RENOUNCING US CITIZENSHIP FOR TAX PURPOSES

It is an understatement that US citizens living abroad are subject to a myriad of reporting requirements, such as Treasury Form TDF 90-22.1 (FBAR), IRS Form 8939 (FATCA), and IRS Form 3520 (foreign trusts).  Worse yet, the severe penalties for failure to comply are almost beyond belief.  For example, a US citizen living in Canada who fails to file Form TDF 90-22.1 can be fined $10,000 per unreported account per year — even if he or she owes no US income tax.

The onerous US reporting requirements have caused many expatriates to consider giving up their US citizenship or residency (green card).  Many of these individuals have lived overseas for many years and have no plans to return to the US.  In their view, the only benefit to retaining US citizenship is the ease of entering or leaving the US.

The mechanics of renouncing US citizenship or residency are relatively straightforward, as described below.

Renouncing Citizenship

A discussion about the procedure for renouncing US citizenship can be found in the Foreign Affairs Manual of the US Department of State (7 FAM 1260-1268), which is posted at http://www.state.gov/documents/organization/115645.pdf.  Mechanically, the individual must make an appointment with the US consulate, complete and sign Forms DS 4079, 4080, 4081 and 4082 and relinquish the individual’s passport.  The individual will then be furnished Form DS 4083, Certificate of Loss of Nationality of the United States.

Another note of caution: If the Department of Homeland Security determines that the renunciation is motivated by tax avoidance, the former citizen will be ineligible to receive visas and ineligible to be admitted to the US.  See 7 FAM 1266 and 8 USC § 1182(a)(10)(E).

Renouncing Permanent Residency

To relinquish permanent residency (i.e., a green card), the individual must meet with the US consulate and provide a signed Form I-407 and surrender his or her green card.

US “Exit Tax”

A collateral consequence of giving up US citizenship or residency is that your US tax compliance will be scrutinized, and you may be liable under Code Section 877A for an “exit tax.” (Canadians will note that the US exit tax works in a manner similar to the Canadian deemed disposition rules.)   In general, Section 877A applies only if the former US person (i) has a net worth over $2 million, (ii) paid US income taxes averaging over $147,000 for the prior five years, or (iii) does not certify on IRS Form 8854 that the person complied with all US tax obligations for the five prior years. The tax is imposed on net unrealized appreciation in excess of $636,000.  Mechanically, a US person leaving the US must file IRS Form 8854 along with the individual’s final income tax return.  Until Form 8854 is filed, the taxpayer must continue filing US tax returns on worldwide income — even if citizenship or residency has been renounced for immigration purposes.  It warrants noting that Form 8854 cannot be filed until the taxpayer is in full compliance on prior years.  (On the Form 8854, the taxpayer must certify under penalties of perjury that all returns have been filed and all taxes have been paid for the prior five years.)

In conclusion, renouncing US citizenship may make sense for individuals who no longer have any connection with the US.  But there are various tax and immigration “side effects.”  Thus, before you take that momentous step, you should consult experienced immigration and tax counsel.

Leave a Reply

Your email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>