Someone strongly disagreed with my conclusion (Reed cannot be applied) due to worry of dealing with border guards. However, if a border guard were to claim he/she was denying one entry based upon a perception of Reed, such an action would not constitute an application of the Reed Amendment but an inaccurate assessment by an overzealous/ignorant border guard. This reminds me of something I have heard John Richardson say many times; that there will be a solution to one’s compliance predicament but that it won’t likely be a “good” one or one to like. IOW there are no perfect (or necessarily likeable) solutions. If any US govt employee (or compliance or media person for that matter) misapplied the Reed Amendment, that does not constitute wrong conclusions or information in this post. And it certainly does not suggest I am “misleading.” The DHS has indicated Reed cannot be applied. The State Dept has said it can’t apply it. An IRS counsel could not draft regulations and says it cannot be applied. If one thinks a compliance person or a misguided govt official or a media person should be believed over all these, then what more can be said?
If one needs a “stock answer” to a border guard, the simple answer to “Did you renounce for tax purposes” is “No.” If one feels the need to say more something like “I’ve lived in/been a dual citizen for x-number of years and simply feel more CDN/French whatever.” Something as neutral as possible. A zealot would still see such a statement as treason. There are no perfect solutions. I really dislike adding this because the whole point of this post is to give expats the information to STOP that reaction of “but what if”..IOW, the fear factor. I am NOT writing this to diss any firm, govt agency etc (even though I will not hide my anger or disgust at how this is abused). However, I am responding to the criticism mentioned above. FWIW, I hope this helps.
Stop! Enough Already!! The Reed Amendment is a Myth!!!
Homeland Security Enforced Reed Amendment Twice in 14 Years Banished Two Ex-Citizens Who Mentioned Tax Motivations
Who Voted For the Reed Amendment in 1996
BiPartisan Attempts to Exile Former U.S. Citizens
No civilized country would ban Eduardo Saverin
No would-be US renunciant/relinquisher should ever believe claims about Reed Amendment preventing ability to enter the U.S. 1/11
— Patricia Moon (@nobledreamer16) June 2, 2016
NO ONE has been stopped at the border and refused entry because a CBP agent suspected they renounced “for tax purposes.” There is NO CONNECTION between an expatriate’s tax liability and a renunciant’s intent. NONE! Once again, I see a major firm bringing up the idea of the Reed Amendment as a possible consequence of expatriation.
Individuals who choose to renounce their US citizenship need to be aware of the potential negative consequences of doing so and take steps to avoid them. The negative consequences can include the imposition of the US exit tax, permanent inadmissibility from the United States, and the imposition of the inheritance tax.
Notice the lack of footnote for the phrase concerning permanent inadmissibility. A post on the blog of their website acknowledges that this is a remote possibility-only if you stated that was your reason for renouncing.
However, in the practical application of the original Reed Amendment, the renouncing individual is rarely denied re-entry to the US unless he confesses during his exit interview to be renouncing for tax avoidance purposes. Needless to say, very few expatriates renouncing their US citizenship confess to having tax avoidance purposes. Consequently, identifying those expatriates who renounce for tax avoidance purposes is nearly impossible. Congress knows this and is attempting to tighten the screws on the renunciation program through the proposed Reed-Schumer Amendment.
Just look at the language used; “confesses at his exit interview.” In spite of this, we continue to see this unreasonable emphasis which does nothing but frighten people. I have no argument that it is very likely Congress will try again/make this worse. But is this the right way to present this to people just finding out about this? This has become my number one irritation and I will try to address it again. The point of this post is to debunk the long-standing, commonly mis-communicated information regarding the Reed Amendment.
- you can/will be turned away at the border if you are an expatriate
- there is information sharing between the IRS and other agencies
- the consulate will try to determine whether or not you are renouncing for tax purposes
- once you renounce you cannot go back
- while CLNs may be forwarded to the other 3-lettered agencies, NO TAX UNFORMATION may be shared by the IRS; a border guard DOES NOT have access to this information
- The lack of regulations makes it impossible for the State Department or the DHS to determine tax liability as motive for renouncing
- the IRS no longer makes rulings on whether or not an expatriate’s intention to renounce is tax-motivated.
- Most consular officer routinely issue visas to former U.S. citizens
The Congress has created laws that are in conflict with each other, the end result being, that the Reed Amendment is completely useless unless one chooses to state expatriation is due to tax purposes. Our expatriate movement is now almost five years old. Since that time, we have managed to challenge a lot of misinformation put out there by the media, the compliance industry, etc. This is another one to throw on the pile.
U.S. Government Actions Against Expatriates
The United States, ironically enough, has a long history of using citizenship as a way to punish those it deems “ungrateful,” “unpatriotic” etc. Putting aside some of the older versions of this idea, the modern beginnings of punishing those who expatriate began with President Kennedy and the Foreign Investors Tax Act of 1966. This Act created I.R.C. § 877 and allowed some U.S.-source income of former citizens to be taxed for up to 10 years following the date of their loss of citizenship. There were no amendments to § 877 until President Clinton’s time in office; at this point, things began to change rapidly and drastically for expatriates.
The Reed Amendment formed part of the Illegal Immigration Reform and Immigrant Responsibility Act of 1996.Enacted on September 30, 1996, it was written by Senator Jack Reed (D-RI)The bill was a response to wealthy U.S. citizens expatriating who then wished to return to live in the United States. Once out of the country, any non-citizen could avoid taxes on capital gains and estates. A well-known example is that of this was Kenneth Dart owner of Dart Container, who had become a citizen of Belize who then attempted to obtain a diplomatic visa to serve as Belize’s new consul in Florida. He offered his own residence to serve as the consulate (while the rest of his family was still living there). Had he succeeded, as a foreign diplomat, he would have been exempt from any obligations to the IRS.
U.S.C. § 1182(a)(10)(E) / INA 212(a)(10)(E) 8 U.S. Code § 1182 – Inadmissible aliens
(a)Classes of aliens ineligible for visas or admission Except as otherwise provided in this chapter, aliens who are inadmissible under the following paragraphs are ineligible to receive visas and ineligible to be admitted 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.
According to Michael Pfeifer, a tax lawyer with Caplin & Drysdale a difficulty ensued in determining whether the Reed Amendment would apply to all those renouncing U.S. citizenship under INA 349 a 1; intending to lose U.S. citizenship by performing an expatriating act.
HIPAA In addition to other legislation being considered to apply to expatriates, President Clinton proposed an expatriation tax in his 1996 budget in order to close the loophole.The Health Insurance Portability and Accountability Act enacted August 21, 1996; Title V amends provisions of law relating to people who give up United States citizenship or permanent residence by:
- expanding the expatriation tax to be assessed against those deemed to be giving up their U.S. status for tax reasons, (U.S. Code § 877 )and
- making ex-citizens’ names part of the public record through the creation of the Quarterly Publication of Individuals Who Have Chosen to Expatriate (U.S. C. § 6039G – the “Name & Shame List”)
U.S. Code § 877 - Expatriation to avoid tax a)Treatment of expatriates
(1)In general Every nonresident alien individual to whom this section applies and who, within the 10-year period immediately preceding the close of the taxable year, lost United States citizenship shall be taxable for such taxable year in the manner provided in subsection (b) if the tax imposed pursuant to such subsection (after any reduction in such tax under the last sentence of such subsection) exceeds the tax which, without regard to this section, is imposed pursuant to section 871.
(2)Individuals subject to this section This section shall apply to any individual if—
(A)the average annual net income tax (as defined in section 38(c)(1)) of such individual for the period of 5 taxable years ending before the date of the loss of United States citizenship is greater than $124,000,
(B)the net worth of the individual as of such date is $2,000,000 or more, or
(C)such individual fails to certify under penalty of perjury that he has met the requirements of this title for the 5 preceding taxable years or fails to submit such evidence of such compliance as the Secretary may require
U.S. C. § 6039G Information on individuals losing United States citizenship (d)Information to be provided to Secretary Notwithstanding any other provision of law— (3)the Federal agency primarily responsible for administering the immigration laws shall provide to the Secretary the name of each lawful permanent resident of the United States (within the meaning of https://www.law.cornell.edu/uscode/text/26/7701 section 7701(b)(6)) whose status as such has been revoked or has been administratively or judicially determined to have been abandoned. Notwithstanding any other provision of law, not later than 30 days after the close of each calendar quarter, the Secretary shall publish in the Federal Register the name of each individual losing United States citizenship (within the meaning of section 877(a) or 877A) with respect to whom the Secretary receives information under the preceding sentence during such quarter.
The Reed Amendment is unenforceable
§ 6103 prohibits the disclosure of “return information,” by the IRS, subject to criminal prosecution under Title 18 of the U.S. Code. (a)General rule Returns and return information shall be confidential, and except as authorized by this title—
- no officer or employee of the United States,
- no officer or employee of any State, any local law enforcement agency receiving information under subsection (i)(1)(C) or (7)(A), any local child support enforcement agency, or any local agency administering a program listed in subsection (l)(7)(D) who has or had access to returns or return information under this section or section 6104(c), and
- no other person (or officer or employee thereof) who has or had access to returns or return information under subsection (e)(1)(D)(iii), subsection (k)(10), paragraph (6), (10), (12), (16), (19), (20), or (21) of subsection (l), paragraph (2) or (4)(B) of subsection (m), or subsection (n),shall disclose any return or return information obtained by him in any manner in connection with his service as such an officer or an employee or otherwise or under the provisions of this section. For purposes of this subsection, the term “officer or employee” includes a former officer or employee.
The Attorney General was never authorized to receive the information necessary from the IRS.
Willard Yates -why Reed Amendment is unworkable. It’s called section 6103 of the IRC.” https://t.co/LHKvlBdeHY 2/11
— Patricia Moon (@nobledreamer16) June 2, 2016
- Customs (now Customs and Border Protection) would have been required to check the names of all aliens appearing at U.S. ports of entry against the list of former United States citizens published by the IRS under HIPAA.
- Those who were identified as former U.S. citizens would be required to sign a waiver of their rights under § 6103;
- Customs would then fax the waiver to the IRS so that the IRS could provide Customs with tax information relating to the former citizen, in particular whether the former citizen met the asset thresholds of 26 U.S.C. § 877(a)(2), and any private letter ruling regarding whether or not the former citizen had tax motivations for giving up U.S. citizenship.
- only one IRS agent would have been assigned to handling such requests; no IRS agent would be available on a weekend
- If one arrived on a weekend, he or she might have to be detained until Monday in order for border agents to make the required determination of tax motivation
Important recap: I.R.C. 6103 sets up a situation where there is no way for IRS to give info to CBP or later, DHS; nor is there any way for the Attorney General to receive the information in order to make a determination.
Also, The Joint Committee on Taxation Report of 2003 was making recommendations for what would become the tax provisions in the AJCA of 2004/creation of the “Tax Citizenship” The following is an interesting insight into how they viewed this to work:
This recommendation, like present law, retains an income tax liability test and a net worth test, but it departs from the present-law approach in two significant respects. First, the objective monetary thresholds would become the general rule for conclusively determining whether a former citizen or former long-term resident would be subject to the alternative tax
regime. The monetary thresholds would serve as a proxy for tax motivation and, unlike present law, no subsequent inquiry into the taxpayer’s intent would be required or permitted in any case. The ruling process of present law would be eliminated. Second, because this objective monetary standard would be less flexible than present law, the present-law amount for the net-worth threshold would be increased.
I don’t know how much more clearly it can be pointed out, that the government intended to make the actual determination of “renouncing for tax purposes” a clearly objective test that did not require “interpretive” treatment. And by doing so, established an alternative way (i.e., to the Reed Amendment) to deal with those who renounced for tax purposes.
Other Difficulties in Enforcing the Reed Amendment
The Department of Homeland Security In 2014, Senator Reed directed DHS to report
on the steps it was undertaking to enforce the Reed Amendment, including a schedule for issuing guidance or regulations
Some comments from the report:
“Interagency coordination between DHS and DOS operations in this area is improving continuously, but there currently are no advisable options for altering enforcement of the inadmissibility ground against persons who do not affirmatively admit to renouncing their U.S. citizenship for the purpose of avoiding U.S. taxation.”
“even if a renunciant were to waive Treasury confidentiality provisions, such that DHS and DOS might review specifics of an individual’s Internal Revenue Service filings, DHS lacks the expertise and resources to review tax filings meaningfully or engage in complicated tax liability analysis, involving both domestic and foreign tax law to determine whether a section 212(a)(10)(E) inadmissibility presumption could be rebutted.”
Interestingly, DHS makes the observation that it would be difficult to rely on the imposition of such a tax as the basis for determining that a person who is subject to such a tax subjectively renounced citizenship for tax avoidance purposes, as section 212(a)(10)(E) requires, particularly if an individual in fact complied in paying any liability resulting from the expatriate tax provisions
According to the DHS report, only two individuals were denied admission to the United States on the grounds of the Reed Amendment between 2002 and 2015 because they stated they had renounced for tax purposes. Another five individuals were thought to possibly be inadmissible; one who renounced pre-1996 who was denied submitted a legal brief to CBP & the decision was reversed.
The Department of State also has no regulations to proceed from and is unable to determine whether a renunciation is based upon avoidance of tax.
INELIGIBILITY BASED ON OTHER ACTIVITIES
9 FAM 302.10-6 FORMER CITIZENS WHO RENOUNCED CITIZENSHIP TO AVOID TAXATION – INA 212(A)(10)(E)FAM 302.10-6(B)(2) Consular Officer’s Role
The role of the Department and the consular officer is very limited in implementing this ground of inadmissibility. Unless the applicant appears as a hit in the lookout system revealing a finding of inadmissibility under INA 212(a)(10)(E), you must assume the applicant is eligible.
9 FAM 302.10-6(D)(2)
(U) Waivers for Nonimmigrants
For those individuals seeking to visit the United States temporarily, however, this ground of inadmissibility can be waived. You should recommend non-immigrants for an INA 212(d)(3)(A) waiver. The waiver is discretionary and applications are evaluated on a case-by-case basis. (See FAM 305.4-2).
Eugene Chow of Chow & King Associates states that in spite of the Reed Amendment, consular officers “routinely issue visas” to ex-U.S. citizens, and the State Department’s Office of the Legal Adviser has reversed denials based on the Reed Amendment after being made aware of them.
ATTEMPTS TO STRENGTHEN THE REED AMENDMENT
THE BAUCUS-BINGAMAN-BURNS AMENDMENT – JUNE 2002
Rewrote the 9 U.S.C. 1182 (a) (10)(E) replacing “expatriating for tax purposes” to ”not in compliance with expatriation revenue provisions” (new versions of sections 877 and 2801)(relating to expatriation). It included changes that would allow IRS to release taxpayer information to the Attorney General. It did not pass into law.
THE SAFER ACT JULY 2002
Broadened the entry ban in 8 U.S.C. § 1182(a)(10)(E) to cover all renunciants regardless of whether or not they had tax avoidance motivations. Did not pass into law.
THE AMERICAN JOBS CREATION ACT (AJCA) 2004
In 2004, the American Jobs Creation Act removed the issue of intent; established new notification requirements as well as new thresholds resulting in a second type of citizenship (the “Tax Citizen”). Thus, the IRS no longer makes rulings on whether or not an expatriate’s intention to renounce is tax-motivated.
Whole idea of the mark-to-market tax section 877A was 2 eliminate “motive” element of prior version of S 877 https://t.co/LHKvlBdeHY\ 5/11
— Patricia Moon (@nobledreamer16) June 2, 2016
THE HEROES EARNINGS ASSISTANCE AND RELIEF TAX (HEART ACT) 2008
Included a new expatriation tax. As Mr. Yates pointed out, “The whole idea of the mark-to-market tax under section 877A was to eliminate the “motive” element of a prior version of section 877. It did not include the inadmissibility or tax information privacy waiver provisions.
See: Notice 2009-85, Guidance for Expatriates Under Section 877A
Since 2000, the first year for which the State Department’s Report of the Visa Office included the relevant statistics, no consular officer has found any visa applicant ineligible for entry into the United States on the grounds of the Reed Amendment. However, in 2015, a consular officer in Barbados refused to issue a visa to Roger Ver (“Bitcoin Jesus”) on the grounds he did not demonstrate non-immigrant intent (i.e., the officer suspected Mr. Ver was attempting to return to the United States to live). Some speculation occurred whether it was really due to the Reed Amendment but legal sources stated the known problems of enforcement. Mr. Ver received a visa later from the Embassy in Tokyo.
THE EX-PATRIOT ACT
In May 2012, Facebook co-founder Eduardo Saverin renounced his U.S. citizenship which outraged Senator Reed . He wrote to DHS director Janet Napalitano urging her to prevent him from re-entering the U.S. It should be noted that Mr. Saverin completed the entire process properly including paying a very large amount of Exit Tax. He would be a perfect example of DHS report’s observation that it would be difficult to ascertain one had renounced for tax purposes when “an individual in fact complied in paying any liability resulting from the expatriate tax provision.” Senator Chuck Schumer (D-NY) knew the Reed Amendment could not accomplish this so along with Senator Bob Casey (D-PA) he created an act that would make former U.S. citizens inadmissible to the United States and charge them 30% capital gains tax on their U.S. investments. It died in committee. In 2013, Reed along with Schumer & Casey tried to attach the Border Security, Economic Opportunity, and Immigration Modernization Act of 2013 as an amendment to a new bill but failed both in the Senate and later in the year, the House.
Expats continue to be threatened with exile as a way to prevent them from leaving “due to tax motivation.” It is important that all members of the tax compliance community understand the interplay of all these factors and stop contributing to the confusion that exists regarding The Reed Amendment. There is endless fear that even without the Reed Amendment, the U.S. agencies will become digitally proficient and connected, thus a risk at crossing the border. Similarly, there is terror that the State Department will apply all sorts of tax-oriented questions, require returns and so on. Here is where things stand:
SHARING OF INFORMATION BETWEEN AGENCIES
INTERAGENCY COORDINATION AND REPORTING REQUIREMENTS (CT:CON-611; 11-12-2015)(Office of Origin: CA/OCS/L)
7 FAM 1241 INTRODUCTION TO INTERAGENCY COORDINATION AND REPORTING REQUIREMENTS(CT:CON-407; 06-29-2012)
a. The Bureau of Consular Affairs (CA) coordinates closely with various offices in the Department of State and other Federal agencies, and with U.S. States, on issues related to expatriation. Much of this interagency coordination is mandated by Federal law and policy guidelines. CA/OCS/L provides copies of approved Certificates of Loss of Nationality (CLNs) to the following Federal agencies pursuant to statutory requirements:
(1) U.S. Citizenship and Immigration Services (USCIS);
(2) Federal Bureau of Investigation (FBI); The FBI is required to add names of expatriated citizens to the National Instant Criminal Background Check System (NICS); this list is considered to be much more accurate than the “Name & Shame List.”
(3) Internal Revenue Service (IRS)
(4) In addition, loss-of-nationality cases involving threats against the United States or U.S. officials may also be brought to the attention of the U.S. Secret Service
Of special note: regarding the information requested/discussed at a renunciation interview: Consular officers no longer obtain tax information from renunciants as previously required by the Health Insurance Portability and Accountability Act of 1996. The American Jobs Creation Act of 2004 (AJCA) made substantial changes to both the tax Section 877 (26 U.S.C. 877) of the Internal Revenue Codes and information reporting rules 26 U.S.C. 6039G that apply to individuals who expatriated or terminated their residency after June 3, 2004.
Questions about expatriation and taxation should be directed to the Internal Revenue Service (IRS) or the IRS Web site. Consular officers are not in a position to provide any advice or answer questions concerning these changes.
And last but not least, DO NOT let any compliance professional tell you it is a good idea to accompany you to the renunciation interview. It will cost you money and though it has not always been adhered to in the past, since July 2015 the State Department indicates it can compromise the issue of voluntary intent.