The GPO has just published the full text of Schumer’s proposed Ex-PATRIOT Act (S. 3205). The act creates the new category of “specified expatriates” (a subset of 877A(g)(1)’s “covered expatriates”) and gives rules for determining who is a “specified expatriate”. It then imposes a tax of 30% on U.S. capital gains of “specified expatriates”, and makes them inadmissible to the United States.
(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.
(I wrote a Wikipedia article about the Reed Amendment for those who would like more background.) The plain language of the Reed Amendment alone (without delving into the legislative intent) would not seem to make relinquishers inadmissible. In contrast, the Ex-PATRIOT Act retains the title of that paragraph of the INA, but changes the body significantly: Timmy Geithner rather than Eric Holder would be empowered to exclude people from the U.S., and it would no longer matter whether you gave up U.S. citizenship by relinquishment or renunciation:
(i) IN GENERAL- Any alien who is determined by the Secretary of the Treasury to be a specified expatriate is inadmissible.
(ii) SPECIFIED EXPATRIATE- In this subparagraph, the term `specified expatriate’ has the meaning given that term in section 871(a)(2)(C) of the Internal Revenue Code of 1986.
(iii) NOTIFICATION OF EXCEPTED INDIVIDUALS- The Secretary of the Treasury shall notify the Secretary of State and the Secretary of Homeland Security of the name of each individual who the Secretary of the Treasury has determined is not a specified expatriate under section 871(a)(2)(C)(ii) of the Internal Revenue Code of 1986.
The other crucial part of the act is the definition of a “specified expatriate”
(C) SPECIFIED EXPATRIATE-
(i) IN GENERAL- For purposes of subparagraph (A), the term `specified expatriate’ means, with respect to any taxable year, any covered expatriate (as defined in section 877A(g)(1)) whose expatriation date (as defined in section 877A(g)(3)) occurs after the date which is 10 years prior to the date of the enactment of this subparagraph.
(ii) EXCEPTION- An individual shall not be considered a specified expatriate if such individual establishes to the satisfaction of the Secretary that the loss of such individual’s United States citizenship did not result in a substantial reduction in taxes.
This is a much tighter standard than the old procedure (I believe prior to 2004) under which former citizens could apply to the IRS for a ruling that they had non-tax reasons for giving up citizenship (see here for details). Instead it presumes you are guilty, and the only way to prove your innocence is to demonstrate that your tax bill did not go down. There are many countries with lower tax rates than the U.S. which also do not permit dual citizenship. An American who settled in one of those countries, achieved career or entrepreneurial success (or even just bought a house in the middle of a downturn and then waited a decade while real estate went up and the U.S. dollar went down), and then naturalised so he could vote on issues in the place where he lived, could become a permanent exile from the U.S.
Furthermore, the Ex-PATRIOT Act provides no exception for naturalised citizens returning to their country of origin after retirement, Americans who married non-Americans and settled abroad, or any of the other dozens of legitimate non-tax reasons that people would leave the United States. The only exceptions are those provided in 877A: people who were dual citizens at birth, or people who renounced U.S. citizenship within six months of turning 18 and did not live in the U.S. for more than 10 years.
And let’s not forget that “covered expatriates” are not just rich people. There is a third category of covered expatriate which everyone forgets about, besides those meeting the asset test or tax liability test: “877(a)(2)(C) covered expatriates”, ordinary emigrants who missed out on some of the IRS’ countless forms in their years of leading ordinary financial lives overseas, and thus cannot honestly check the Form 8854 box certifying that they have complied with all their tax obligations in the past five years. They too could become “specified expatriates” at Geithner’s whim.