Renouncing US Citizenship – Set to get Tougher


Following much debate and heated controversy in early America, the US Congress took firm action and granted US citizens the right to expatriate by enacting The Expatriation Act of 1868. This Act begins by recognizing that “the right of expatriation is a natural and inherent right of all people, indispensable to the enjoyment of the rights of life, liberty and the pursuit of happiness…”

Now 144 years later, two US Senators, Charles Schumer and Bob Casey, recently unveiled their possibly unconstitutional tax law proposal for those giving up US citizenship.  The proposal is aimed at Facebook co-founder, Eduardo Saverin and others similarly situated who have renounced (or in the future, will renounce) US citizenship, for what the Senators perceive as “substantial” tax avoidance motives.

The Proposed Ex-PATRIOT Act

The proposed “Expatriation Prevention by Abolishing Tax-Related Incentives for Offshore Tenancy” Act, or for short, the so called “Ex-PATRIOT Act”, builds on current tax laws that punish certain expatriates.  You can learn more about the current law in my earlier blog post to be found here

Under the Ex-PATRIOT Act, any expatriate with either a net worth of over $2 million (“Net Worth” Test), or an average income tax liability of at least $148,000 over the last five years (“Tax Liability” Test), will be presumed to have renounced their citizenship for “a substantial tax purpose.” The burden of proof will then shift to the expatriate to demonstrate to the IRS that this is not the case.  If there is a “legitimate reason” for the expatriate’s renunciation of US citizenship, then the draconian expatriation penalty will not apply.  On the other hand, if the IRS finds that the expatriate gave up US citizenship for “a substantial tax [avoidance] purpose”,  a 30% tax on that individual’s US-source capital gains will be imposed (gains from “US sources” here generally means gains on the disposition of US stocks). The tax will hit “no matter where [the individual] resides.”

Under current law, when a nonresident alien (NRA) individual sells stocks in US companies, he is not taxed on the gains, provided he did not have a physical presence in the US for 183 days or more in the year of the sale. This exemption from tax was specifically carved out in the law in order to build a strong incentive for foreigners to invest in the US stock market. With the Schumer and Casey proposal, wealthy “expatriates” will no longer even consider investing in the US. One has to wonder if this is a good tax policy!

The Senators seek to have the expatriation tax be retroactive by applying it to anyone who gave up his citizenship in the last ten years! As a practical matter, is such an expatriate who gave up citizenship, in say, 2006 supposed to now come and demonstrate to the IRS that he had no “substantial tax [avoidance] purpose” for expatriating?  While the proposed Act seeks to apply its terms retroactively, it only taxes capital gains earned in the USA after the enactment date. Surely it will just be easier for the expatriate to avoid investing in the US at all.

Banned from Entering the USA

The Ex-PATRIOT Act also provides that if the IRS finds that expatriation had as its “substantial purpose” the avoidance of taxes, “the individual who renounced citizenship will be barred from any type of re-entry into the United States”. This provision requires an already overburdened government agency to make a decision regarding tax-avoidance intent for every individual who renounces US citizenship and is subject to the Net Worth / Income Tax Liability tests, mentioned earlier.  Furthermore, it is retroactive and will apply to individuals who have renounced citizenship during the 10-year period prior to the enactment date.  Whether such retroactivity would be upheld by a court of law is another issue, and in my view a doubtful proposition.

Current US immigration laws already provide that former US citizens who are deemed to have renounced their US citizenship for tax avoidance purposes may be banned from entering the US by including them in a class of “inadmissible” aliens. This law is commonly referred to as the “Reed Amendment” and was enacted in 1996. [Public Law 104-208, § 352; INA § 212(a)(10)(E); 8 USC § 1182(a)(10)(E)]. The law has never been enforced probably because of doubts as to its constitutionality.  Legal scholars have questioned the constitutionality of the Reed Amendment on grounds that the right to expatriate is a fundamental right protected by the Constitution. Any infringement of a Constitutionally protected fundamental right is subject to strict scrutiny by the courts and is almost never upheld.  It would seem that a similar analysis would apply to the ban imposed on ‘taxpatriates’ by the Ex-PATRIOT Act.

2 thoughts on “Renouncing US Citizenship – Set to get Tougher

    1. In my view, the writing is on the wall — expatriation will surely be met with further sanctions by the US government. Even if Romney wins the election, it will be impossible to stop this runaway train. People who are considering expatriation should get proper counsel – this includes individuals holding green cards for substantial periods of time. Even if the individual has not been meeting the Immigration Law requirements for maintaining the card, from a US tax perspective, the individual is still a US resident taxable on his worldwide income and responsible for FBAR etc reporting.

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