The Tax Times: The Cost To Renounce Your US Citizenship Just Increased By 422%

On Friday, August 8, 2014 we posted, US Expatriation Increase At a Record Pace in 2014! Where we discussed that the number of Americans renouncing U.S. citizenship stayed near an all-time high in the first half of the year before rules that make it harder to hide assets from tax authorities came into force (FATCA - Effective Date July 1, 2014).

The number of Americans renouncing U.S. citizenship stayed near an all-time high in the first half of the year before rules that make it harder to hide assets from tax authorities came into force (FATCA - Effective Date July 1, 2014).

Now, the State Department interim rule just raised the fee for “Renunciation of U.S. Citizenship” to $2,350 from $450. Critics note that it’s more than twenty times the average level in other high-income countries. The State Department says it’s about demand on their services and all the extra workload they have to process people who are on their way out.

“Renunciation” vs. “Relinquishment”

“Renunciation” Section 349(a)(5) of the Immigration and Nationality Act (INA) (8 U.S.C. 1481(a)(5)) is the section of law governing the right of a United States citizen to renounce his or her U.S. citizenship. That section of law provides for the loss of nationality by voluntarily "(5) making a formal renunciation of nationality before a diplomatic or consular officer of the United States in a foreign state , in such form as may be prescribed by the Secretary of State" (emphasis added).

A person wishing to renounce his or her U.S. citizenship must voluntarily and with intent to relinquish U.S. citizenship:

1. appear in person before a U.S. consular or diplomatic officer,

2. in a foreign country (normally at a U.S. Embassy or Consulate); and

3. sign an oath of renunciation

Renunciations that do not meet the conditions described above have no legal effect. Because of the provisions of Section 349(a)(5), U.S. citizens cannot effectively renounce their citizenship by mail, through an agent, or while in the United States. In fact, U.S. courts have held certain attempts to renounce U.S. citizenship to be ineffective on a variety of grounds, as discussed below.

“Relinquishment” “Relinquishment” of US Nationality is an alternative method to Renunciation for losing one’s US nationality. “Relinquishment” involves a formal confirmation of a prior “expatriating act” and affirmation of the person’s voluntary intent to give up the rights and privileges of US citizenship, by a person who is at least 18 years of age.

The Department of State’s website describes Potentially Expatriating Acts to include certain specified acts voluntarily and with the intention to relinquish U.S. nationality. Briefly stated, these acts include:

Obtaining naturalization in a foreign state upon one's own application after the age of 18 (Sec. 349 (a) (1) INA);
Taking an oath, affirmation or other formal declaration of allegiance to a foreign state or its political subdivisions after the age of 18 (Sec. 349 (a) (2) INA);
Entering or serving in the armed forces of a foreign state engaged in hostilities against the United States or serving as a commissioned or non-commissioned officer in the armed forces of a foreign state (Sec. 349 (a) (3) INA);
Accepting employment with a foreign government after the age of 18 if (a) one has the nationality of that foreign state or (b) an oath or declaration of allegiance is required in accepting the position (Sec. 349 (a) (4) INA);
Formally renouncing U.S. nationality before a U.S. diplomatic or consular officer outside the United States (sec. 349 (a) (5) INA);
Formally renouncing U.S. nationality within the United States (The Department of Homeland Security is responsible for implementing this section of the law) (Sec. 349 (a) (6) INA);
Conviction for an act of treason against the Government of the United States or for attempting to force to overthrow the Government of the United States (Sec. 349 (a) (7) INA).

An individual who has performed any of these acts who wishes to lose U.S. nationality may do so by affirming in writing to a U.S. consular officer that the act was performed voluntarily with an intent to relinquish U.S. nationality. A U.S. national also has the option to formally renounce U.S. nationality abroad in accordance with INA Section 349 (a) (5).

Re-Entering the US After Expatriation?

Former U.S. citizens also may face difficulty in even coming back into the United States for visits and it's a choice you can't change. "Renunciation is the most unequivocal way in which a person can manifest an intention to relinquish U.S. citizenship. Please consider the effects of renouncing U.S. citizenship, described above, before taking this serious and irrevocable action."

Under Code Sec. 877A, the current expatriation tax law in effect, there is no limitation on the number of days that an expatriate may return to the U.S. Except, of course, such individuals should take care to avoid spending enough time in the U.S. to exceed the number of days in any given year that would cause them to be considered a U.S. tax resident under the substantial presence test (IRC Section 7701(b)).

For persons who expatriated after June 3, 2004 and before June 17, 2008, there was a maximum limit of 30 days in the calendar year for 10 years after expatriation that one could spend in the U.S. or else they may be taxed as a U.S. citizen and resident, rather than as a nonresident under the expatriation rules. That 30-day limitation is no longer relevant for expatriations occurring after June 17, 2008 when Code Section 877A came into effect.

Senator Jack Reed announced on June 12, 2013 his “Amendment to Prevent Ex-Citizen Tax Dodgers from Reentering the U.S.” Under that Proposal, a “specified expatriate” will be inadmissible (again, a “specified expatriate” is a “covered expatriate” who cannot establish to the IRS that the “loss of his citizenship” did not result in a “substantial reduction in taxes”).

However, that is just proposed at this stage, and not law. Current US immigration laws 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.

However, there have been reports in the press in the past year that 2 or 3 individuals had been denied entry into the U.S. under the Reed amendment provisions. (See our post Reed Amendment Gernerating Enforcement in 2012?)

If this is true, given that it is only if the expatriation is tax motivated whereby entry into the U.S. might be denied, then one should avoid mentioning taxes as a reason for renunciation when there are likely other valid reasons for expatriation.

Loss of US Nationality and Taxation.

P.L. 104-191 contains changes in the taxation of U.S. nationals who renounce or otherwise lose U.S. nationality. In general, any person who lost U.S. nationality within 10 years immediately preceding the close of the taxable year, whose principle purpose in losing nationality was to avoid taxation, will be subject to continued taxation.

To leave America, you generally must prove 5 years of U.S. tax compliance. If you have a net worth greater than $2 million or average annual net income tax for the 5 previous years of $157,000 or more for 2014 (that’s tax, not income), you pay an exit tax. It is a capital gain tax as if you sold your property when you left. At least there’s an exemption of $680,000 for 2014. Long-term residents giving up a Green Card can be required to pay the tax too.

If you expatriated after June 16, 2008, the new IRC 877A expatriation rules apply to you if any of the following statements apply.

Your average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than a specified amount that is adjusted for inflation ($147,000 for 2011, $151,000 for 2012, $155,000 for 2013 and $157,000 for 2014).
Your net worth is $2 million or more on the date of your expatriation or termination of residency.
You fail to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the 5 years preceding the date of your expatriation or termination of residency.

If any of these rules apply, you are a “Covered Expatriate.”

A Citizen will be treated as relinquishing his or her U.S. citizenship on the earliest of four possible dates:

The date the individual Renounces his or her U.S. nationality before a diplomatic or consular officer of the United States, provided the renunciation is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the U.S. Department of State;
The date the individual furnishes to the U.S. Department of State a signed statement of Voluntary Relinquishment of U.S. nationality confirming the performance of an act of expatriation specified in paragraph (1), (2), (3), or (4) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(1)-(4)), provided the voluntary relinquishment is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the U.S. Department of State;
The date the U.S. Department of State issues to the individual a certificate of loss of nationality; or
The date a U.S. court cancels a naturalized citizen’s certificate of naturalization.

A Long-Term Resident, as defined in IRC 7701(b)(6), a long-term resident ceases to be a lawful permanent resident if:

The individual’s status of having been lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with immigration laws has been revoked or has been administratively or judicially determined to have been abandoned, or if
The individual:

(1) Commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country,

(2) Does not waive the benefits of the treaty applicable to residents of the foreign country, and

(3) Notifies the IRS of such treatment on Forms 8833 and 8854.

Form 8854, Initial and Annual Expatriation Information Statement, and its Instructions have been revised to permit individuals to meet the new notification and information reporting requirements. The revised Form 8854 and its instructions also address how individuals should certify (in accordance with the new law) that they have met their federal tax obligations for the five preceding taxable years and what constitutes notification to the Department of State or the Department of Homeland Security.

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Copies of approved Certificates of Loss of Nationality of the United States are provided by the Department of State to the Internal Revenue Service pursuant to P.L. 104-191.

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"Should I Stay or Should I Go"?