Renouncing U.S. Citizenship: A New Trend?

U.S. citizenship is considered a precious commodity for countless people in the United States and around the world, with more than 25 million immigrants gaining U.S. citizenship since 1907. So when news broke earlier this year that high-profile, affluent U.S. citizens such as Facebook co-founder Eduardo Saverin and songwriter Denise Rich had renounced their citizenship, media attention and political reaction quickly focused on their motivations and whether there is a diminishing attraction of acquiring or retaining U.S. citizenship.

Saverin, who was born in Brazil and took U.S. citizenship in his teens, and U.S.-born Rich, it turns out, are not alone among Americans who have recently chosen to denaturalize, a process called renunciation of U.S. citizenship. Since 2009, the United States has witnessed a rise in citizenship renunciation, especially among the affluent. Some see this as a barometer of the waning appeal of U.S. citizenship. However, it seems that recent legislative changes, legal developments, and new Internal Revenue Service (IRS) enforcement efforts are the more likely triggers for this new — and until recently, little noticed — trend.

Last April, Saverin and Rich appeared on a list of Americans who had chosen to renounce citizenship, which is published quarterly by the IRS in the Federal Register. Saverin's citizenship renunciation was noticed by the media before Rich's, and gained notoriety because his decision was seen as timed to avoid or minimize his U.S. tax liability in anticipation of Facebook's initial public offering (IPO) in May. His renunciation application was filed months earlier, in January 2011, and granted in September 2011. His financial stake in Facebook at the time when the company went public was believed to be over $3 billion. Under U.S. tax law, citizens are taxed on their worldwide income, including capital gains. It has been estimated that by renouncing his citizenship, Saverin's tax savings could exceed $100 million. Saverin has taken up residency in Singapore, a country that does not levy taxes on capital gains.

News of the Rich citizenship renunciation came a month after public attention on the Saverin case. Rich, a songwriter and Massachusetts native, had an earlier brush with controversy in 2001 (after her ex-husband, Marc Rich, a well-known international commodities trader and entrepreneur, was pardoned for illegal trading with Iran and tax evasion in the 1980s). A dual citizen of Austria, Rich claimed that she renounced her U.S. citizenship to be closer to her family in Europe. The decision reportedly will save her tens of millions of dollars in taxes.

Though the Saverin and Rich cases attracted the spotlight, the trend of citizenship renunciation is evident. Quarterly published figures from the IRS indicate that the number of U.S. citizenship renunciations has risen in recent years — to 1,780 in 2011, from 1,485 in 2010 and 731 in 2009. Prior to 2009, the numbers ranged from 200 to 400 cases annually.

A number of factors are believed to have contributed to the increase. For starters, the United States is the only major industrialized country that taxes all of its citizens, whether they reside on U.S. territory or abroad. And all U.S. citizens working overseas (estimates are that more than 6 million Americans live abroad) are required to file tax returns and pay taxes annually on their total earnings.

While tax liability for overseas income has been part of the U.S. tax system since the federal income tax was first introduced, its enforcement historically has been lax. In 2009, however, the IRS began a concerted effort to pursue U.S. citizens who fail to disclose assets held in international bank accounts. In February 2009, the Department of Justice (DOJ) filed a lawsuit in a U.S. district court in Miami against the UBS AG, after it received insider information from a whistleblower, Bradley C. Birkenfeld, that the Swiss banking giant was allegedly helping U.S. taxpayers hide money in secret offshore accounts. Birkenfeld served a two and half year sentence in prison for withholding certain information during the investigation, but this month, the IRS paid him a $104 million whistleblower award for his service and to encourage others to come forward with information about illegal tax evasion.

In the landmark lawsuit, DOJ asked the court to order UBS to disclose the names of all U.S. citizens who maintained accounts with the bank. The parties reached a settlement and UBS paid a penalty of $780 million and provided the IRS with information on an estimated 4,700 account holders. Since then the IRS has pursued other financial institutions and held several limited amnesties for U.S. taxpayers with secret offshore accounts, collecting more than $5 billion in tax and penalties.

As part of a further concerted effort to prevent tax evasion, Congress in March 2010 passed the Foreign Account Tax Compliance Act (FATCA), which established tougher asset-disclosure rules for U.S. citizens with bank accounts abroad and on banks where the accounts are held. The key provisions of the law will be phased in beginning January 1, 2013.

Additionally, beginning this year, U.S. citizens must file a new Form 8938 with the IRS listing all foreign financial assets, including insurance policies, loans, and shares in non-U.S. companies. Failure to file can result in a fine of up to $50,000.

Thus, it is not surprising that many lawyers and interest groups who represent U.S. expatriates believe that the combination of the scaled-up IRS enforcement and legislative and regulatory changes are providing the impetus for increased renunciation of U.S. citizenship.

There may, however, be other reasons animating such decisions — including political differences, seeking political office in another country, and for inheritance or family-related purposes.

Process and Cost of Renouncing U.S. Citizenship under Present Law

An individual who wishes to relinquish U.S. citizenship must apply in person at an American embassy or consulate abroad and sign an oath of renunciation. The embassy or consular staff ascertains that the renunciation is voluntary, and informs the applicant of the consequences of the decision, including the prospects of becoming stateless if they do not have or are not eligible to receive a passport of another country. They are also informed that re-entry into the United States in the future will require a visa.

Since 2008, a renouncing U.S. citizen must pay a $450 filing fee and an expatriation or exit tax. The expatriation tax applies, with limited exceptions, to those who earned at least $151,000 in 2012; have a net worth of $2 million or more on the date of their expatriation; or have failed to properly file taxes for any of the past five years. Their assets are treated as if liquidated at the time of expatriation, and any net unrealized gain over $651,000 is taxed as income. They must also pay a 30 percent withholding tax on any deferred compensation, which includes pension plans and stock options.

Additionally, since 1996 if the government determines that a former U.S. citizen renounced citizenship to avoid taxation, he or she is not admissible to the United States. Under current law, the U.S. Attorney General must have determined that an individual renounced citizenship for the purpose of evading U.S. tax liability. Though this provision of the law is not enforced in practice, high-profile cases such as the recent ones are bound to elicit higher interest.

The Ex-PATRIOT Act

In May, news of Saverin's renunciation was met with sharp — and bipartisan — congressional criticism. On May 17, the day of the Facebook IPO, Senators Charles Schumer (D-NY) and Robert Casey (D-PA) introduced a bill titled the Expatriation Prevention by Abolishing Tax-Related Incentives for Offshore Tenancy (Ex-PATRIOT Act). The measure is designed to significantly increase the tax liability of those whom the government believes have relinquished citizenship to gain a tax advantage, and to make it harder for them to be admitted to the United States.

The Ex-PATRIOT Act would increase both the financial cost of renouncing U.S. citizenship and the likelihood of being permanently barred from the United States. The bill would amend the tax code and impose an annual 30 percent tax on all gains derived from U.S. sources upon anyone deemed to have expatriated for tax avoidance purposes. Additionally, the responsibility for identifying such individuals would shift from the Attorney General to the Treasury Secretary. The IRS, as part of the Treasury Department, would be required to submit names of those deemed tax avoiders to the State Department and Department of Homeland Security to alert them of the inadmissibility of such travelers if they seek to enter the United States. In effect, such individuals would be placed on a watch list.

The fate of the Ex-PATRIOT Act in Congress is uncertain, though Republicans joined Democrats in condemning Saverin's action. "This is a great American success story gone horribly wrong," Schumer said. "Eduardo Saverin wants to de-friend the United States of America just to avoid paying taxes. We aren't going to let him get away with it. Saverin has turned his back on the country that welcomed him and kept him safe, educated him and helped him become a billionaire." House Speaker John Boehner (R-OH) expressed his support for the Ex-PATRIOT Act and criticized Saverin, saying that it is "absolutely outrageous that somebody would renounce their citizenship to avoid paying taxes."

Saverin, who has become a permanent resident of Singapore, denied that his decision was animated by financial considerations. In a statement issued in an Agence France Presse article in July, Saverin said: "My decision to expatriate was based solely on my interest in working and living in Singapore, where I have been since 2009. I am obligated to and will pay hundreds of millions of dollars in taxes to the United States government."

The Ex-PATRIOT bill has elicited strong, deep-rooted opposition from proponents of limited taxation. A Wall Street Journal opinion piece condemned the bill's sponsors for attempting to punish expatriates over a decision that is legal and that anyone is free to make. Grover Norquist, president of Americans for Tax Reform, compared the Ex-PATRIOT Act to the policies imposed by Nazi and Soviet governments on their former citizens. Other critics of the bill argue that innovators and entrepreneurs such as Saverin should not be discouraged from conducting business in or being barred access to the United States.

However, in an election season where concerns over tax fairness have become a staple theme, it is not surprising that decisions of a few affluent individuals to cede allegiance to the country for perceived reasons of evading taxes may have struck a raw nerve.

See the IRS list of citizenship renunciations in the Federal Register.

See the Wall Street Journal opinion piece.

Read about the IRS Expatriation Tax.

Read the IRS summary of FACTA's key provisions.

Read about renouncing citizenship at the State Department's website.

See the DOJ press release about its lawsuit against UBS.

Read Wall Street Journal article about DOJ case against UBS.

Read New York Times interview with Saverin.

Read The Economic Times' article on Saverin's permanent residency in Singapore.