States government? I don’t want to have any problem with anyone. I am not even sure that I am a long term resident because I left the United States on 2010, and received my green card in 2006, but legally I filled out that I–407 of Abandonment of Lawful Permanent Resident this year on 2014. It also it says in the Form 8854 that I have to send to IRS the last 5 year taxes and I only have until 2010, because after that I didn’t have any income."

The short answer for this person would be :

• You remained a U.S. taxpayer until you filled in Form I-407 and handed it to the Embassy official in your home country. This means you should have filed U.S. income tax returns in 2011, 2012, and 2013 even though you were not living in the United States and had no plans to return to the United States. There are several ways you can fix the problem of not filing income tax returns for 2011 - 2013. I don't know which one is best for you, but I will discuss them below.
• You are required to file Form 8854 for the year that you terminate your green card. That is 2014. The form will be filed sometime in 2015, along with your 2014 U.S. income tax returns. If you do not file this form, it creates big tax complications for you. Maybe the tax complications will not matter in your case, but it sounds like you want to keep everything clean and simple. So it is better to file Form 8854. I will describe the complications you face if you miss the deadline for filing Form 8854.
• You were a U.S. resident for part of the year of 2014, so you have to file a U.S. income tax return in 2014. This will be filed sometime in 2014. There are several ways to handle this, and I will describe the choices for you. I don't know what is best for you.

You're A Taxpayer Until You File Form I-407

The first thing for green card holders to understand is that for U.S. income tax purposes, you continue to be a green card holder until a definite event of paperwork occurs.

There is an event of paperwork that occurs if you claim protection under an income treaty between the United States and your home country. But I am going to ignore that situation. This did not happen to you.

The event of paperwork that matters for you is the Form I-407. U.S. tax law says that you are a "resident alien" if you have a green card visa and it has not been revoked by the United States government or abandoned by you. Internal Revenue Code Section 7701(b)(6). "Revoked" means the government started legal proceedings to cancel your green card visa. "Abandoned" means you decided to give up the green card visa voluntarily. The way you abandon a green card visa is by filing Form I-407.

In other words, once you start being a "resident alien" by having a green card, you continue to be a "resident alien" until the day that a piece of paperwork in the U.S. government says you do not have a green card anymore.

The legal analysis is as follows. An alien (i.e., a noncitizen of the United States) is treated as a resident for income tax purposes if he or she is lawfully admitted for permanent resident status at any time in the year. Internal Revenue Code Section 7701(b)(1)(A)(i). A person is lawfully admitted for permanent resident status in the United States if the person has received an immigrant visa--the green card [Internal Revenue Code Section 7701(b)(6)(A)] and that immigrant status visa has not bee revoked or abandoned [Internal Revenue Code Section 7701(b)(6)(B)].

Once you are a "resident alien" you are required to comply with all of the tax rules imposed on U.S. citizens and residents. All of your income earned worldwide is taxable. You must file income tax returns every year, in addition to many other possible pieces of paper required by the U.S. government.

So, in this situation, he was a green card holder from 2006 until mid-2014. Therefore he was a resident alien, subject to the full U.S. income tax laws, until the day she filed Form I-407.

No Tax Returns for 2011 - 2013 -- What To Do?

He was required to file income tax returns in 2011 through 2013. He did not. What can he do about this?

The obvious answer lies in his statement that he has not worked during those years. There are minimum amounts of income you must reach before you are required to file an income tax return. The amount varies by your filing status, age, and other factors. You can find the information in the instructions for Form 1040 every year.

To give a simple example, the instructions for the 2011 Form 1040 say that a single person under age 65 is not required to file an income tax return if total income is under $9,500. He says he did not work. I also assume that he did not have investments that created income for him (capital gain, interest, dividends, rent, etc.). This means that there is a good change that he is exempted from the filing requirement for income tax returns in 2011 through 2013 based on her income level.

But income levels alone will not tell him whether he must file a tax return or not. The unfortunate situation is that he is an American taxpayer living abroad. As such there are are all sorts of weird tax rules that might apply to create a requirement to file a tax return, even if his income was zero.

The first place to start is his comment that he received help from other people when he needed money. That would look like a gift that he received. If gifts from one individual to him were more than $100,000 in one year, then Form 3520 would be required to be filed.

Another place to look is foreign bank accounts. If he has a bank account, he may be required to file an income tax return for the purpose of checking the box at the bottom of Schedule B.

It is impossible to tell right now whether as a technical matter no tax returns for 2011 through 2013 were required. However, it is definitely a possibility.

If he was not required to file income tax returns in 2011 through 2013, then he can truthfully answer the question at the bottom of Page 3 of Form 8854 that is bothering him -- has he complied with her tax obligations for the five years before expatriation? These years are 2009 through 2013. Hhe complied with his tax filing obligations (I assume) by filing correct income tax returns in 2009 and 2010 while he was still living in the United States. He complied with his tax filing obligations for 2011 through 2013 by doing nothing, because he was not required to do anything.

I think he has two choices:

• Hhe can either verify that he had no filing requirement and therefore do nothing more. He might get questions from the IRS: "We see you have not filed any tax returns in 2011 through 2013, but now you are expatriating in 2014. What happened?" Then he can deal with the questions and answer them -- if he is asked.
• Or he can file tax returns for 2011 through 2013, reporting no taxable income, answering the questions correctly, and getting the paperwork into the system with the U.S. government. When the IRS has paperwork with zero income showing on the tax returns, that answers a lot of questions for them. At the moment the IRS knows nothing. A pile of tax returns showing zero income will preemptively answer those questions.

If he chooses the second method, the question is how to do it. How does he file the late income tax returns for 2011 through 2013? Since the tax liability and penalty risk is likely to be zero in his case (he should double-check this), I would say just prepare the tax forms and send them in. Don't bother with the Streamlined Procedure. Just file.

There is an interesting second choice for him. If he lives in a country with an income tax treaty, consider filing late 2011 through 2013 income tax returns with a treaty election to be treated as a nonresident of the United States. This can solve some other problems--such as making him not subject to the exit tax rules at all, which makes Form 8854 a non-issue. But let's leave this idea alone. he has simpler, easier ways to solve her problems.

Form 8854 -- What To Do?

He must file Form 8854 for the year that he gave up his green card -- 2014. It will have a filing deadline of June 15, 2015, given what I think is his situation. Do not miss the deadline.

Missing the deadline means that he will automatically become a "covered expatriate". Given his financial situation this is not likely to have any economic consequences. Becoming a covered expatriate means that all of his assets are treated as if they are sold, and foreign pensions are typically taxed in a lump sum. Other things cause immediately-due U.S. income tax.

But because he has made so little income, I would guess he has no assets of the kind that would create an exit tax. Therefore, covered expatriate status would mean a more complicated Form 8854 but otherwise would create no immediate problems for him.

If he ever ends up having U.S. citizen or resident heirs and leaves them money when he dies then the recipients of the inheritance will pay a tax for the privilege of receiving an inheritance from a covered expatriate. This applies to gifts, too. Maybe that doesn't matter much, or maybe this is an improbable event not worth considering.

My suggestion to him is to simply file the Form 8854 on time in early 2015. For his situation the work is not terribly big and it sounds like he wants to keep everything in his life well-organized and handled.

2014 Income Tax Return

He must also file a tax return for 2014. This is a dual-status income tax return -- dual status because he was a "resident alien" and a "nonresident alien" in a single year. He was a U.S. resident for part of the year (up until he filed her Form I-407) so the filing requirement is based on that status. On December 31, 2014 he will not be a "resident alien" so the correct tax return is Form 1040NR, with a Form 1040 attached to describe his income from January 1, 2014 through until the day before he gave up her green card.

The same analysis needs to be done to determine whether a tax return is required or not based on all of the various filing requirements imposed. However, not filing the tax return has two bad effects:

• He becomes a covered expatriate because he fails the "certification test" which requires the exit year tax compliance to be filed correctly and on time; and
• He has not signaled to the U.S. government -- by filing the right kind of tax return -- that they should take him out of the database of people that should be filing U.S. income tax returns every year.

In Summary

His situation is common. I see a lot of situations like his. The fortunate (!) thing for him is that his financial life is so simple. It is likely that he can handle all of the tax paperwork from giving up his green card, and do so without any tax cost to him.

The way he arrived at this situation is common. Most people do not understand that they must file Form I-407 to formally cancel the green card visa. Most people do not know that having a green card visa and living outside the United States means that the requirement to file a U.S. tax return -- and pay tax on worldwide income -- continues to plague them, even if they have no intention of ever returning to the United States.

For green card holders living abroad, it is important to make the decision to extricate yourself from the U.S. tax system completely or live fully within the U.S. tax system. There is no middle ground. Fortunately for him, he just has paperwork to do. For most of the people that I talk to who are in his position, there is significant tax cost involved as well. They have high income, significant assets, pensions, etc. They have inherited property, made gifts, married, divorced -- in short, lived normal lives. The cleanup becomes difficult.
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