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29 March 2024

Taxpatriate? Tax dodgers welcome to leave, not welcome to return

Published
By Majorie van Leijen

An amendment to the Homeland Security Bill has been proposed banning US expatriates who have renounced their US citizenship or long-term residence in order to escape US tax obligations from entering the country.

The amendment would mean that former citizens of the United States who officially renounced United States citizenship and who have been determined by the Secretary of Homeland Security to have done this for the purpose of avoiding US tax obligations are inadmissible.

Furthermore, covered expatriates unable to present evidence that they renounced US citizenship with the purpose of avoiding US tax obligations would also become inadmissible.

"Congress is taking notice that expatriations (relinquishing US citizenship or “long-term” green cards) have been steeply on the rise and that the players are sometimes big ones (such as Eduardo Saverin, Denise Rich and Tina Turner)," writes Virginia La Torre Jeker, JD, in her blog post ‘Banned from the US? Senators Reintroduce ‘Taxpatriate Bill’ 

Faced with heavy tax burdens, an increasing number of US citizens or long-term green card holders have made the decision they no longer want to hold a US passport.

However, relinquishing US citizenship is a complicated procedure with fierce consequences if certain tax duties have not been fulfilled.

If the person renouncing US citizenship has a net worth of at least $Dh2 million, an average income tax liability of at least USD155,000 over the last five years, or fails to certify under penalty of perjury that he has met all his US tax obligations for the five year period prior to expatration, he is considered a covered expatriate

Earlier this month a proposal to penalise covered expatriates unable to provide evidence that they did not renounce citizenship with the purpose of avoiding US tax obligations was made in Congress by three senators, to be amended to the US immigration laws.

However, the proposal was dropped and inserted in the Homeland Security Bill by Senator Reed.

“Some professionals think this proposal may have a greater chance of passing in the Homeland Security Bill than in the Immigration bill,” commented Virginia.

In response to the first proposal this month, she wrote in her blog: "…the burden of proof would shift to the “covered expatriate” to demonstrate to the IRS that his loss of US citizenship did not result in a “substantial reduction in taxes.

"If the expatriate cannot meet his burden of proof, he will be classified as a so-called “specified expatriate”.

If the expatriation did not result in a “substantial reduction in taxes” then he will not be classified as a “specified expatriate” and the new and additional draconian expatriation penalty will not apply."

The proposed ban from re-entering the US is an enforcement of an existing law, which has never been enforced since it was implemented in 1996, writes Virginia.

"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."

The same Senator Reed said in a statement earlier this month: “American citizenship is a privilege.

“But it seems that a privileged few are trying to game the system by accumulating wealth and benefiting from the greatness of the United States and then renouncing their citizenship to avoid paying their fair share of taxes.

“They are welcome to leave our country, but they should not be welcomed to return without playing by the rules and paying what they owe."

The proposed amendment reinstates the inadmissibility of specified expatriates, however, leaves space for an escape route.

"The Secretary of Homeland Security may grant waivers to certain “specified expatriates” on the issue of inadmissibility if the individual satisfies requirements relating to his tax status “such as a tax or penalty equal to the loss in tax revenue to the United States” as a result of the individual’s loss of citizenship," writes Virginia. 

Virgina La Torre Jeker JD is a Dubai-based American tax specialist blogging about US tax issues 

[Image via Shutterstock]