Well, the numbers of individuals renouncing US citizenship is apparently reaching epic proportions. It has been reported that 5,816 Americans gave up their citizenship in the first six months of 2020 and that this represents a 1,210% increase from the prior six months ending December 2019, when only 444 cases were recorded. Most clients I am hearing from who are expatriating or considering it, cite the uncontrolled COVID-19 pandemic in the US, the political upheaval there and of course, the extreme burdens of citizenship-based taxation. “Enough is enough” seems to be the mantra. For those with alternatives, US citizenship is simply no longer worth the price tag.
The number of published expatriates for the quarter ending March 31, 2020 was 2,909, which is the highest quarterly number ever. The previous quarterly period that approached this number was some years back, in the fourth quarter of 2016, when 2,365 names were published. It should be noted that this list is published by the US Internal Revenue Service (IRS) and its numbers have been on the lower side when compared to other government sources, such as the FBI. The IRS list naming individuals who expatriated during the quarter ending March 31, 2020 is here.
What about the Ban on Re-Entry?
With this dramatic rise in expatriation numbers, there is also renewed interest in the question whether those giving up US citizenship will be banned from re-entering the USA. There also seems to be a lot of misunderstanding of the law surrounding this topic. I hope my post today will clarify the issues and the state of the law.
Current US immigration laws (note, not the US tax 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, enacted in 1996, is commonly referred to as the “Reed Amendment”. Public Law § 352; INA § 212(a)(10)(E); 8 USC § 1182(a)(10)(E). Please note, the language of the law quoted below, refers to “citizens” and “citizenship” and not green card holders who are long term residents (LTR) who give up the card. (You can learn more about LTRs at my blog post here. Although many LTRs are unaware, they have serious tax issues to consider before giving up that green card.).
The law reads as follows:
(E) Former citizens who renounced citizenship to avoid taxation
Any alien who is a former citizen of the United States who officially renounces United States citizenship and who is determined by the Attorney General to have renounced United States citizenship for the purpose of avoiding taxation by the United States is inadmissible.
24 Years Later… Still No Guidance
It’s been almost a quarter of a century since the law was enacted, yet regulations implementing this law have never been published. Doubts as to its constitutionality have been raised by legal scholars, on grounds that the right to expatriate is a fundamental right protected by the Constitution, and as such, would be subject to strict scrutiny by the courts.
Five years ago the Department of Homeland Security (DHS) carefully considered the policy, legal, and operational challenges to implementing this law. The DHS had engaged closely with the Department of State (DOS) and the Department of the Treasury, including the IRS, in efforts relating to the provision’s enforcement. To date, all agencies have drawn a blank. Implementation of the Reed Amendment has clearly been hindered by numerous policy, operational, and legal complexities and challenges.
How many times the law has been enforced is open to question. But here is what we know based on the DHS November 30, 2015 Fiscal Year 2015 Report to Congress, titled “Inadmissibility of Tax-Based Citizenship Renunciants”:
In the period 2002-November 30 2015, two individuals who admitted to having renounced US citizenship for tax avoidance purposes were found to be inadmissible under the Reed Amendment. Five additional individuals were identified as possibly inadmissible on the basis of the law. One was served a notice to appear, but was not placed in removal proceedings. The four others were paroled, one of whom was deferred for inspection and later admitted.
Tax Avoidance Motive and “Covered Expatriate” Status
“Covered expatriate” status is based on objective tests concerning the individual’s average annual net income tax liability over the past 5 years, his net worth, and certification of past tax compliance. More details here. Once an individual is classified as a covered expatriate certain harsh tax results will follow, including the mark-to-market or “exit tax”.
If an individual is a so-called “covered expatriate” for purposes of the US tax law expatriation regime, is this sufficient to render him inadmissible to the US based on the Reed Amendment?
I do not think so. Here is why: First, confidentiality laws prevent disclosure of tax information by the IRS to DHS or DOS unless the taxpayer voluntarily permits that disclosure in writing. So, one first has to question how the immigration authorities would even know if an individual was a “covered expatriate”. Second, although the tax laws covering expatriation apply certain harsh tax penalties if one is a covered expatriate, this certainly does not mean that the individual renounced US citizenship for tax avoidance purposes, as required by the Reed Amendment. For example, if the individual has a net worth of US$2 million, he is treated as a covered expatriate under the tax laws. Does this automatically mean he has renounced for the purpose of avoiding taxation for purposes of the Reed Amendment?
Is Relinquishment By an Expatriating Act “Better” than Relinquishment By Renunciation?
Since the statutory language of the Reed Amendment applies only to those who “officially renounce” United States citizenship some practitioners are of the view that it is better to “relinquish” one’s US citizenship by an expatriating act that is NOT a renunciation. While this makes sense, it has never been tested in court. However, if the individual can relinquish US citizenship by way of an expatriating act, this would seem a safer option, at least insofar as the statutory language of the law stands today.
In practice, however, it may be that those who have expatriated are denied entry based on other grounds even if the Reed Amendment is not specifically mentioned. Furthermore, legislative proposals have cropped up time and again to make the expatriation regime even harsher, including the re-entry bans. Thus, the law may change and there can be no guarantee that re-entry after a renunciation may not become more difficult.
Next week’s blog post will cover the difference between the two methods of “divorcing” the United States – “renouncing” US citizenship or committing a so-called “expatriating act” with the intent to give up one’s US citizenship.
I was recently interviewed on the topic of the Reed Amendment and its impact in the brave new world of expatriations by John Richardson, a US and Canadian attorney. The short podcast can be heard here.
Posted August 12, 2020
All the US tax information you need, every week –
Just follow me on Twitter @VLJeker (listed in Forbes, Top 100 Must-Follow Tax Twitter Accounts 2017-2020).
Subscribe to Virginia – US Tax Talk to receive my weekly US tax blog posts in your inbox.
Visit my earlier US tax blog “Let’s Talk About US Tax” hosted by AngloInfo since 2011, it contains all my old posts. Some hyperlinks to my blog posts on AngloInfo may have expired. If you copy the expired URL, you can most likely retrieve the actual post by using the “Wayback Machine” which is an archiving service. Simply paste the URL into the Wayback Machine search box. It will show you the archived post was saved on a specific date. Click on that date to retrieve the post.
You can access my papers on the Social Science Research Network (SSRN) at https://ssrn.com/author=2779920