The increased popularity of renouncing your U.S. citizenship to avoid potential tax liabilities has resulted in a surprising fee hike by the U.S. Department of State. Although the hike is not unexpected, the fee increase of fivefold is. Sought to be a deterrent to discourage dual citizens from renouncing their U.S. citizenship, the fee increased from $450 to $2,350 on September 4, 2014.
By way of background, in 2012, about 932 people renounced their U.S. citizenship. That number more than tripled in 2013 with approximately 3,000 expatriations. And that number is expected to be exceeded by the end of 2014. One reason for the increase in expatriation cases is the vigorous enforcement by the IRS of the Foreign Account Tax Compliance Act (FATCA). FACTA, enacted to prevent U.S. taxpayers from being able to conceal assets held in offshore accounts and shell corporations, is a federal law that requires U.S. citizens, including individuals who live outside the U.S., to report their financial accounts held outside the U.S. The law imposes a reporting obligation to the IRS on foreign financial institutions regarding withholding account identification, and documentation relevant to their clients and customers.
To begin with, under section 349 of the Immigration and Nationality Act (“INA”), a person can lose their citizenship by formally renouncing his or her nationality before a diplomatic or consular officer of the United States in a foreign state. The process for a person to renounce his or her citizenship is set forth in the Foreign Affairs Manual.
As explained in that manual, a person seeking to renounce his or citizenship must (i) appear at a diplomatic or consular office; and (ii) read, understand, and sign a Statement of Understanding Concerning the Consequences and Ramifications of Relinquishment or Renunciation of U.S. Citizenship (Form DS-4081) and Oath/Affirmation of Renunciation of Nationality of United States (Form DS-4080). Once a person completes those acts, the consular officer will issue a Certificate of Loss of Nationality. That certificate, along with the oath of renunciation, will be forwarded to the State Department for approval. The State Department must then approve the consular officer’s issuance of the Certification of Loss of Nationality before the renunciation is effective.
Non-minor children can also renounce their American citizenship following this process. But it may be more difficult for the minor child to do so. That is because the central issue in determining whether a person has renounced his or her citizenship is whether the person understood the implications of renunciation, and as a consequence, the State Department generally does not permit minors (persons under the age of 18) to renounce their citizenship or their parents to renounce citizenship on their behalf. Before the State Department will issue the oath of renunciation to a minor, the minor must convince the diplomatic or consular officer that the minor (i) fully understands the nature and consequences of the oath of renunciation; (ii) is not subject to duress or undue influence; and (iii) is voluntarily seeking to renounce his or her citizenship. If the minor child is able to convince the diplomatic or consular officer of those things, then he or she will be able to renounce his or her citizenship.
While voluntary expatriation—renunciation of citizenship—may have tax advantages, it has significant negative consequences as well. A person who renounces his or her citizenship may not be able to travel to the United States. Under section 212(a)(E)(10) of the INA (known as the Reed Amendment), any former citizen who renounced his or her citizenship to avoid taxes may not be admitted into the United States.
The Internal Revenue Code provides that a former citizen has renounced his or her citizenship for tax avoidance purposes if the former citizen’s tax liability or net worth exceeded certain amounts on the date of expatriation, unless the former citizen qualifies for one of two exceptions. The first exception is for dual citizens. A person does not fall under the purview of the Reed Amendment if the person (i) became a United States citizen and a citizen of another country at birth and remains a citizen of the other country; and (ii) does not have substantial contacts with the United States. A person does not have substantial contacts if the person (i) was never a resident of the United States; (ii) never held a United States passport; and (iii) was not present in the United States for more than 30 days during any of the 10 years preceding the person’s expatriation. The second exception is for minor children. Minor children do not fall within the purview of the Reed Amendment if (i) the child became a citizen of the United States at birth; (ii) neither of the child’s parents was a United States citizen at the time of the child’s birth; (iii) the child was expatriated before the child reached 18½ years of age; and (iv) the child was not present in the United States for more than 30 days during any of the 10 years preceding the person’s expatriation.
As a practical matter, an individual’s renunciation of their American citizenship will most likely not prevent them from visiting the United States for limited periods of time. But clients should be aware that section 212(a) of the INA does, on its face, bar admission of former citizens who renounced their citizenship for tax avoidance purposes, and there is no guarantee that the Department of Homeland Security will decline to enforce or grant the individuals a waiver from the Reed Amendment. Finally, because renunciation is the most unequivocal way in which a person can manifest an intention to relinquish U.S. citizenship, those contemplating a renunciation should understand that the act is irrevocable, except as provided in 8.U.S.C. §1483, and cannot be canceled or set aside absent successful administrative judicial appeal.
For this reason, clients should seek the advice of competent immigration and tax counsel before considering navigating this process.