The IRS is in unique company as it is the only major country that has has universal jurisdiction to tax whatever you make, anywhere. This is quite barbaric in my opinion. This applies to any US person (person means citizens or resident alien or VISA holder). Many taxpayers are having enough and are an thinking that it is time to say good bye to the IRS. But doing so is tricky.
Because the law is so complicated, we will use hypothetical questions to address the typical fact patterns, the typical problems and some of the unique solutions out there.
If I expatriate, where do I go?
If you expatriate, you will need a non-US passport. Domina and St. Kitts offer pay-per-citizenship services. Other terrific ways of gaining passports cheaper is seeing if a country you or your spouse is descendant of will grant you a passport. Check with that country's consulate.
What about dual citizenship?
That does you little good to avoid the IRS. A dual passport gives you the right to live in two countries. Many of the typical tax havens will welcome you — however there is usually some significant equity requirements — mainly, you better be rich already. These small nations really don't want to be taking in the "riff-raff." So for a lot of regular people, dropping a huge chunk of change to get a passport, is not an option. And if you are still a citizen of the US, the IRS has full reach into your pocket book.
Am I stuck overseas? My life and family is here.
You can be in the US for no more than ninety days at a time. Our advice: take a three week vacation somewhere every quarter.
So can I renounce my US citizenship? I heard that it is very hard or impossible to do so.
Yes, you certainly can renounce your US citizenship. True, its quite a commitment to do so, which is why some folks' idea of renunciation hasn't been successful —they didn't renounce all rights. Section 349(a)(5) of the Immigration and Nationality Act (INA) (8 U.S.C. 1481(a)(5)) (thank the Lord for cut and paste, eh?) mandates these following requirements in order to renounce 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
Note: there is another requirement to escape the jurisdiction of the IRS. That will be a little further down.
I have undeclared offshore accounts. I am aware the the IRS is cracking down on such holders. The IRS has not found me yet. Can I renounce my citizenship to avoid having to come clean with the IRS and pay them anything?
No. You will be required to swear under oath that you are in compliance with all tax laws. If you have not come clean with the IRS on undeclared bank accounts, the IRS considered that non-compliance and therefore, you entire renunciation of citizenship would we considered invalid. And you would still be considered a US person for tax purposes.
Chances are, the IRS wouldn't figure out you were in non-compliance for years. So when they finally caught you they could charge you will all sorts of tax crimes. If you are considering renouncing your citizenship, in order to be 100% protected use the Offshore Voluntary Disclosure Process.
So, assuming I can renounce my U.S. Citizenship, can I get away without paying a dime to the IRS?
Before you can leave for good, the IRS has a little friend they call the "Expatriation Tax.". This is an extra-special tax you have to pay if the IRS believes that the reason you are renouncing your citizenship is just to skip out on taxes. The IRS assumes you are attempting to skip out on taxes if the following criteria are met:
- Your average income tax liability of $127,000 for tax year 2005 (or higher amount for later years)and for the 5 prior years
- or a net worth of $2,000,000 on the date of expatriation.
In addition, the Code requires you to certify to the IRS that you have satisfied all federal tax requirements for the 5 years prior to expatriation (again this is why Voluntary Disclosure would be necessary). It also requires annual information reporting for each taxable year during which an individual is subject to the rules of IRC 877.
How do I get out of this expatriation tax?
One possibility, is to use something known a Private Placement Life Insurance (PPLI) What PPLI is, is essentially buying a very unique life insurance product that is tailored to your investment goals. You are able to access the money it earns by taking loans against the policy, tax free. There are other, lesser known ways that can help reduce this amount that are currently being tested.
But one of the considerations is: because PPLI is such an effective method to avoid any taxation, why renounce citizenship anyway?
What else do I need to do to renounce my citizenship?
Finally, and this is the stealthy last requirement that is needed. Be sure you tell the State Department or Department of Homeland Security that you did renounce your citizenship. Even if you took the three steps above, the IRS will continue to treat you as a US citizen. You could have all the responsibilities and none of the rights.
So again, your expatriation is not effective until the notification and tax satisfaction certifications are filed with the IRS and the Department of State or of Homeland Security.