More are renouncing U.S. citizenship as IRS cracks down

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109. The Expat Tax Is Law - The Door Is Now Closed!

The Expat Tax Is Law - The Door Is Now Closed!


After last year’s failed attempt to pass an American expatriate tax, the US Treasury Department succeeded in sneaking the provisions into the miscellaneous revenue positions of the recently passed Health Coverage vailability and Affordability Act of 1996. Given the failure of their high profile campaign last year, the Treasury Department switched strategies this year and undertook one of stealth. While the press was talking about tax-deductible contributions to medical savings accounts (MSAs), provisions tightening the expatriation tax rules were implemented. Foreign grantor trust rules were also tightened under the law.

In order to provide the health insurance and care benefits provided under the law, a separate tax title adds certain revenue raising provisions. In general, these revenue offsets add provisions aimed at making certain that the United States get their fair share plus some when US citizens and permanent residents expatriate. In short, Uncle Sam would like to tell its expatriates that they earned their money from the United States, not in it.

A review of selected sections of the Congressional Record provides some additional insight into the thinking behind these new provisions:

It has come to the attention of Congress that some very wealthy individuals have been relinquishing their citizenship to avoid US income, estate and gift tax. The bill does not want to discourage citizens from exercising their right to expatriate, but does not want to provide a tax incentive for such an action . . .

If Congress truly wanted to eliminate the incentive for expatriation, it might be better to eliminate high taxation and put an end to the litigation crisis rather than creating another layer of government regulation and bureaucracy.

Congress believes the changes are consistent with existing tax treaties in conferring a tax credit for taxes paid in the foreign country, and to the extent they are inconsistent, the Treasury Department will re-negotiate the treaties to account for the changes. The new provisions take precedence over any treaties . . .

To make certain that other countries will not benefit from America’s brain drain, the United States will once again embark on a campaign to bully other nations into accepting America’s oppressive system of taxation and regulation.

The bill would subject former citizens to the expatriation provisions with no inquiry into their motive and requires individuals who exchange property that would otherwise be exempt from US taxation as foreign source income to immediately recognize US source income on any gain from such a transaction. The Secretary is authorized to issue regulations to treat removal of tangible property from the US and other conversions to foreign source income as currently taxable as US source income. For example, any income from stock transferred to a foreign source, such as dividends, would be converted to US source and immediately taxed . . .

Logic dictates that if this tax were to approach 100%, it would look quite similar to currency controls and foreign investment prohibitions. Since it only goes about half of the way, we can assume that we are 50% down the road toward American currency and foreign investment controls.

A new information-reporting requirement has been added requiring former citizens and long-term residents to complete information reporting at the time of expatriation .

Just to make certain that no one escapes from the United States without leaving all their wealth behind, the new information reporting requirements will make certain that the Treasury Department always knows where your assets are placed. Of course, if you fail to report, civil and criminal sanctions will apply. The new treaty negotiations will most likely include provisions to extradite those "expat tax evaders" back home for their "criminal act" of leaving a country that was once known as the home of the free. Our sources at the Internal Revenue Service tell us this treaty provision will be known as the Hotel California provision, you can check out, but you can never leave.

The bill also requires that a US person that receives a distribution from a trust must report that to the Service . . .

Now Uncle Sam is not only seeking to penalize those patriots that have placed their funds out of harm’s way, but now the potential recipients of those receipts. If the logic of current money laundering statutes apply as they do in most tax cases, the bank that accepts the cashing of the beneficiary’s distribution check from a foreign trust will be a co-conspirator in this "unpatriotic" affair.

Effective for transfers made after February 6, 1995, if a non-resident alien becomes a resident within five years of transferring property to a foreign trust, the transferor will be considered to have transferred the property on the date he became a resident . . .

The Statue of Liberty stands as America’s great symbol of open immigration with its famous inscription "give us your tired and poor". With this provision, any person who hopes to emigrate to the United States will definitely become both tired of complying with US regulations and poor after he complies with them.

If a US person receives more than $10,000 worth of gifts from one foreign person during any tax year, he must file a report with the Service. If he fails to file a report, the Service has the sole discretion to determine the taxation of the property received by the US person and the person is liable for a penalty of 5% of the value of the gift for each month he fails to file a report . . .

Currency controls and foreign investment restrictions work both ways. Not only will governments prevent you from sending your money out, but they will also prevent you from sending your money in without their fair share plus some.

The Service has the power to prescribe regulations to prevent the avoidance of the Estate, Trust and Beneficiary part of the Code . . .

This provision is known as an Abusive Transaction provision. It is commonly referred to by international human rights organizations as the arbitrary and capricious application of laws.

Once the Secretary of the Treasury establishes a reasonable belief that the expatriate's loss of US citizenship would result in a substantial reduction in estate, inheritance, legacy and succession taxes, the burden of proving that one of the principal purposes of the loss of US citizenship was not avoidance of US income or estate tax is on the executor of the decedent's estate . . .

If these provisions were making you feel a bit suicidal, please forget it. Uncle Sam is not only going to pursue you to the grave, but also your executors and heirs.

Other items in the Congressional Record provide an even greater insight into Washington’s motivations:

Because US citizens who retain their citizenship are subject to income tax on accrued appreciation when they dispose of their assets, as well as estate tax on the full value of assets that are held until death, the Committee believes it fair and equitable to tax expatriates on the appreciation in their assets when they relinquish their US citizenship. The Committee believes that an exception from the expatriation tax should be provided for individuals whose income and net worth are relatively modest . . .

If you are poor, you may leave; however, if you were a productive American in the United States that no longer exists, you must stay and pay or leave behind the fruits of your productivity. America’s Second Civil War has begun and it is known as Class Warfare.

Exceptions from the expatriation tax are provided for individuals. [An] exception applies to a US citizen who relinquishes citizenship before reaching age 18½, provided that the individual was a resident of the United States for no more than 5 taxable years before such relinquishment . . .

Since one cannot renounce their American citizenship prior to their 18th birthday, the children of an American resident overseas has only 6 months to renounce their citizenship and avoid the application of these laws. How many18-year-olds are capable of making this type of decision?

Under the provision, an individual is permitted to elect to defer payment of the expatriation tax with respect to the deemed sale of any property. Under this election, the expatriation tax with respect to a particular property, plus interest thereon, is due when the property is subsequently disposed of.

In order to elect deferral of the expatriation tax, the individual is required to provide adequate security to ensure that the deferred expatriation tax and interest ultimately will be paid… In the event that the security provided with respect to a particular property subsequently becomes inadequate and the individual fails to correct such situation, the deferred expatriation tax and interest with respect to such property becomes due. As a further condition to making this election, the individual is required to consent to the waiver of any treaty rights that would preclude the collection of the expatriation tax . . .

Only in Congress could one dream of a law that requires its former citizens to waive their rights in a foreign country in order to escape from the political, social, and economic tyranny of the United States.

Under the provision, special rules apply to trust interests held by the individual at the time of relinquishment of citizenship or termination of residency. In addition, an individual who holds (or who is treated as holding) a trust interest at the time of relinquishment of citizenship or termination of residency is required to disclose on his or her tax return the methodology used to determine his or her interest in the trust, and whether such individual knows (or has reason to know) that any other beneficiary of the trust uses a different method . . .

The latter provision is known as the "Stool Pigeon" clause as you are required to turn your fellow beneficiaries over to the Internal Revenue Service. Similar laws existed in Nazi Germany that encouraged children to turn their parents and neighbors over to the authorities.

If an individual holds an interest in a trust that is not a qualified trust, a special rule applies for purposes of determining the amount of the expatriation tax due with respect to such trust interest. Such separate trust is treated as having sold its assets as of the date of relinquishment of citizenship or termination of residency and having distributed all proceeds to the individual, and the individual is treated as having re-contributed such proceeds to the trust. The individual is subject to the expatriation tax with respect to any net income or gain arising from the deemed distribution from the trust. A beneficiary's interest in a non-qualified trust is the basis of all facts and circumstances. If the individual has an interest in a qualified trust, a different set of rules applies. In determining this amount, all contingent and discretionary interests are resolved in the individual's favor, (i.e., the individual is allocated the maximum amount that he or she potentially could receive under the terms of the trust instrument) . . .

The United States is quite generous in calculating the tax based on the maximum possible distribution. In their arrogance, it appears that the law does not detail how to recover the excess tax if the maximum level is ever reached. Alternatively, Congress never intended for former Americans to comply with this law.

If the individual does not agree to such a waiver of treaty rights, the tax with respect to distributions to the individual is imposed on the trust, the trustee is personally liable therefor, and any other beneficiary of the trust will have a right of contribution against such individual with respect to such tax. . .

Based on the above, no foreign financial institution with offices or business in the United States would accept the trusteeship of an American’s assets.

Under the provision, an individual is permitted to make an irrevocable election to continue to be taxed as a US citizen with respect to all property that otherwise is covered by the expatriation tax. This election is an "all-or-nothing" election; . . .

Congress is quite generous with this provision in allowing expatriating Americans to continue being chased by tax collectors for the rest of their lives overseas.

Under the provision, an individual is treated as having relinquished US citizenship on the date that the individual first makes known to a US government or consular officer his or her intention to relinquish US citizenship… A US citizen who furnishes to the State Department a signed statement of voluntary relinquishment of US nationality, confirming the performance of an expatriating act with the requisite interest to relinquish his or her citizenship is treated as having relinquished his or her citizenship on the date the statement is so furnished (regardless of when the expatriating act was performed), provided that the voluntary relinquishment is later confirmed by the issuance of a CLN [Certificate of Loss of Nationality]. If neither of these circumstances exist, the individual is treated as having relinquished citizenship on the date a CLN is issued or a certificate of naturalization is cancelled. The date of relinquishment of citizenship determined under the provision applies for all tax purposes . . .

Based on this provision, almost any American who now wishes to undertake the expatriation route will be subject to the tax. In short, the door has closed for most Americans.

Under the provision, the exclusion from income does not apply to the value of any property received bygift or inheritance from an individual who was subject to the expatriation tax. Accordingly, a US taxpayer who receives a gift or inheritance from such an individual is required to include the value of such gift or inheritance in gross income and is subject to US income tax on such amount .

This implies that if an American expatriate sends funds back to support his aging parents, his parents will need to treat these gifts as taxable income. If the parents fail to report these amounts, they could also suffer civil and criminal penalties associated with tax evasion.

Under the provision, an individual who relinquishes citizenship or terminates residency is required to provide a statement which includes the individual's social security number, forwarding foreign address, new country of residence and citizenship and, in the case of individuals with a net worth of at least $500,000, a balance sheet . . .

Given the desire to obtain balance sheets from expatriating Americans, it is only a matter of time before the IRS requires the inclusion of personal balance sheets of individual taxpayers with their Form 1040s or at least those they suspect might wish to expatriate.

In the case of a former citizen, such statement is due not later than the date the individual's citizenship is treated as relinquished and is provided to the State Department . . .

In short, this means that you cannot obtain your certificate of loss of nationality without providing the information to the United States government.

Further, the provision requires the Secretary of the Treasury to publish in the Federal Register the names of all former US citizens with respect to whom it receives the required statements or whose names it receives under the foregoing information-sharing provisions . . .

Now your friends and neighbors can know that you have expatriated. Although Congress respects the right of Americans to expatriate, it will publish your name in the federal register as if expatriation were a criminal act.

The provision directs the Treasury Department to undertake a study on the tax compliance of US citizens and green-card holders residing outside the United States and to make recommendations regarding the improvement of such compliance. The findings of such study and such recommendations are required to be reported to the House Committee on Ways and Means and the Senate Committee on Finance within 90 days of the date of enactment . . .

Uncle Sam has awoken to the fact that Americans living overseas are the most likely individuals to expatriate and as a result, they are gearing up to create a machine to attack them as well.

The provision is effective for US citizens whose date of relinquishment of citizenship (as determined under the provision) occurred on or after February 6, 1995. US citizens who committed an expatriating act with the requisite intent to relinquish their US citizenship prior to February 6, 1995, but whose date of relinquishment of citizenship (as determined under the provision) does not occur until after such date, are subject to the expatriation tax . . .

This means that if you have not already relinquished your citizenship or have only done so recently, you are subject to the expat tax. The door has closed, but not completely.


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