Deciding to expatriate is a big deal and if you decide to go through with it, you want to make sure it's done correctly. You have to renounce with the State Department and file a certification with the IRS stating that you have been in compliance with the tax code for the last five years. And if you have stuff, you will be paying an exit tax.
The IRS is all "Hey, sorry you're leaving. We're going to miss your tax payments to us. So before you go, we're going to tax the heck out of you one last time!" (FYI, just like anything, there is a way to plan to legally lower your exit tax. Contact us if you need assistance planning.)
Form 8854 (Initial and Annual Expatriation Statement) must then be filed with the IRS.
The Reed Amendment
Controversy started brewing in 1996 when 'The Reed Amendment' passed into law. It stated that people who renounce their citizenship for the purposes of tax avoidance “should not be able to return to the United States”. The idea is, if you expatriate for the purpose of avoiding taxes you are never allowed back into the country. Like, ever.
The Case of the Regulations that weren't there
Technically, the US government has never issued regulations to uphold this law. They sure tried…they came up with some proposals but none were ever put in place because they quickly found that this was going to be a challenging law to uphold. They saw holes in every plan.
So, how exactly would the DHS determine if someone expatriated for tax purposes? There is no box on Form 8854 that says "Are you expatriating for the purposes of evading taxes? If so, check here!"
Our most favorite government report, like, ever
No — seriously. We've reviewed a lot of government reports here. They are usually long winded, confusing documents that end up saying a whole lot of nothing. But the “Inadmissibility of Tax-Based Citizenship Renunciants report” is a great read. The report was requested by the Senate; they wanted the Secretary to submit a report on "the steps that the Department has undertaken to enforce the Immigration and Nationality Act (the Act), including a schedule for issuing guidance or regulations, if necessary."
The author basically says, "Hey guys. There's really no way for us to uphold this law. So we're not going to do anything…k?."
Our favorite part is the Conclusion:
"Despite the legal, operational, and policy challenges to the full implementation of section 212(a)(10)(E) of the Immigration and Nationality Act, the Department of Homeland Security and the Department of State remain committed to continuing to strengthen lines of communication, improve information sharing, and develop more consistent protocols to ensure that both Departments are aware when a renunciant admits that he or she renounced U.S. citizenship for the purpose of U.S. tax avoidance."
Short, simple, and to the point? No. An entire paragraph that actually means nothing! Essentially, the paragraph states the DHS and the Department of State will try to communicate between with each other when someone renounces for tax purposes. Even though there is actual no mechanism to know when someone actually renounces for tax purposes!
If you are considering expatriating, can contact us for help. We can either a) help you ensure you are doing everything correctly and work with you to plan to lower your exit tax, or b) help you come up with a plan to lower your tax liabilities while keeping your US Citizenship. Read more about our services and fees here, or contact us to schedule a consultation. Call us at 888-727-8796 or email info@irsmedic.com.
