Offshore Amnesty Penalties: An Unfortunate Driving Force for Renouncing Citizenship

Posted on by Moskowitz LLP Posted in International Taxation

Moskowitz LLP, A Tax Law Firm, regularly counsels individuals with foreign connections on U.S. taxation issues, facing offshore amnesty penalties. Here in San Francisco and the Silicon Valley, in particular, and California in general, we have recently seen an increase in individuals considering renouncing their U.S. citizenship1 and green cards because of the U.S. position that citizens and green card holders are subject to tax and reporting requirements on worldwide income and assets. For instance, individuals seeking legal counsel regarding IRS Offshore Voluntary Disclosure are weighing that program’s penalty structure and any alternative route to resolution which may be advised, with just leaving the U.S., and going to Korea, China, South America, or wherever they may have ties or that otherwise appear enticing. Amongst the host of legal and political considerations, to legally exit the United States you must comply with Immigration and IRS requirements. Failure to comply with these requirements may bar you from re-entering the United States, even for a visit2 or cause you to be extradited for tax crimes and/or have the foreign government seize your income and assets at the bequest of the United States. Anything other than a legal renunciation of citizenship, you and your assets remain subject to U.S. Law.

Procedural Aspects of Renouncing U.S. citizenship

There are procedural requirements for U.S. citizens, long-term residents, and permanent residents (green card holders).

  1. Immigration: Compliance with Immigration and Nationality Act, Section 349(a).3
  2. Taxation: Compliance with Internal Revenue Code sections 887, 887A, which includes but is not limited to, certification (signed under the penalty of perjury) of:

a) Average tax liabilities for previous five years; and,

b) Net worth demonstration via Balance Sheet and Income Statement; and

c) Tax compliancy for previous five years (it is not hard to foresee the potential criminal and civil exposure to individuals with this test, especially if you are renouncing as a move to avoid Offshore Banking Disclosure Penalties)

Tax Effects of Renouncing U.S. citizenship – the “Exit Tax”

The Heroes Earnings Assistance and Relief Act of 2008 (HEART) established the “exit tax” and is triggered by thresholds associated with disclosures required to be made on the form 8854. This tax calculation, includes, but is not limited to, a tax calculated via a mark-to-market regime4, and has further tax implications with deferred compensation and qualified retirement accounts.

This tax was imposed to de-incentivize the potential tax benefits of renouncing U.S. citizenship. However, recent tax amnesty programs (such as the OVDP) and their associated penalty schemes have proved more burdensome than Exit Tax implications. That being said, because Form 8854 requires detailed disclosures and tax compliance certification subject to scrutiny, we believe that a taxpayer weighing Offshore Disclosure versus renouncement of citizenship, will face the potential criminal implications of both failing to avail themselves of lawful remedies for offshore banking/asset issues and renouncing their citizenship. This is unfortunate because there are many ways that you can become compliant with U.S. tax laws without losing everything you have worked for or starting over. We recommend seeking the advice and counsel of a tax attorney familiar with these specific issues.

You can learn more about our firm at https://moskowitz.com/ or by calling our tax law firm at (415) 394-7200.

  1. Over 1800 have renounced their citizenship in 2011 (see Reuters April 16, 2012).
  2. The Reed Amendment: Illegal Immigration Reform and Immigrant Responsibility act of 1996.
  3. Information and opinions as to compliance with Immigration laws and requirements not discussed herein.
  4. Mark-to-market (aka, fair value accounting) is accounting for the fariv value of an asset (or liability) based on the current market.

Moskowitz LLP, A Tax Law Firm, Disclaimer: Because of the generality of this blog post, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Prior results do not guarantee a similar outcome. Furthermore, in accordance with Treasury Regulation Circular 230, we inform you that any tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purposes of (i) avoiding tax related penalties under the Internal Revenue Code, or (ii.) promoting, marketing, or recommending to another party any tax related matter addressed herein.