September 27, 2019
More than five million United States citizens live outside of the U.S., according to estimates by the federal government. Regardless of where they live, all citizens are required to pay federal income tax to the IRS. Federal law provides several methods for renouncing or relinquishing U.S. citizenship, but doing so comes at a significant cost. The U.S. Department of State (DOS) requires citizens seeking to renounce their citizenship to pay a substantial fee, and the IRS imposes an expatriation tax on some former citizens and others living abroad. Recently, the IRS announced new procedures, known as the Relief Procedures for Certain Former Citizens (RPCFC), that streamline the process for certain former U.S. citizens to resolve tax compliance issues.
Under the Fourteenth Amendment to the U.S. Constitution, any person born on U.S. soil is a citizen by birth, or natural-born citizen. The only exceptions are children born to foreigners who are in the U.S. in diplomatic capacities, and therefore subject to diplomatic immunity from U.S. laws. Immigrants to the U.S. can become naturalized U.S. citizens by following the procedures set forth by the Immigration and Nationality Act (INA).
Section 349(a) of the INA, codified at 8 U.S.C. § 1481(a), identifies seven ways that a U.S. citizen can lose their citizenship. The U.S. Supreme Court has ruled multiple times, such as in 1967’s Afroyim v. Rusk, that the government cannot involuntarily strip a person of their citizenship. Under § 349(a)(5), an individual can renounce their citizenship by voluntarily and knowingly “making a formal renunciation of nationality” at a U.S. consulate or embassy abroad.
Renouncing one’s U.S. citizenship is a permanent decision with serious consequences. In order to prove relinquishment, an individual must obtain a Certificate of Loss of Nationality (CLN) from the DOS. Without this document, the IRS will presume that the individual is still a citizen subject to U.S. tax laws. The DOS charges a fee, currently set at $2,350, and the person must settle with the IRS. This may include an expatriation tax for individuals with high net worth or large amounts of assets.
Renunciation of citizenship may also restrict a person from returning to the U.S., even as a visitor. The INA identifies numerous grounds for inadmissibility to the country, such as communicable disease, national security concerns, and prior attempts at unlawful entry. It also includes a provision, codified at 8 U.S.C. § 1182(a)(10)(E), which states that a person who renounces their citizenship “for the purpose of avoiding taxation by the United States is inadmissible.” It is not clear how often, if ever, this provision has been enforced, but it is on the books.
The RPCFC allows individuals to resolve compliance issues with the IRS in order to obtain a CLN. To qualify, a person must meet the following criteria:
– Have not filed a tax return as a U.S. citizen or resident;
– Relinquished their citizenship after March 18, 2010;
– Have an annual income below a threshold amount, set at $168,000 in 2019;
– Have net worth below $2 million; and
– Owe no more than $25,000 in federal taxes for the preceding five years.
If you need help with a tax-related matter in California, the tax advisors at the Enterprise Consultants Group are available to help you understand your rights and options. Please contact us today online or at (800) 575-9284 to see how we can assist you.