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.
The first thing to note about the Ex-PATRIOT Act is that it would close the Reed Amendment “relinquishment loophole”. The 1996 Reed Amendment added INA 212(a)(10)(E), which 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.
Hang ’em high!
Hang who high? Schumer et al?
BTW – how French this all is …… including the part about guilty until proven innocent ……
Looks like Schumer et al want to make Washington the new Kremlin and the IRS the new KGB …. methinks that this is a little late in the the cycle of US power however …. world power is moving away from the US rapidly and will be forced to move even faster by this nonsense. Of course the world still needs to escape the slavery of Fabianism.
Dark times indeed. Also seems unconstitutional. Seems vindictive. Hopefully will not pass.
At least it seems that anyone who had less than two million who met the five years of required compliance and with little or ideally zero taxes owed could still have given up their citizenship safely.
Though I could also see how in a roundabout way, they’re pushing outspoken critics into a corner as they could be accused of renouncing or relinquishing to avoid US tax liabilies. It thus seems to go against constitutional rights to free speech.
I also agree that the professionals have a vested interest in maintaining the complexities so that we’re forced to continue being dependent on them for compliance. The whole thing sickens me. But at least I don’t have children to worry about leaving a legacy to, so it’s probably not going to be so tragic if I continue having to budget $2000-3000 in ongoing annual accounting costs. However, I resent this imposition very much.
Thanks for this. Well, so long US. It was nice knowing you.
@Petros, at least you have stuck by your principles and I will always admire that.
All expats are being hung high. Its seems to be the American way.
The truly bizarre aspect of the proposed legislation is that the only people to whom it will apply are persons who might actually have paid the expatriation tax of 877A.
Those who expatriate for any reason (tax or otherwise) but are not “covered expatriates” pay nothing if they file their 8854 and will be welcomed as a future visitor/investor to the US.
Those who file the form 8854 but whose wealth or income causes them to have to fork over a pile of money in §877A taxes as a result of expatriation, will be banned from the US for their trouble and will have any incentive to invest in the US eliminated.
That being the case, why would such a person bother to file the 8854 and pay the expatriation tax?
Is Charles Schumer the Senior or Junior Embarassment from the state of New York?
The only real consequence I see here for non-wealthy expatriates is that it complicates the otherwise very attractive strategy which I call Out in a Blaze of Glory – filing an 8854 saying that you haven’t filed five years of tax returns, but that your net worth is below $636,000, so farewell Uncle Sam.
Chuck Schumer is a great luminary and probably had Bruce Ackermann as his professor.
@broken man, Tim once did the numbers on those who file 8854. It was a fraction of the renunciants. Now I suppose that about 50% of those who renounce will not file 8854 and be banned forever. Or they file it, and get FBAR fines for not filing FBAR. These are paper traps to catch the Expat which is fair game in America.
The Fifth Amendment 8854 may not be allowed. I am probably kiboshed–add to it that under the Reed Amendment I am banned in any case.
But of course, I’ve haven’t paid tax or owed any tax. This is the law of unintended consequences. I won’t be doing my 10K vacations in the US anymore, like the bi-annual trek to Maui.
Besides the absurdity of it all, I already identified at least one major flaw in this bill. The way it is written, a specified expatriate includes a former long-term permanent resident, but the exception only mentions former US citizens. The section about inadmissibility specifically mentions “former citizens” in the title, but the text mentions specified expatriates, which would include also former long-term residents. Schumer seems to be angry at those who renounce citizenship, but the way he wrote the bill, the same punishment would apply to former residents. I doubt that Schumer has thought about this aspect at all.
@Petros – Who needs Maui? Better food in Mexico, and your money goes further.
For someone who is an uncovered expatriate (on several redundant grounds) I don’t see the down side of filing an 8854.
@broken man I don’t need Maui. I’m just saying that these colossal luminaries running the United States are actually going to hurt the tourism industry as a first order of business. This is the law unintended consequences. They try to collect a few million extra taxes and they lose billions in foreign spending in the US. The snow birds are going to sell their condos. Then they too will be banned from the United States.
Seems to me the direction is simple. If you are a specifed expat, don’t invest in the United States and avoid having to pay the 30% on future capital gains.
This is what happens when government officials cease to see their citizens as people and only as $.
Would capital gains from US stocks held in a foreign brokerage account still be considered US-sourced though? After all, many multi-national companies trade on the US stock market.
This is going to sound unPCish, maybe somewhat inaccurate and definitely metaphorically mixed up but I’m feeling frustrated and angry and this is what spews out when I get this way. Yesterday was sunshine and roses and today is rain clouds and SOSes (I’ll explain later).
Pity the USer trying to live a life outside the US prison wall but still shackled with an IRS ankle bracelet. You, the red, white and blue square peg, have to find a way to shapeshift into the round black hole with the bottomless penalty pit below which has been carelessly and complexly crafted by the IRS. Or you can try to escape by shedding your stars and stripes and then accept that you might be banished forever from the country of your birth. You must live an abnormal financial life now because of the IRS. If you keep your banking simple (providing you are allowed to even have an account) and you keep your balances low, you lose the opportunity to maintain a financial safety net or save for retirement. And forget about having joint accounts with your nonUSer spouse or serving as treasurer for a local charity.
Lose your USer status and exceed an arbitrary monetary threshold and you might also lose your freedom to travel to the good ole USA, thanks to the SOSes (Stuck On Stupids). You will look with envy at your neighbour who is not burdened with US personhood and lives a normal financial life and can visit the USA anytime. If you ditch your USer status and you have been stabbed in the back by the SOSes expat putdown bill maybe you can persuade your nonUSer neighbour to do a temporary identity swap with you just so you can visit your family and friends in the USA now and then and of course you really do want to drop reams of tourist dollars there (sarcasm). Or I guess you can join the ranks of criminals and spies and desperately seek out a false passport. Would it be too much to ask this bizzarro world to stop a second, because I really, really do want to get off.
@Mona: “Would capital gains from US stocks held in a foreign brokerage account still be considered US-sourced though?”
I wonder if anyone really knows for sure. I’ve certainly never seen a good definition of “US-sourced”. What about an EU domiciled S&P500 tracker ETF listed on the LSE? A global unit trust fund domiciled in the EU and which invests in part in US stocks? American companies listed on non-US exchanges via GDRs? And on. And on. And on.
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The persecution of ex-pats continues with the door now officially hitting many of us in the arse.
The Democrats have shown their un-American totalitarian socialist faces.
I am so glad I cut their s#!++y citizenship loose.
@Shadow, “…the way he wrote the bill, the same punishment would apply to former residents. I doubt that Schumer has thought about this aspect at all.”
Maybe, but I’m not so sure. When it comes to “expatriation”, congress has long equated people with as little as six years and two days of US permanent residency with lifelong US citizens. (With, of course, no such equivalence whatsoever when it comes to voting or other benefits of citizenship…)
Where this could really smart is when a green card holder loses US permanent residency involuntarily because they have to live outside the US for a year or two. All the disadvantages of the “exit tax”, the permanent bar on re-entry, and a decade of further servitude to US capital gains taxes for something as simple as, say, having to spend time looking after a sick relative in their home country.
I suspect US permanent residents who do not wish to become US citizens in future and settle in the US forever are probably gearing up to leave the US even as I write. Much more so even than HEART, Ex-PATRIOT forces an early and irrevocable “all or nothing” decision on green card holders. Some will choose “all”, but others will choose “nothing”. The net loss is the US’s. The “all”s would have stayed anyway. The “nothing”s however might have stayed at least a little longer. If not for the anti-expat tax laws, that is.
A real disincentive to emigrating to the US. The xenophobic will love it.
@All, I’d like to propose a new member for the Hall of SHAME, Stephen J Dunn. Lawyer, representing entrepreneurs, representing taxpayers in IRS examinations, admirer of Carl Levin. Wrote a perfectly awful piece (in my opinion) starting with Saverin, and then veering off into problems with becoming Canadian and swearing an oath to the queen, etc. drivel drivel drivel
http://www.forbes.com/sites/stephendunn/2012/05/20/relinquishing-u-s-citizenship/2/
@all- even as the U.S. government tells its renunciating expats and former Green Card holders that they can never come back, they government is trying to bring in more potential victims through the front door:
http://blogs.wsj.com/washwire/2012/05/22/plan-for-u-s-entrepreneurs-visa-moves-forward/tab/comments/#comment-1380521
@outragedcanadian, that Forbes article is really peachy, isn’t it? It looks like it was penned by a fifth grader. Or perhaps it is “national smoke-a-bowl-of-crack week” in the US at the moment.