All Expatriates Need to Know to Leave the United States Behind:
As a U.S. citizen or long-term green card holder, you love your country or at least hold some feeling of nostalgic attachment, but over the years or decades, it has become clear that your interests and goals are not well-served by remaining a U.S. citizen. IRS criminal investigation division examines citizens’ and green card holders’ reasons for renouncing their U.S. citizenship. The decision to become a U.S. expat is a difficult one, but for increasing numbers of Americans, it is a decision that makes sense for purposes of finances, convenience, and other reasons. However, the decision to renounce one’s U.S. citizenship should never be made without the careful guidance of a professional.
The tax lawyers and CPAs of the Tax Law Offices of David W. Klasing have prepared a brief set of frequently asked questions regarding the renunciation of U.S. citizenship. This FAQ can serve as a starting point for one’s inquiry into whether renouncing citizenship is a prudent decision. However, this FAQ is general in nature and does not and cannot account for your particularized concerns such as the amount and type of assets you hold, particularized goals, other citizenships held, and an array of other individualized factors. Therefore, personalized legal advice is a must before you take any action regarding renouncing your U.S. citizenship.
Who Is an Expatriate Under U.S. Law?
Under Internal revenue Code Section 877A(g)(2), there are two distinct classes of individuals who are considered to be expatriates or expats under U.S. law. First, an expatriate is any individual who has given up or renounced their U.S. citizenship. Second, and perhaps more relevant to readers of this page, an expat is also any individual who is a “long-term” resident of the United States who is no longer considered a lawful permanent resident of the United States. Under IRC § 877A(g)(5), a “long-term resident” is any individual who qualifies as a lawful permanent resident for at least 8 of the previous 15 tax years. A lawful permanent resident is defined by IRC § 7701(b)(6).
What Tax Concerns Motivate People to Renounce their U.S. Citizenship?
An array of tax concerns can motivate taxpayers to renounce their U.S. citizenship. For many individuals, their renunciation of citizenship is motivated by the United States’ citizenship-based tax regime. That is, unlike every other nation in the developed world, the United State does not tax on the basis of where economic activity occurs. Rather, the United States taxes a citizen’s, permanent resident’s, or other covered individual’s global income. This can lead to double-taxation and a significantly increased tax burden. While tax treaties can mitigate the effects of double-taxation, they are imperfect and not responsive to all situations.
What Foreign Account Reporting Requirements Spur Renunciations?
In recent years, another factor that has motivated individuals to give up their U.S. citizenship is the array of informational return obligations they face. In recent years, the U.S. government has cracked down on secret offshore accounts through enhanced Report of Foreign Bank Account (FBAR) enforcement and the passage of Foreign Account Tax Compliance Act (FATCA). In particular, FATCA has caused significant problems for Americans living abroad because the law has spurred some foreign financial institutes (FFIs) to stop doing business with Americans. Aside from this difficulty, the informational returns are highly invasive and, depending on one’s foreign assets, compliance can be particularly complex.
Are there Other Reasons for Renunciations?
Aside from the potentially onerous tax and reporting regimes, there are numerous other reasons motivating the renouncement of U.S. citizenship. In some cases, convenience can play a motivating role in the decision. In one is spending a majority of their time in a foreign nation, it simply may no longer make sense to retain one’s U.S. citizenship along with the responsibilities it carries. In other cases, family concerns may serve as an additional factor that motivates a renunciation.
Are People Renouncing their U.S. Citizenship?
According to renunciation statistics released by the IRS and U.S. Department of the Treasury, every year since 2013 has set a record for the number of renunciations. While the number of renunciations decreased sharply from 2011 to 2012, renunciations of citizenships rebounded sharply in 2013 far surpassing both 2011 and 2012 numbers. In 2014, the number of renunciations increased once again. Finally, from 2014 to 2015, renunciations increased approximately 20 percent to 4,279 individuals. These numbers are only the official numbers and many believe that they significantly understate the true scope of renunciations
Is Renunciation for Everyone? How Do I Know it’s Right for My Situation?
Clearly, renunciation isn’t for everyone, but for many expats and U.S. citizens living abroad it should be seriously considered. Whether renunciation is right for you will depend on your finances and the impact of tax and informational reporting laws you face. The best way to determine whether a renunciation of citizenship is appropriate for your circumstances is to consult with an individual who can advise you regarding both the tax and legal implications of a renunciation.
What is the “Ten Year Shadow?” Is It Still in Effect?
The ten-year shadow may be a familiar term to individuals who may have previously contemplated the renouncement of citizenship. Under the ten year shadow, expats were obligated to continue paying taxes on U.S.-based profits and gains for an additional ten years after expatriation. The ten-year shadow is no longer in effect or a consideration for individuals considering expatriation. However, it is not all good news. In many cases, the obligations imposed by the new regime are more onerous and less flexible.
What is the Heroes Earnings Assistance and Relief Tax Act (HEART Act)?
The HEART Act is the new regime under which a renouncement of citizenship proceeds. While the initial coverage of the HEART Act focused on the tax benefits it would provide military service members serving in a combat zone, the law also established significant penalties for citizens and long-term green card holders who renounce their respective citizenship or status. The HEART Act was effective June 17, 2008, and applies to all “covered expatriates.” Under the law, covered expatriates are liable for an exit tax and future accounting obligations.
Who is a “Covered Expatriate” Under Section 877A(g)(1)(A)?
The term “covered expatriate” is defined in IRC § 877A(g)(1)(A). A “covered expatriate” is any expatriate who meets any one of the following characteristics:
- He or she is subject to an annual net income tax liability in the previous five years that exceeds the yearly specified amount. This amount is adjusted for inflation on a yearly basis. For 2016, the applicable net income tax liability is set at $161,000.
- He or she meets the net worth test by having a net worth of at least $2 million on the date of expatriation.
- He or she will fail or has failed to certify compliance with all U.S. tax duties incurred in the five years previous to the expatriation date. This certification includes all tax duties including but not limited to one’s obligation to file and pay income taxes, employment taxes, and gift taxes. Furthermore, all informational return obligations are also covered by this rule. The individual must certify compliance under the penalty of perjury by filing IRS Form 8854 by the tax filing due date.
Covered expats are generally subject to expatriation exit taxes. The exit tax will be explained and described in further detail below.
Are There Exceptions to the Covered Expatriate Tests?
There are a number of exceptions under IRC § 877A(g)(1)(B that can result in one who would otherwise be classified as a “covered expatriate” not being classified as such. These exceptions affect only the tax liability test and the net worth test. The first exception is where the individual has held dual citizenship since birth, he or she continues to be a citizen of this second country, is taxed as a resident of the second country, and has not been a U.S. resident for greater than 10 years taxable years from the date of the renouncement of citizenship. The second exception is where the individual renounces citizenship prior to the age of 18.5 and has not been a citizen for more than 10 taxable years.
What Is the Mark-to-Market Expatriation Exit Tax?
The HEART Act sets forth a new exit tax that affects covered expats. The exit tax abolishes and replaces the previous obligation to file U.S. tax returns for ten years following renouncement. Rather, the one-time exit tax would be applied under a mark-to-market tax regime. The mark-to-market tax is applied to an individual’s net unrealized gain on all property held that exceed certain specified exemption limits.
Generally, this means that covered expatriates are taxed on property above the limit, calculated on the day prior to expatriation, on the basis that they sold the property. The property is sold at the calculated fair market value on the same date. The mark-to-market tax is then applied on the proceeds that exceed the exemption limit. The limit is adjusted for inflation yearly. In 2016, proceeds greater than $693,000 are subject to the mark-to-market exit tax.
Are there Exceptions to the Mark-to-Market Tax?
There are certain exemptions to the mark-to-market tax where a 30-percent tax or other taxation will apply. Generally, this applies to deferred compensation items. IRC § 877A(c)(1) sets forth the exceptions to the applicability of the mark-to-market tax. The section states that deferred compensation plans and items are exempt from the mark-to-market tax but subject to an alternative tax. The exact tax that will apply is dependent upon whether the “deferred compensation item” is considered an eligible or ineligible deferred compensation item. If an item qualifies as “eligible,” then, generally, a withholding tax of 30 percent applies. For ineligible deferred compensation items, IRC § 877A(d)(2)(A) sets forth the expectation that the covered expat will face taxation on the basis of present value as if the ineligible item was received on the day prior to the expatriation date.
Can Payment of the U.S. Exit Tax be Delayed or Deferred?
An irrevocable election exists where an individual can choose to defer payment of the mark-to-market tax on deemed sales where a prescribed interest rate would apply. This election is typically contingent upon the punishment of adequate interests to secure the election. This security is generally offered in the form of a bond or letter of credit. This election is made via the IRS Form 8854 filing and is made on a property-by-property basis. If the election is made the individual will incur an obligation to file an annual expatriation statement for all applicable years. Furthermore, a U.S.-based agent must be appointed on the expatriate’s behalf.
Since I Will No Longer Live in the United States, Can I Conceal Accounts to Minimize the Impact of the Exit Tax?
Some people seem to believe that since they will be renouncing their citizenship and leaving the United States, they are free to conceal accounts and assets that would otherwise give rise to tax obligations. Other individuals seem to hold the belief that renouncing citizenship will immunize them from past tax crimes. Unfortunately for individuals who make these assumptions, neither is accurate. The U.S. government may seek to prosecute you for tax and other crimes even after you have renounced citizenship and left the country.
To understand this point, consider the case of Albert Cambata. Mr. Cambata opened a Swiss bank account in 2006 under the name of a Hong Kong shell corporation. In 2006, a $12 million dollar payment was deposited in the Swiss account after being passed through an intermediary Belizean holding company. In 2007 and 2008, Mr. Cambata failed to report or pay taxes on the foreign income or assets held in the account. In 2008, he transferred the funds to a Singapore-based branch of the Swiss bank.
In 2013, after living in Switzerland for 5 years, Mr. Cambata traveled to a U.S. embassy in Bratislava to announce that he had obtained citizenship in St. Kitts and Nevis and intended to renounce his U.S. citizenship. However, despite these actions, Mr. Cambata – now a former U.S. citizen — ended up facing U.S. charges for filing false tax returns in 2007 and in 2008.
Further items of note include that while the IRS typically has 6 years to bring tax charges, this statute of limitations is tolled when the individual is “outside of the United States.” Likewise, if you have criminal tax concerns, it is essential that you consult with a tax lawyer prior to renunciation. Only an attorney can provide the requisite level of confidentiality through the attorney-client privilege to protect any potential admissions. Disclosures made to an accountant do not receive the level of protection necessary to prevent or thwart a government subpoena.
How Does an Expat or U.S. Citizen renounce His or Her Citizenship?
In brief, there are six essential steps that one must take to renounce their U.S. citizenship. First, the individual must obtain or have citizenship in a nation other than the United States. Second, the individual must ensure that they have maintained compliance with all tax obligations for the past five years. Third, the individual must leave the country and head to a country with a U.S. consulate. Fourth, the individual intending to renounce his or her U.S. citizenship must appear at the U.S. consulate, typically in the nation of their new citizenship, to renounce their citizenship. Fifth, the individual must file their final U.S. tax return and Form 8854, finally, the individual must pay the exit tax and any other obligations incurred.
This sets forth only the basic details regarding the renunciation of one’s U.S. citizenship. Clearly, there are an array of additional concerns, planning, and disclosures that must be made at each step of the process. A professional team of financial and legal advisors can help guide you through each step of the process.
Considering Expatriation and Renouncing Your U.S. Citizenship?
If you are considering giving up your U.S. citizenship to more effectively pursue your financial and personal goals, the lawyers and CPAs of the Tax Law Offices of David W. Klasing may be able to help. David W. Klasing is a dually certified attorney and CPA who can assess both the tax and legal aspects of your renunciation. David and the entire financial and legal team of the Tax Law Offices of David W. Klasing can address your concerns, assess any potential legal or tax issues that would affect your renunciation, and guide each step of the process. To schedule a reduced-rate consultation at their Los Angeles or Irvine offices, call 800-681-1295 today.
