Expatriation – Giving up Your US Citizenship or US Green Card – Is it an Escape Route for Non-filers of Tax Returns, FBARs and other Tax Forms?
Those considering taking on US citizenship or a green card often incorrectly assume they can later relinquish it without adverse tax consequences. What if a person wishes to give up his US citizenship or US green card? Advance tax planning is a must. Under certain so-called “expatriation” tax rules, harsh tax consequences will result if the individual is classified as a “covered expatriate”. Generally this classification is met if any of the following apply:
- Certain dollar thresholds are exceeded (net worth over US$2 million or a certain average income tax liability over the past 5 years) or,
- The person fails to notify the IRS that he has expatriated and satisfied all of his tax liabilities for the past five years even if he did not meet the dollar thresholds. This is accomplished by filing Form 8854.
In these cases, imposition of an “Exit Tax” (among other harsh tax results) will occur when one gives up his US citizenship or “long term” green card.
A limited exception will apply if an individual became at birth a US citizen and a citizen of another country and continues to be a citizen of, and is taxed as a resident of, that other country. In order for this exception to apply, the individual must not have been a resident of the US for more than 10 years during the 15-year period ending with the year of expatriation. A similar exception applies for certain minors who expatriate before reaching the age of 18½ if they have not been a resident of the US for more than 10 years before expatriation. Even if either exception applies, the individual must still meet the tax compliance certification requirement.
The tax certification requirement acts as an effective bar to expatriation for those who have not filed tax returns and met all of their US tax liabilities for the five year period prior to expatriation. When a US citizen or long-term green card holder expatriates, the individual must submit a very detailed form to the IRS along with the final tax return. Part of this form requires the individual to certify under penalties of perjury whether he has complied with all of his tax obligations for the past 5 years including but not limited to income tax, employment tax, gift tax, filing of information returns as well as having met all obligations to pay tax, interest and penalties. If the person has not complied with these tax obligations, it means the Exit Tax and other consequences will be imposed even if the individual did not meet the dollar thresholds for net worth or average annual income tax liability. So, expatriation is not the magic potion for those who have fallen out of compliance with the US tax system!
Who is a “Long Term” Green Card Holder?
A long term green card holder is generally one who has held the card for 8 out of the past 15 preceding tax years. Even if the individual is not complying with the terms of maintaining green card status for purposes of the US immigration laws, the years he has held the card can still count for US tax law purposes. Furthermore, when calculating if the 8 year mark has been reached, “short” tax years are counted (this means, for example, if one obtained the green card on say, October 1, 2007, the period from October 1, 2007 through December 31, 2007 counts as one full year).
Under the Exit Tax provisions, the individual is subject to tax on the net unrealized gain on all of his world wide assets as if such property were sold for its fair market value on the day before the expatriation date. Special rules apply for pension plans and trusts. Exit Tax is only one of the harsh results that can occur. Other Gift and Estate tax implications also arise, but are beyond the scope of this piece.
Due to the harsh tax consequences that can apply if a green card is held for a lengthy time period and then given up, those persons who hold green cards should immediately examine if they are really necessary.
In all cases, a failure to notify the IRS that one has expatriated and satisfied all prior tax liabilities even if the dollar thresholds are not met, will result in application of the harsh expatriation tax rules – make sure you file the necessary paperwork!
Expatriation Numbers on the Rise
In 2011 close to 1,800 individuals renounced their US citizenship or relinquished their long term green cards. This is a very large number and is reported to be almost eight times more than the number of individuals taking such action in 2008, and more than the total for the combined 3-year period 2007 through 2009. Around the world, various interest groups have become more empathetic to why individuals are renouncing and they are making the IRS take notice. Cited are serious banking problems with overseas financial institutions refusing to have American clients; the plight of American women married to non-US spouses who refuse to provide information to the IRS regarding jointly owned foreign financial accounts and other foreign assets; the huge administrative and financial burden to comply with all the confusing and complex US tax and information reporting requirements when living overseas.
Eduardo Saverin, one of the co-founders of Facebook recently renounced his US citizenship. His act generated a hail storm of negative publicity and name-bashing as well as calls by US Senators to exclude him from setting foot on US soil ever again. Mr. Saverin’s act of giving up his US citizenship most likely had far less to do with US taxes than to secure his future ability to do business in global circles that have now increasingly been excluding US persons from participation in their ventures. The attitude treating Americans as pariahs in the international world of business is growing daily. It is due to the very strong and very legitimate concerns by non-US businessmen and non-US investors that they and their overseas businesses will be exposed to the very long arms of the US taxman by having an American in on the deal. An excellent article on this topic, appears here.
Other more recent high profile expatriates in 2012 include a Hong Kong- based buyout specialist at the Carlyle Group; a private equity executive, also based in Hong Kong with J.P. Morgan Chase; a partner working in Hong Kong at a major US law firm ; an international socialite; an Israeli Supreme Court justice and a London-based architect and painter. More information can be found here.
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