FATCA and the Road to Expatriation...B. An Overview of FATCA The most significant nonpolitical reason for re-nouncing one’s U.S. citizenship can be summarized in five letters. FATCA,

FATCA and theRoad to Expatriation

By Matthew A. Morris

Reprinted from Tax Notes, November 2, 2015, p. 691

tax notesVolume 149, Number 5 November 2, 2015

®

(C)

TaxA

nalysts2015.A

llrightsreserved.

TaxA

nalystsdoes

notclaim

copyrightin

anypublic

domain

orthird

partycontent.

For more Tax Notes content, please visit www.taxnotes.com.

FATCA and the RoadTo Expatriation

By Matthew A. Morris

A. IntroductionExpatriation is a controversial term laden with

heavy political implications. In the United States,the standard definition of the verb ‘‘expatriate’’ is torelinquish one’s U.S. citizenship, but the politicalconnotation is best captured by the term ‘‘ex-patriot,’’ referring to a former patriot who hasrenounced his political allegiance to the UnitedStates. Also, the verb expatriate can easily be con-fused with the noun expatriate, which refers to aU.S. citizen living abroad. The common associationof an expatriate in the United States may be eitherthat of a wealthy American living a life of luxury ina foreign country or a 20-something college studentor recent graduate who opts for the peripateticbackpacker experience before finally returning tohis permanent home in the United States. Becauseof images like these, the verb expatriate has pickedup a host of unjustified assumptions and associa-tions.

Perhaps the most widely shared assumption re-garding expatriation is that relinquishing or re-nouncing one’s citizenship expresses an underlyingpolitical belief — the desire to dissociate from theUnited States because of a political disagreement orbecause of allegiance to another country. However,despite this common assumption, there are severalnonpolitical reasons U.S. citizens may wish to relin-

quish or renounce their citizenship. For example,some countries outlaw dual citizenship, whichmakes it impossible for residents of those countries— some of whom reside there for economic or social(family) reasons rather than political reasons — toremain legal residents there without formally re-nouncing or relinquishing their U.S. citizenship.1

Other U.S. citizens relinquish or renounce theircitizenship to avoid the burdensome U.S. incometax and information reporting requirements underthe Foreign Account Tax Compliance Act. The prob-lem here is threefold:

1. FATCA — and the IRS disclosure initiativesdesigned to encourage compliance withFATCA before the IRS’s announcement of thestreamlined filing compliance procedures inJune 2014 — does not distinguish between‘‘bad actors’’ who intentionally failed to dis-close foreign income and assets from ‘‘benignactors’’ who did not know about the U.S.income tax and reporting requirements (dis-cussed in Section B);

2. FATCA and the United States’ citizenship-based taxation system have made it prohibi-tively expensive for expatriates and‘‘accidental’’ U.S. citizens to become compliantand meet the U.S. income tax and informationreporting requirements (discussed in SectionC); and

3. the expatriation tax, or ‘‘exit tax,’’ undersection 877A imposes a harsh mark-to-marketregime on taxpayers who meet the applicablenet worth or net income threshold or who failto certify under penalty of perjury that theyhave met U.S. income tax and reporting re-quirements for the five tax years preceding thetax year in which they renounce their U.S.citizenship, regardless of whether the taxpay-ers are benign actors or bad actors (discussedin Section D).

1The countries that either ban or impose significant restric-tions on dual citizenship include (but are not limited to)Andorra, Austria, Bahrain, China, El Salvador, Estonia, India,Indonesia, Japan, Lithuania, Malaysia, Montenegro, the Nether-lands, Norway, Panama, Poland, Singapore, Slovakia, Thailand,Ukraine, the United Arab Emirates, and Venezuela. AndrewHenderson, ‘‘Which Countries Allow Dual Citizenship?’’ No-mad Capitalist, Apr. 25, 2014.

Matthew A. Morris

Matthew A. Morris is apartner at Kerstein, Coren &Lichtenstein LLP.

In this article, Morris sug-gests ways to fix the expa-triation tax so that it bettertargets bad actors ratherthan benign actors. He pro-poses requiring taxpayers tocertify that they have notwillfully structured their af-fairs or assets to fall below

the applicable net income and net worth thresholdsand adding an exception to the expatriation tax forindividuals who have returned to compliance withU.S. income tax and reporting requirements.

tax notes™

VIEWPOINT

TAX NOTES, November 2, 2015 691

(C) T

ax Analysts 2015. A

ll rights reserved. Tax A

nalysts does not claim copyright in any public dom

ain or third party content.


B. An Overview of FATCA

The most significant nonpolitical reason for re-nouncing one’s U.S. citizenship can be summarizedin five letters. FATCA, which became law in theUnited States in 2010,2 imposes comprehensive re-porting requirements on individuals3 with foreignaccounts, on foreign financial institutions, and onforeign governments.4 The basic premise of the lawis that (1) foreign governments that enter intointergovernmental agreements to implementFATCA agree to report to Treasury informationregarding accounts held by U.S. citizens in thatcountry, and (2) FFIs that agree to register with theIRS and provide the names of their U.S. accountholders will avoid an automatic withholding tax of30 percent on any U.S.-source payments made tothe FFIs. This means that individuals with accountsin foreign countries that have signed on to FATCA— or holders of accounts at FFIs that have regis-tered with the IRS — can no longer shield theseaccounts from U.S. income tax and disclosure re-quirements.5 FATCA is rapidly becoming a world-wide disclosure regime, and U.S. citizens whomaintain accounts in foreign countries without dis-closing them to Treasury on Financial Crimes En-forcement Network Form 114 (foreign bank accountreports) or reporting the income on their Forms1040 may seek to avoid harsh civil or criminalpenalties by renouncing their U.S. citizenship be-fore their names and account information areturned over to the IRS.

An ancillary consequence of FATCA is that mil-lions of benign actors — a term originally coined byNational Taxpayer Advocate Nina Olson in her 2012

Report to Congress6 — have been swept intoFATCA’s net despite the original purpose of FATCAto identify and investigate bad actors evading theirU.S. income tax requirements.7 For example, thereare thousands of ‘‘accidental’’ U.S. citizens whowere born in the United States but moved at ayoung age with their families to a foreign countryand became citizens there. These U.S. citizens bybirth may have never set foot in the United Statessince childhood or may have returned to the UnitedStates after many years living and working in whatthey consider to be their home countries. Mostaccidental U.S. citizens, especially those who neverreturned to the United States, are unaware that theUnited States imposes tax on its citizens, permanentresidents, and substantial presence residents8 ontheir ‘‘worldwide income,’’ regardless of whetherthat source of income is subject to tax in theircountry of residence. This particular class of benignactors may not have complied with U.S. income taxand reporting requirements for many years or mayhave been minimally compliant with these require-ments by filing returns reporting only U.S.-sourceincome without filing other necessary informationreturns such as FBARs. This means that manybenign actors are forced to choose between twoequally unappealing alternatives: either (1) complywith the United States’ exceedingly complex inter-national income tax and information reporting re-gime or (2) relinquish or renounce their U.S.citizenship to avoid these burdensome tax anddisclosure requirements, a process that involves itsown complex set of tax procedures (discussed inSection D, below).

Benign actors who sought to retain their U.S.citizenship and come into U.S. tax compliance were

2FATCA was enacted as subtitle A (sections 501 through 541)of title V of the 2010 Hiring Incentives to Restore Employment(HIRE) Act. See P.L. 111-147, title V, subtitle A, sections 501-547(Mar. 18, 2010).

3FATCA also imposed a reporting requirement on U.S.citizens, resident aliens (who meet the green card or substantialpresence test under section 7701(b)(1)(A)), and specific nonresi-dent aliens (those who elect to be treated as resident aliens andbona fide residents of American Samoa or Puerto Rico) to reportspecified foreign financial assets on Form 8938 to be filed withtheir Form 1040 annually. See IRS ‘‘FATCA Information forIndividuals’’ (Apr. 2, 2015); section 6038D (mandating thedisclosure of information regarding foreign financial accountsrequired by Form 8938).

4See IRS, Foreign Account Tax Compliance Act. FATCAadded sections 1471 to 1474 to the code, which set forth thewithholding requirements for nonsignatory foreign govern-ments and FFIs.

5As of July 15, 2015, 68 countries have signed IGAs toimplement FATCA, and 44 countries have reached agreementsin substance with the United States to implement FATCA.Treasury Resource Center, FATCA-Archive.

6National Taxpayer Advocate, ‘‘2012 Annual Report to Con-gress,’’ at 134 (Dec. 31, 2012).

7The State Department estimates that as of May 2014, 7.6million U.S. citizens live abroad. State Department, Bureau ofConsular Affairs, ‘‘Who We Are and What We Do: ConsularAffairs by the Numbers’’ (May 2014). Foreign accounts main-tained by these estimated 7.6 million expatriate U.S. citizens —not to mention foreign accounts owned by dual citizens andother taxpayers with substantial connections to foreign coun-tries — are subject to the same reporting requirements underFATCA as foreign accounts owned by bad actors who specifi-cally intend to evade U.S. income tax and reporting require-ments.

8See section 7701(b)(3) (setting forth the number of days ofphysical presence in the United States required to treat nonciti-zen, nonpermanent residents as U.S. citizens or permanentresidents for federal income tax purposes).

COMMENTARY / VIEWPOINT

692 TAX NOTES, November 2, 2015

(C) T

ax Analysts 2015. A





initially encouraged to participate in the IRS off-shore voluntary disclosure program (OVDP).9 Thisprogram was originally designed to offer bad actorsthe opportunity to come forward without the threatof criminal prosecution to file their delinquent oramended returns for an eight-year lookback period,pay the additional income tax plus interest, pay asubstantial understatement penalty equal to 20 per-cent of the additional income tax, and pay an‘‘offshore’’ or miscellaneous penalty (originally 20percent but currently equal to 27.5 percent of thehighest aggregate account balance during the eight-year lookback period for most foreign accounthold-ers).10 Faced with significantly more OVDPapplications than originally expected,11 the IRS fo-cused primarily on the administrative complexityof processing, assigning, reviewing, and closingthese OVDP cases within a reasonable amount oftime. In consideration of these administrative bur-dens, the IRS was not well-equipped to address thespecific nuances of each case that tended to estab-lish non-willfulness or the larger questions of fun-damental fairness in the OVDP process as a whole.The standard IRS party line regarding the OVDPwas (and to a large extent still is) that it is asettlement initiative, and thus it affords taxpayersno statutory appeal rights or any of the otherprocedural protections found in the code.12

Once benign actors committed to participating inthe OVDP, they had only one way out — a processreferred to as an ‘‘opt-out’’ in which they wouldforgo the OVDP penalty structure for a much moreambiguous, open-ended scenario involving the fullgamut of civil penalties (including the draconianwillful failure-to-file FBAR penalty equal to 50

percent of the highest aggregate balance of thetaxpayer’s foreign accounts for the years underinvestigation).13 Even though benign actors consti-tuted the vast majority of OVDP applicants, veryfew opted out because of the risk of these poten-tially devastating FBAR penalties.14

Since the first OVDP in 2009, the program hasbeen substantially revised and expanded to accountfor non-willful tax and information return compli-ance problems. In June 2014 the IRS announced thestreamlined filing compliance procedures, whichoffer both residents and nonresidents of the UnitedStates the opportunity to resolve their complianceissues simply by filing the delinquent tax returnsfor the past three tax years and FBARs for the pastsix calendar years, paying the additional income taxand interest thereon, paying a miscellaneous off-shore penalty equal to 5 percent of the highestbalance of their year-end balances in their foreignaccounts over a six-year lookback period (for resi-dents only — nonresidents are not responsible forpaying a miscellaneous offshore penalty), and filinga certification of non-willful conduct.15

C. The Rising Costs of Compliance

Despite the significant progress the IRS has madein simplifying the compliance process for benignactors, accidental U.S. citizens with few connections

9See, e.g., National Taxpayer Advocate, supra note 6, at 136(‘‘The IRS ‘strongly encouraged’ everyone with an FBAR viola-tion and unreported income (including benign actors) to par-ticipate in its OVD programs and initially discouraged themfrom opting out.’’).

10See Matthew A. Morris, ‘‘One Size Does Not Fit All:Unintended Consequences of the Offshore Voluntary DisclosureProgram,’’ Int’l Tax J. (CCH) (2013) (summarizing the terms ofthe 2009, 2011, and 2012 programs).

11Compare IR-2012-89 (‘‘In a typical year, we used to get 100or so taxpayers who used our voluntary disclosure program.When we first set up our new program in 2009, we thought thatfigure would rise to maybe 1,000.’’), with IR-2011-14 (‘‘The firstspecial voluntary disclosure program closed with 15,000 volun-tary disclosures on Oct. 15, 2009. Since that time, more than3,000 taxpayers have come forward to the IRS with bankaccounts from around the world.’’).

12See, e.g., IRS Offshore Voluntary Disclosure Program Fre-quently Asked Questions and Answers, at A27 (July 15, 2015)(‘‘The certification process is less formal than an examinationand does not carry with it all the rights and legal consequencesof an examination. For example, the examiner will not send theusual taxpayer notices . . . [and] the taxpayer will not haveappeal rights with respect to the Service’s determination.’’).

13See 31 U.S.C. section 5321(a)(5)(C) (establishing a maxi-mum penalty of the greater of $100,000 of 50 percent of theamount reportable for any willful failure to file an FBAR — apenalty that can be imposed for each unfiled FBAR rather thanfor each individual nonfiler). The IRS recently issued guidancestating that ‘‘in most cases, the total penalty amount for all yearsunder examination will be limited to 50 percent of the highestaggregate balance of all unreported foreign financial accountsduring the years under examination’’ rather than a cumulativepenalty of 50 percent of the highest account balance for eachyear in which an FBAR violation (i.e., non-filing) occurred. SeeSBSE-04-0515-0025, ‘‘Interim Guidance for Report of ForeignBank and Financial Accounts (FBAR) Penalties’’ (May 13, 2015).This interim guidance reverses the IRS’s previously held posi-tion that a willful failure-to-file FBAR penalty should apply foreach year in which an FBAR violation occurred. See, e.g., UnitedStates v. Zwerner, Dkt. No. 1:13-cv.22082-CMA (S.D. Fl., June 11,2013) (The IRS assessed a willful FBAR penalty equal toapproximately 200 percent of the highest aggregate accountbalance — 50 percent of the highest aggregate account balancefor four consecutive calendar years; the jury found Zwernerliable for three years of willful penalties, equal to approximately150 percent of the highest aggregate account balance.).

14The Internal Revenue Manual acknowledges the potentialfor confiscatory FBAR penalties. See, e.g., IRM section 4.26.16.4(‘‘FBAR civil penalties have varying upper limits, but nofloor. . . . Examiner discretion is necessary because the totalamount of penalties that can be applied under the statute cangreatly exceed an amount that would be appropriate in view ofthe violation.’’).

15See generally IRS, ‘‘Streamlined Filing Compliance Proce-dures’’ (Oct. 9, 2014).



(C) T

ax Analysts 2015. A





to the United States may feel that their U.S. citizen-ship is not worth the costs of participating in thestreamlined foreign offshore procedures and theannual costs associated with preparing ‘‘true, cor-rect, and complete’’ U.S. income tax and informa-tion returns. For many nonresident U.S. citizens, theannual tax and information returns required to befiled are exceedingly complex and in most casescannot be prepared without some form of profes-sional assistance.

Example 1: Geoffrey was born in the UnitedStates in 1962. His father was a U.S. citizenonly, and his mother was an Australian citizenonly. Under Australian law at the time ofGeoffrey’s birth, it was not possible to obtainAustralian citizenship at birth in a countryoutside of Australia unless the child (or theparent on behalf of the child) applied for andwas granted citizenship.16 Geoffrey’s parentsdid not apply for Australian citizenship on hisbehalf. Geoffrey moved to Australia with hismother when he was 7 years old and acquiredAustralian permanent residency status. He hasworked in Australia as a self-employed attor-ney since he was 25 years old and has madecontributions to his Australian retirement ac-count (referred to as a superannuation accountin Australia) since that time. He became acitizen of Australia in 1997. When he was 50years old, in 2012, he inherited his father’sshares of a closely held Australian softwarecompany, becoming a 25 percent owner. Thecompany was valued at USD $1 million as ofthe date of his father’s death. Geoffrey is now53 years old. He has never filed a U.S. incometax return or information return (such as anFBAR). To come into compliance with his U.S.income tax and information reporting require-ments, Geoffrey must prepare and file thefollowing forms:

• Forms 1040 for tax years 2012, 2013, and2014. The Forms 1040 must include thefollowing tax and information forms:

• Form 3520 for tax year 2012, reporting hisreceipt of shares from a foreign estate;17

• Form 3520 and Form 3520-A for tax years2012 to 2014, reporting his Australiansuperannuation account as a foreigngrantor trust for U.S. income tax pur-poses;18

• Forms 5471 for tax years 2012, 2013, and2014, reporting the balance sheet informa-tion regarding the Australian softwarecompany (required because he ownsmore than 10 percent of the total value ofa foreign corporation’s stock);19

• Forms 8621 for tax years 2012, 2013, and2014, reporting the passive foreign invest-ment company gains and losses on hisAustralian superannuation account;20

• Forms 8938 reporting his specified foreignfinancial assets in Australia;21 and

• Form 8275, ‘‘Disclosure Statement,’’claiming an exemption from the require-ment to report self-employment tax to theUnited States because he is already con-tributing to the Australian social securitysystem under an Australia-U.S. Social Se-curity Agreement (including a letter fromthe U.S. Social Security Administrationindicating that his wages are not coveredby the U.S. Social Security system).22

16Another barrier to Geoffrey obtaining dual Australian-U.S.citizenship at birth is that the United States did not allow dualcitizenship before the Supreme Court decision in Afroyim v.Rusk, 387 U.S. 253 (1967), which held that Congress has nopower under the Constitution to divest a person of U.S. citizen-ship under the Fourteenth Amendment without that person’svoluntary relinquishment thereof.

17See section 6039F (requiring the disclosure of foreign giftsand bequests from foreign persons or estates); Form 3520, PartIV, at 6 (2014); and Instructions to Form 3520, at 12 (2014).

18The U.S. income taxation of earnings on Australian super-annuation accounts is far from a settled area, but there is someauthority within the international tax practitioner community tosuggest that these accounts should be treated as foreign grantortrusts subject to information reporting on Form 3520 and Form3520-A and that any foreign mutual funds held in these super-annuation accounts should be taxed as PFICs. See, e.g., LTR200807003 (concluding that Australian superannuation fundsshould be treated as trusts for U.S. income tax purposes underreg. section 301.7701-4(a), which provides that an ‘‘arrangementwill be treated as a trust if it can be shown that the purpose ofthe arrangement is to vest in trustees responsibility for theprotection and conservation of property for beneficiaries whocannot share in the discharge of this responsibility’’). Some taxlaw practitioners agree that superannuation accounts mightqualify as trusts (and more specifically, grantor trusts) for U.S.income tax purposes. See, e.g., Phil Hodgen, ‘‘Form 3520-A FilingDeadline Is March 15, 2011,’’ HodgenLaw PC International TaxBlog (Mar. 11, 2011) (‘‘Australian citizen sticks money into asuperannuation account. Immigrates to the United States. Sameresult: Form 3520-A . . . will be required.’’).

19See section 6046 (requiring the disclosure of informationregarding foreign corporations when a U.S. citizen or residentbecomes a 10 percent shareholder of the foreign corporation);Form 5471 (rev. Dec. 2012).

20See generally sections 1291-1297 (containing the PFIC rules);Form 8621 (rev. Dec. 2014); Instructions to Form 8621 (rev. Dec.2014).

21See supra note 3 (discussing the Form 8938 requirementunder FATCA).

22See IRS, ‘‘Social Security Tax Consequences of WorkingAbroad’’ (Nov. 2, 2014) (explaining that an individual workingin a foreign country must continue to pay Social Security tax to


(Footnote continued on next page.)


(C) T

ax Analysts 2015. A





• FBARs for calendar years 2009, 2010, 2011,2012, 2013, and 2014. Geoffrey will need toprepare and file these FBARs for the sixprevious calendar years for which the FBARdeadline has already passed under the termsof the streamlined foreign offshore proce-dures and will need to prepare and file theseFBARs by June 30 of each subsequent calen-dar year to remain in compliance with hisrequirements under FATCA.

Not only must Geoffrey file the above income taxand information returns for previous tax years tocome into U.S. tax compliance, he needs to continuefiling these forms annually to remain in compliance.Because it would be very difficult for Geoffrey toprepare all of the necessary returns and informationreturns on his own, even with the assistance of asoftware program such as TurboTax, this couldresult in significant annual tax and informationreturn preparation fees.

More importantly, however, the U.S. tax on PFICincome from the Australian mutual funds in his Aus-tralian superannuation account provides a majordisincentive to retaining U.S. citizenship. Althoughhis superannuation account is a qualified tax-deferred investment and retirement vehicle underAustralian law, the account becomes a significantannual drain on his net income for U.S. tax purposesunder the mark-to-market regime of section 1296 orthe ‘‘excess distribution’’ deferred tax and interestregime under section 1291. After application of theforeign tax credit, Geoffrey’s U.S. income tax on hisAustralian self-employment income and familybusiness dividend income is de minimis. However,the income generated by the foreign mutual funds inhis Australian superannuation account is likely sub-ject to U.S. tax because (1) this category of income isnot addressed in the Australia-U.S. income taxtreaty, (2) no specific exception applies to the generalrule that ‘‘gross income means all income from what-ever source derived,’’23 and (3) no U.S. FTC is avail-able to offset the U.S. income tax liability eventhough the contributions to the superannuation ac-count (and the annual earnings on those contribu-tions) are taxed in Australia at a 15 percent rate, asthese taxes are paid at the fund level rather than atthe shareholder level.24 Subjecting the PFIC earnings

within Geoffrey’s superannuation account to bothU.S. and Australian income taxes undermines thecentral purpose of the Australian superannuationsystem, which is to provide an adequate source ofretirement savings for Australian citizens.

For Geoffrey and other U.S. expatriates, acciden-tal U.S. citizens, and U.S. citizen-residents withaccounts and investments abroad, the professionaland tax costs of complying with U.S. income taxand information return requirements has becomeprohibitively expensive. Taxpayers like Geoffrey —with minimal connections to the United States, nopresent or future plans to return to the UnitedStates, and an overwhelming tax and informationreturn compliance burden — might therefore con-clude that expatriation is the only prudent optionfrom a practical, economic, and tax standpoint.

D. The Expatriation Tax Under Section 877AThe expatriation tax rules set forth in section 877A

apply to (1) U.S. citizens who renounced their citi-zenship on or after June 17, 2008,25 and (2) ‘‘long-term residents’’ who ended their U.S. resident statusfor federal tax purposes on or after June 17, 2008.Long-term resident is defined in section 877(e)(2) asany individual who is a lawful permanent residentof the United States (green card holder) in at leasteight of the 15 tax years ending with the tax year inwhich the individual gives up resident status forfederal tax purposes.26 An individual will be treatedas relinquishing or renouncing U.S. citizenship onthe earliest of the following: (a) the date the indi-vidual ‘‘renounces his United States nationality be-fore a diplomatic or consular officer of the UnitedStates,’’ (b) the date the individual provides to theState Department ‘‘a signed statement of voluntaryrelinquishment of United States nationality,’’ (c) thedate the State Department issues to the individual a

the United States unless an exception applies or there is a SocialSecurity totalization agreement between the United States andthat country); Social Security Administration, ‘‘U.S. Interna-tional Social Security Agreements’’ (listing the countries withSocial Security agreements currently in force).

23Section 61(a).24This assumes that Geoffrey’s contributions to his superan-

nuation account were ‘‘concessional’’ (pretax) contributions. IfGeoffrey made ‘‘non-concessional’’ (after-tax) contributions, the

earnings on those contributions would not be subject to taxwhile they remain in the superannuation account. See Austra-lian Taxation Office, ‘‘Super and Tax.’’ Geoffrey’s inability toclaim a U.S. FTC for the Australian income taxes paid on hisconcessional contributions results from the lack of proper docu-mentation regarding the tax payment. Because the fund paysthe tax, rather than the individual accountholders, the trustee ofthe superannuation account cannot provide Geoffrey with anydocumentation regarding the amount of taxes paid. AlthoughU.S. mutual funds or other regulated investment companies canpass the amount of the fund-level taxes paid on to individualshareholders by issuing a Form 1099-DIV or similar statement,Australian superannuation accounts are not designed with U.S.tax compliance in mind and therefore are not equipped to passthis information on to individual accountholders. See IRS Pub-lication 514, Foreign Tax Credit for Individuals, at 6 (2014) (sum-marizing the rules for foreign taxes paid by U.S. mutual fundsand passed on to shareholders).

25The rules for expatriations before June 17, 2008, which arenot discussed in this article, are set forth in section 877.

26Section 877(e)(2).


(Footnote continued in next column.)


(C) T

ax Analysts 2015. A





‘‘certificate of loss of nationality,’’ or (d) the date thata U.S. court ‘‘cancels a naturalized citizen’s certifi-cate of naturalization.’’27

Assuming that the individual who relinquishesor renounces U.S. citizenship meets the definition ofa ‘‘covered expatriate’’ under section 877A(g)(1)(A)(see discussion below), the mechanics of the expa-triation tax under section 877A are as follows. Theexpatriating taxpayer must file three tax returns forthe year of renunciation of U.S. citizenship (to befiled on or before April 15 of the calendar yearfollowing renunciation, or by June 15 if the taxpayeris living outside of the United States):

1. Form 1040 from January 1 to the day onwhich the individual renounces U.S. citizen-ship (reporting the individual’s worldwideincome and assets);2. Form 1040NR for the day after the renun-ciation of U.S. citizenship until December 31(reporting only U.S.-source income); and3. Form 8854, ‘‘Initial and Annual ExpatriationStatement’’ (to determine whether the re-nouncing taxpayer is a covered expatriate and,if so, whether any expatriation tax or exit tax isdue).The expatriation tax or exit tax is a mark-to-

market tax. The mark-to-market regime under sec-tion 877A treats all worldwide property of a coveredexpatriate as sold for its fair market value on theday before the expatriation date.28 Standard rules ofgain and loss then apply — the FMV of the propertyon the day before expatriation is treated as theamount realized, and the taxpayer compares theamount realized with his basis in the property todetermine if there is any taxable gain or loss. Bothgains and losses on the deemed sales are recog-nized, but the wash sale rules of section 1091 areinapplicable.29 The amount that would be includ-able by reason of the deemed sale rules is reducedby an exclusion amount ($690,000 for expatriationsin tax year 2015).30

These mark-to-market rules do not apply to thefollowing types of property:

1. Deferred compensation items.31 Eligible de-ferred compensation items (such as qualified

U.S. retirement accounts) are not marked tomarket, but the payer of these items mustwithhold 30 percent of any taxable distribu-tion to a covered expatriate. All other items ofdeferred compensation are treated as havingbeen distributed to the covered expatriate tothe extent of the expatriate’s accrued benefit(or the amount that the individual is entitledto transfer without a substantial risk of forfei-ture) on the day before the expatriation date.32

No early distribution tax will apply by reasonof the deemed distribution of non-eligible de-ferred compensation items, and adjustmentsmust be made to subsequent distributionsfrom the plan to reflect the tax impact of thedeemed distribution on the covered expatriate(that is, the expatriate will get a step-up inbasis for the amount deemed distributed onthe day before expatriation).33

2. Specified tax-deferred accounts.34 The amountof a specified tax-deferred account is treated ashaving been distributed to the covered expa-triate on the day before expatriation. No earlydistribution tax will apply by reason of thedeemed distribution of non-eligible deferredcompensation items, and adjustments must bemade to subsequent distributions from theplan to reflect the tax impact of the deemeddistribution on the covered expatriate (that is,the expatriate will get a step-up in basis for theamount deemed distributed on the day beforeexpatriation).35

27Id. Section 877A(g)(4).28Section 877(e)(2); section 877A(a)(1).29Section 877(e)(2); section 877A(a)(2)(B).30Rev. Proc. 2014-61, 2014-47 IRB 860.31Deferred compensation items include an item of deferred

compensation such as a qualified retirement plan listed insection 219(g)(5) (e.g., section 401(a) or 403(a) plans), any foreignpension plan or similar arrangement, any item of deferredcompensation, and any property received in exchange forservices to the extent not already included in gross income

under section 83. Section 877A(d)(4). Eligible deferred compen-sation items include deferred compensation items if the payer ofthese items is a U.S. person (or elects to be treated as one for U.S.tax purposes) and the covered expatriate (i) notifies the payer ofhis status as a covered expatriate and (ii) makes an irrevocablewaiver of the right to claim any treaty benefits associated withthe income. Id. Section 877A(d)(3).

32Section 877A(d)(2)(A). Deferred compensation items otherthan eligible deferred compensation items are treated as havingbeen distributed to the taxpayer on the day before expatriation.Eligible deferred compensation items are not treated as havingbeen distributed to the taxpayer on the day before expatriation,but the payers of these items must withhold 30 percent of anypayment to a covered expatriate.

33Section 877A(d)(2)(B) and (C).34Id. Section 877A(e)(2) (‘‘‘Specified tax-deferred account’

means an individual retirement plan (as defined in section7701(a)(37)) other than any arrangement described in subsection(k) (‘simplified employee pension’) or (p) (‘simple retirementaccount’) of section 408, a qualified tuition program (as definedin section 529), a Coverdell education savings account (asdefined in section 530), a health savings account (as defined insection 223), and an Archer MSA (as defined in section 220).’’).

35Id. Section 877A(e)(1)(B) and (C).


(Footnote continued in next column.)


(C) T

ax Analysts 2015. A





3. Any interest in a non-grantor trust.36 Fordistributions of property from a non-grantortrust, the trustee deducts 30 percent of thetaxable portion of the distribution to the cov-ered expatriate.37 If the FMV of the propertydistributed exceeds the trust’s basis in theproperty, then the trust will recognize gain asif the property were sold to the covered expa-triate for FMV.38

Section 2801 (enacted in June 2008)39 imposesmajor estate and gift tax consequences if coveredexpatriates attempt to gift or devise cash or prop-erty to U.S. persons after the expatriation date.40

Unlike the standard rules that impose gift andestate tax on the donor or decedent’s estate if theamount of the gift or value of the gross estateexceeds the applicable threshold amount, section2801 states that the donee of a gift from a coveredexpatriate or the devisee of cash or property re-ceived from a covered expatriate’s estate will beresponsible for paying tax equal to the product ofthe highest rate of estate tax under section 2001(c)or the highest rate of gift tax under section 2502(a)times the value of the gift or bequest. The rationalefor this rule appears to be that a covered expatriateshould not be entitled to repatriate cash or propertyto the United States by means of a gift or estateplanning strategy without incurring a serious taxpenalty. Because the covered expatriate is presum-ably beyond the IRS’s reach after expatriation, thegift and estate tax is imposed on the donee ordevisee instead of on the covered expatriate or theestate.

As mentioned above, the expatriation tax undersection 877A applies only to ‘‘covered expatriates.’’The following individuals are exempted from thedefinition of a covered expatriate:

A. individuals who (i) ‘‘became at birth acitizen of the United States and a citizen ofanother country and, as of the expatriationdate, continues to be a citizen of, and is taxedas a resident of, such other country,’’ and (ii)have ‘‘been a resident of the United States asdefined in section 7701(b)(1)(A)(ii)’’ (under thesubstantial presence test) for not more than 10of the prior 15 tax years;41 or

B. individuals who (i) relinquish their U.S.citizenship before age 18½ and (ii) have beenU.S. residents (under the substantial presencetest of section 7701(b)(1)(A)(ii)) for not morethan 10 tax years before the date of relinquish-ing their U.S. citizenship.42

If neither of the above exceptions under (A) and(B) applies, individuals will be considered coveredexpatriates under section 877A(g)(1)(A) (by refer-ence to section 877(a)(2)) if they meet any of thefollowing criteria43:

A. The individual’s average annual net incometax in the five tax years preceding the renun-ciation or relinquishment of citizenship isgreater than $160,000 (originally $124,000, asadjusted for inflation). The computation ofaverage annual net income tax is determinedunder section 38(c)(1).44 That section defines‘‘net income tax’’ as the sum of the regularincome tax and alternative minimum tax, re-duced by the credits allowable under ‘‘Sub-parts A and B of this part’’ (sections 21 through30D).45

B. The net worth of the individual as of thedate of expatriation is $2 million or more (notadjusted for inflation). The net worth test is astandard balance sheet analysis of the taxpay-er’s assets and liabilities. The values of assetsand liabilities are measured according to thevaluation principles set forth in section 2512‘‘without regard to any prohibitions or restric-tions on such interest’’ (for example, discountsfor marketability and lack of control) as of thedate of expatriation.46

C. The individual fails to certify on Form 8854under penalty of perjury that he is compliantwith his U.S. income tax and informationreturn compliance responsibilities for the pre-ceding five tax years. The certification saysnothing regarding the timing of the compli-ance, except for the implicit requirement thatthe taxpayer must meet the requirements be-fore completing the form.47

36See id. Section 877A(f)(3) (an individual will be treated asholding an interest in a nongrantor trust if the trust does notmeet any of the grantor trust rules set forth in sections 671 to679); sections 671-679 (the grantor trust rules).

37Id. Section 877A(f)(1)(A).38Id. Section 877A(f)(1)(B).39See P.L. 110-245, section 301(b)(1) (June 17, 2008).40Section 2801.41Id. Section 877A(g)(1)(B)(i).

42Id. Section 877A(g)(1)(B)(ii).43The criteria for covered expatriate status under section

877A(g)(1)(A) are objective standards rather than rebuttablepresumptions: If an expatriating taxpayer meets either the netincome, net worth, or noncompliance criteria, then he is acovered expatriate even if U.S. income tax avoidance hasnothing to do with his decision to expatriate.

44Id. Section 877(a)(2)(A).45Id. Section 38(c)(1).46Notice 97-19, 1997-1 C.B. 394, section III, ‘‘Tax Liability and

Net Worth Tests,’’ at 2.47Form 8854 is required to be filed with the expatriating

taxpayer’s final Form 1040 for the year that includes the


(Footnote continued on next page.)


(C) T

ax Analysts 2015. A





Each of the criteria for covered expatriate statuslisted in section 877(a)(2) is intended to determinewhether the taxpayer’s decision to renounce ismotivated by tax avoidance. Until the statute wasamended under the American Jobs Creation Act of2004, section 877 also contained a subjective test todetermine whether a taxpayer was motivated by taxavoidance.48 Before the 2004 amendment, section877(a)(1) stated that an individual renouncing citi-zenship is responsible for the expatriation tax undersection 877 ‘‘unless such loss [of citizenship] did nothave for one of its principal purposes the avoidanceof taxes.’’49 Section 877(a)(2) also stated before the2004 amendments that an individual ‘‘shall betreated as having a principal purpose to avoid suchtaxes’’ if either the net worth or the annual netincome tests are met.50 The 2004 act removed allreferences to subjective intent in the statute, optinginstead for the objective standards of (a) annual netincome, (b) net worth, and (c) failing to certify taxcompliance.51

The first two criteria of the amended statutorydefinition of covered expatriate are based on unjus-tified assumptions regarding net worth and annualincome. For example, if an individual’s net worthand average annual net income for the past five taxyears exceed the thresholds set forth under section877(a)(2)(A) and (B), the IRS assumes that theindividual’s motivation to renounce was tax avoid-ance. Notice 97-19 states that under section877(a)(2), a former citizen is considered ‘‘to havelost U.S. citizenship with a principal purpose toavoid U.S. taxes if the former citizen’s tax liabilityor net worth exceeded specific amounts on the dateof expatriation.’’52 Although the notice is referringto a now-superseded version of section 877(a)(2),the general presumption remains that a taxpayer’sdecision to expatriate is motivated by a tax-avoidance purpose if the taxpayer exceeds the taxliability or net worth thresholds in the currentversion of the statute. If there is any doubt that thepurpose of sections 877 and 877A is to discourageexpatriation to avoid U.S. income tax, one need onlylook to the title of section 877: ‘‘Expatriation toAvoid Tax.’’

The assumption that high-income and high-net-worth taxpayers are necessarily motivated by atax-avoidance purpose is problematic. As describedin Sections B and C, above, the taxpayer’s decisionmay be more closely related to the duplicativeburden and professional costs of complying withtwo countries’ tax laws. In Example 1 (Section C)above, Geoffrey has little if any U.S. income taxliability on his Australian wage and dividend in-come after the application of the U.S. FTC. Evenassuming for the sake of argument that Geoffrey’ssuperannuation account were not subject to U.S.income tax, he would still need to hire a qualifiedinternational tax professional to prepare all of thecomplex information returns reporting his foreignaccounts and assets each year. Attorney Phil Hod-gen perfectly summarizes this problem: ‘‘Imaginewhat it is like to [pay] $2,000, $3,000, or more for taxreturn preparation, with a zero tax bill. It is apointless [and] expensive exercise.’’53

The third criterion for covered expatriate status— failing to certify U.S. tax compliance undersection 877(a)(2)(C) — also targets a tax-avoidancemotive: The IRS assumes that a taxpayer whocannot certify compliance with tax and informationreturn obligations must have renounced for tax-avoidance purposes. The assumption is problematicnot only because expatriation may be related to theburdens of compliance (as discussed above), butalso because it is unclear whether filing amended ordelinquent returns for the five years precedingexpatriation meets the compliance requirement.Form 8854 simply requires taxpayers to certify thatthey have ‘‘complied with all of [their] tax obliga-tions for the 5 preceding tax years’’ and not thatthey have timely filed true, correct, and completeincome tax and information returns for those years.Thus, it appears (although it is not entirely clear)that taxpayers can restore compliance for previousyears by filing amended or delinquent informationreturns for the past five tax years and paying anyadditional income tax due (assuming that all re-turns and forms are filed and all taxes are paidbefore completing the Form 8854).

Further, taxpayers who are compliant with theirU.S. income tax and information return require-ments may still be motivated by a tax-avoidancepurpose to renounce or relinquish their U.S. citizen-ship.

Example 2: Jack, a wealthy businessman, wasborn in the United States to American parentsand has lived his entire life in the UnitedStates. Starting in the mid-1980s, Jack opened

individual’s expatriation date. Instructions to Form 8854, at 3(rev. 2014). Thus, for U.S. citizens or residents living outside theUnited States and renouncing their citizenship on October 1,2015, the due date for Form 8854 is the same due date as for thetaxpayers’ 2015 Form 1040 (June 15, 2015, which is the standardApril 15 due date plus an automatic two-month extension oftime to file for U.S. citizens and resident aliens living abroad).

48P.L. 108-357, section 804(a)(1) (Oct. 22, 2004).49Section 877(a)(1).50Id. Section 877(a)(2).51P.L. 108-357, section 804(a)(2) (Oct. 22, 2004).52Notice 97-19, section I, at 1.

53Hodgen, ‘‘Why People Expatriate,’’ HodgenLaw PC Inter-national Tax Blog (June 5, 2012).



(C) T

ax Analysts 2015. A





several bank accounts in offshore tax havenssuch as Switzerland and the Cayman Islands.Jack’s sole reason for opening these foreignaccounts was to shield his considerable assetsfrom U.S. income tax. Jack married Jill, also alifetime U.S. citizen, approximately 20 yearsago. Fully aware of the expatriation tax rules,Jack liquidated the assets in these foreignaccounts 10 years ago (in 2005) and gifted theproceeds and other assets to Jill (who becamethe sole owner, not a joint or co-owner withJack). Jack also started to file his U.S. incometax returns as ‘‘married filing separately.’’ As aresult of Jack’s gifts to Jill and his choice to fileas ‘‘married filing separately,’’ Jack does notmeet the net income test of section 877(a)(2)(A)or the net worth test of section 877(a)(2)(B).Further, Jack signed the certification of com-pliance on Form 8854 under penalty of perjurybecause he has been fully compliant with hisU.S. income tax and reporting requirementsfor the past five years, despite his noncompli-ance from the mid-1980s to 2005. Jack re-nounces his citizenship in 2015 and is notresponsible for the mark-to-market expatria-tion tax under section 877A because he fallsunder the net income and net worth tests andmeets the compliance certification require-ment.Example 2 illustrates that tax compliance in the

five-year period preceding expatriation should notbe considered persuasive evidence of the lack of atax-avoidance motive. Individuals like Jack are freeto structure their affairs to shield their assets fromthe net worth test and keep their incomes below thenet income threshold to avoid the expatriation tax,54

whereas a taxpayer like Geoffrey in Example 1 maynot be so lucky because (1) he does not fall underthe dual citizen exception to the expatriation tax

under section 877A(g)(1)(B)(i),55 and (2) he neverrearranged his assets to fall below the net incomeand net worth thresholds. As explained further inSection E below, there is a broken link between therequirements in the covered expatriate definitionand the question of willfulness.

E. Restoring the Purpose of the Expatriation TaxBefore considering ways to revise section 877A so

as to mitigate its impact on benign actors, one mustfirst determine the overarching legislative purposebehind the section 877A mark-to-market regime. Isthe goal to discourage expatriation (1) for politicalreasons (to keep as many U.S. citizens from re-nouncing their citizenship as possible), regardlessof the existence of tax-avoidance motives; (2) foreconomic reasons (to compensate Treasury for theloss of future tax revenue from the expatriatingcitizens), regardless of the existence of tax-avoidance motives; or (3) specifically to discourageU.S. citizens from expatriating for purposes of taxavoidance? The legislative history of section 877 —which, as discussed in Section D above, contains asubjective tax-avoidance motive test that was laterreplaced with the objective tests for net income, networth, and compliance certification — suggests thatits purpose is primarily to discourage expatriationto avoid U.S. income tax.56

Proposal 1: Require expatriating taxpayers tocertify non-willfullness. If the purpose of the ex-patriation tax is to discourage or even punish U.S.citizens for renouncing for tax-avoidance purposes,as suggested by the legislative history, this purposewould be better served by requiring taxpayers tocertify that they have not willfully (1) structuredtheir affairs to fall below the net income thresholdof section 877(a)(2)(A), (2) structured their assets tofall below the net worth threshold of section877(a)(2)(B),57 or (3) failed to comply with their U.S.income tax and information return requirements inthe five full tax years preceding the expatriation.The specific language regarding non-willfulness

54This is not mere academic speculation regarding a loopholethat few taxpayers are likely to exploit. Although statistics onthe actual number of taxpayers who employ these strategies areimpossible to obtain, several tax practitioner websites discusstax planning strategies for falling below the net income and networth thresholds of section 877(a)(2). See, e.g., Hodgen, ‘‘How toCompute Net Tax Liability for Form 8854,’’ HodgenLaw PCInternational Tax Blog (‘‘If you are thinking about expatriatingat some point in the future, start filing your tax returns using thestatus ‘Married Filing Separately’ rather than ‘Married FilingJointly’. You may be able to avoid covered expatriate status thatway.’’); Chi-Yu Liang, ‘‘A Few Things to Know Before BreakingUp With Uncle Sam,’’ Stout Risius Ross Inc. (Spring 2015)(‘‘Accordingly, there are several ways in which a taxpayer maybe able to plan in order to fall under the $2 million net worththreshold. The individual may wish to make completed gifts toothers by giving annual exclusion gifts, making payments foreducational or medical expenses, or making use of his or her$5.43 million federal gift tax exemption.’’).

55See supra text accompanying note 41 (discussing dualcitizen exception to covered expatriate status under section877A(g)(1)(B)(i)). Geoffrey does not qualify for the dual citizenexemption from the expatriation tax under section877A(g)(1)(B)(i) because he was not a citizen of Australia at birthbut acquired Australian citizenship many years later.

56See supra notes 49-50.57As a public policy matter, the $2 million net worth thresh-

old of section 877(a)(2)(B) should be both increased and indexedfor inflation if the purpose is to target the wealthiest echelon ofexpatriate U.S. taxpayers. For the sake of simplicity, the networth threshold could track the inflation-adjusted thresholdvalue of the taxpayer’s gross estate for federal estate taxpurposes ($5,430,000 for tax year 2015). See section 2010(c)(3)(A);IRS Form 706 instructions (for decedents dying after December31, 2014).



(C) T

ax Analysts 2015. A





could be borrowed from the certification formsrequired for participation in the streamlined filingcompliance procedures.58 These new certificationforms, which could be titled ‘‘Certification by U.S.Person of Non-Willfulness for Purposes of the Ex-patriation Tax,’’ might require taxpayers to certifysomething like the following under the penalty ofperjury:

I certify that I have not at any time intention-ally structured my affairs and/or assets inorder to fall below the applicable net incomethreshold under section 877(a)(2)(A) of theInternal Revenue Code (the ‘‘Code’’) or theapplicable net worth threshold under section877(a)(2)(B) of the Code in such a way as toavoid the expatriation tax (or ‘‘exit tax’’) undersection 877A of the Code. I further certify thatany tax non-compliance within the five (5) taxyears preceding the date of my expatriationwas due to non-willful conduct. I understandthat non-willful conduct is conduct that is dueto negligence, inadvertence, mistake, or con-duct that is the result of a good-faith misun-derstanding of the requirements of the law.

I recognize that if the Internal Revenue Servicereceives or discovers evidence of willfulness,fraud, or criminal conduct, it may open anexamination or investigation that could lead tocivil fraud penalties, FBAR penalties, informa-tion return penalties, or even referral to Crimi-nal Investigation.

As discussed in Section D above, it is not entirelyclear whether taxpayers who eventually come intocompliance with their U.S. income tax and informa-tion return requirements by filing amended ordelinquent income tax and information forms afterthe applicable due dates for these forms but beforethe date of expatriation are entitled to ‘‘certifyunder penalty of perjury that [they have] met therequirements of this title for the 5 preceding taxableyears’’ under section 877(a)(2)(C). To clarify thispoint, the IRS should issue guidance to say thattaxpayers who have satisfied all the requirements ofeither the OVDP or the streamlined filing compli-ance procedures — including taxpayers that haveopted out of the OVDP and have paid all applicabletaxes, interest, and penalties — are deemed to havemet the requirements of this title for the five pre-ceding tax years under section 877(a)(2)(C).

Proposal 2: Add a new category of ‘restoredcompliance’ taxpayers to the list of taxpayers ex-empt from covered expatriate status. In this au-thor’s opinion, clarifying that participants in theOVDP or the streamlined filing compliance proce-dures are entitled to certify compliance for the fivepreceding tax years does not go far enough tofurther the IRS’s objectives of encouraging volun-tary compliance and discouraging tax evasion. Ifthe IRS truly wishes to encourage delinquent tax-payers with foreign income and assets to come intocompliance with their U.S. income tax and informa-tion return requirements, the IRS should ask Con-gress to add a new exception to the coveredexpatriate rules under section 877(c). This newsection (section 877(c)(4)) might read as follows:

(4) Taxpayers who restore past non-compliance. The Secretary shall prescribe suchregulations as may be appropriate to exemptindividuals who restore non-compliance withthe requirements of this title for the 5 preced-ing taxable years by satisfying the applicablerequirements of the (1) Offshore VoluntaryDisclosure Program (either through an ex-ecuted Closing Agreement or through a com-pleted examination following an opt-out ofthis Program), (2) Streamlined Filing Compli-ance Procedures, or (3) similar settlement ini-tiative.The IRS could promulgate a new regulation

under section 877 stating as follows:A taxpayer meets the section 877(c)(4) excep-tion from the ‘‘covered expatriate’’ definitionof section 877A(g)(1) if:

1. the Secretary and taxpayer have fullyexecuted a Form 906 Closing Agreementand the taxpayer has (a) applied for par-ticipation in the Offshore Voluntary Dis-closure Program or similar settlementinitiative, (b) completed that program’scertification process, and (c) paid all ap-plicable tax, penalties, and interest inaccordance with the terms of that Form906 Closing Agreement prior to executionof the Form 8854: Initial and AnnualExpatriation Statement;

2. the taxpayer has (a) applied for partici-pation in the Offshore Voluntary Disclo-sure Program or similar settlementinitiative, (b) has made an irrevocableelection to ‘‘opt out’’ of that Program, and(c) the taxpayer has paid all applicabletax, penalties, and interest assessed bythe Internal Revenue Service in a civilexamination following the taxpayer’selection to ‘‘opt out’’; or

58See Form 14653, ‘‘Certification by U.S. Person ResidingOutside of the United States for Streamlined Foreign OffshoreProcedures’’ (Jan. 2015); Form 14654, ‘‘Certification by U.S.Person Residing in the United States for Streamlined DomesticOffshore Procedures’’ (Jan. 2015).



(C) T

ax Analysts 2015. A





3. the taxpayer has completed all of therequirements of the Streamlined FilingCompliance Procedures (either the Do-mestic or Offshore Procedures), includingpaying all applicable tax, penalties, andinterest in accordance with the terms ofthose Procedures.

Narrowing the covered expatriate definitioncould potentially undermine U.S. public policy in-terests by making it easier to expatriate. Even so,excepting OVDP and streamlined participants fromthe rules — regardless of those individuals’ annualincomes or net worth — is more likely to advancethe overarching legislative goals of sections 877 and877A by more specifically targeting bad actors whoseek to expatriate to avoid past, present, and futureU.S. tax obligations.

Adding an exception to covered expatriate statusfor OVDP and streamlined participants would en-courage voluntary compliance and facilitate theexpatriation process for those taxpayers who haverestored compliance through the OVDP or stream-lined procedures. Forcing taxpayers who have re-stored compliance to pay the expatriation tax isparticularly unfair because (1) formerly noncompli-ant taxpayers who have completed the OVDP pro-cess have already been punished by paying amiscellaneous penalty as high as 50 percent (but27.5 percent for most taxpayers in the OVDP)59 oftheir highest aggregate offshore account balanceover an eight-year voluntary disclosure period (inaddition to the additional income tax, substantialunderstatement penalties, failure-to-file and failure-to-pay penalties (if applicable), and interest on theunpaid tax); (2) noncompliant taxpayers who haveopted out of the OVDP have already been punishedby paying additional income tax, interest, and (ifapplicable) civil penalties (including non-willful orwillful failure-to-file FBAR and other informationreturn penalties) in the course of a civil examinationfollowing the opt out; and (3) noncompliant taxpay-ers who have completed the streamlined filing

compliance procedures have already certified underthe penalty of perjury that their compliance prob-lems are attributable to non-willful conduct.60 Thiscertification in itself should be sufficient to over-come the presumption that the taxpayer expatriatedfor purposes of tax avoidance.

F. ConclusionWhen section 877 was initially enacted, its pur-

pose was clear — to impose a harsh penalty, in theform of an expatriation tax, on those expatriating toavoid U.S. income tax. Unfortunately, the subjectivemethod that the statute initially used to assess theexpatriating taxpayer’s motivation was too difficultto enforce. To ease the administrative burden on theIRS, Congress replaced the subjective test with anobjective one: Under the current version of section877 (and the newly enacted section 877A), a tax-avoidance motive can be inferred only when ataxpayer meets specific objective criteria such asexceeding the net income or net worth thresholds orfailing to certify compliance with U.S. income taxand reporting requirements.

The problem with the new test is that the objec-tive test (1) has lost much of the spirit and intent ofthe original statute, and (2) is vulnerable to abuseby bad actors who are able to shift their income andassets to fall below the applicable thresholds. Con-gress and the IRS could help to restore some of theoriginal spirit and intent of section 877 by requiringtaxpayers to certify that they have not willfullystructured their affairs or assets to fall below theapplicable net income and net worth thresholds ofsection 877(a)(2) and by adding an exception to theexpatriation tax for individuals that have com-pleted the OVDP or streamlined filing complianceprocedures. This would (a) discourage expatriationfor tax-avoidance motives without unnecessarilypunishing taxpayers who have voluntarily dis-closed and resolved their past noncompliance and(b) encourage compliance for the vast majority ofbenign actors who want to remain U.S. citizens.

59See 2014 OVDP FAQs, supra note 12, at 7.2 (explaining thata miscellaneous penalty of 50 percent of the highest aggregateaccount balance will be imposed only when the U.S. govern-ment is investigating the FFI in which the account is held orwhen another facilitator assisted in establishing the offshoreaccount); id. at 7 (imposing a default miscellaneous penalty rateof 27.5 percent of the highest aggregate account balance in allother circumstances).

60See supra note 58 (discussing Form 14653 and Form 14654).Also, participants in the streamlined domestic offshore proce-dures are required to pay a miscellaneous penalty equal to 5percent of the highest end-of-year balance over the six-yearlookback period. Participants in the streamlined foreign off-shore procedures are not responsible for paying a miscellaneouspenalty. See streamlined filing compliance procedures, supranote 15.



(C) T

ax Analysts 2015. A





50th AnnualHeckerling Instituteon Estate Planning™

January 11-15, 2016 Orlando, Florida

Unparalleled Coverage of Individual and Estate Planning

Online Registration and Brochure Available at www.law.miami.edu/heckerling

Flexible Planning Strategies for a Changing World

Recent Developments PanelAdvising Clients in Times of Protracted Change Modern Use of Partnerships The Supreme Court in the Age of Obama Marital Planning in a New EraPost-Mortem Planning

Planning With Trusts

Navigating the NIITTrustee SelectionRejuvenating Irrevocable TrustsLifetime QTIPs

Charitable Giving

Ethical IssuesPlanning and Drafting CRTs and CLTsPlanning Implications of Alternative Investments

Planning with Financial Assets

Intra-Family Options and Derivatives Alternative Investments The Impact of Chapter 14Asset ProtectionInsurance Planning

Elder Law

Planning for Clients with Diminished Capacity Special Needs Trusts Protecting your Client in Guardianship Court

International Planning

Planning for Clients with International ConnectionsThe Changing World View of U.S. Estate PlanningNaturalization and

Opportunities

Litigation

Protecting Our ClientsFiduciary Case Law Update Current Audit Issues and TrendsLessons from the Huguette Clark Probate Contest

Fundamentals

International PlanningThe Nuts and Bolts of CRTs and CLTs

Skills

years50

Expand Your Practice!

An LL.M. degree from the Heckerling Graduate Program in Estate Planning will advance your career in sophisticated individual and estate planning. Full and part-time programs are available. To learn more visit: www.law.miami.edu/estateplanning

(C) T

ax Analysts 2015. A





Documents

FATCA and the Road to Expatriation...B. An Overview of FATCA The most significant nonpolitical reason for re-nouncing one’s U.S. citizenship can be summarized in five letters. FATCA,