A covered expatriate is an individual who either:
1) Relinquishes their U.S. citizenship; or
2) Terminates their long-term residency status after June 16, 2008.
The act of expatriation, triggers two (2) taxes:
1) Under IRC Section 877A, a “mark-to-market tax” is imposed on the expatriate taxing net gains on assets (in excess of $651,000 in 2012).
2) Under IRC Section 2801, a gift tax is imposed on a U.S. citizen or resident alien who receives property as a gift from a “covered expatriate.”
The expatriation date is the date:
1) A U.S. citizen relinquishes their citizenship;
2) A long-term resident alien ceases to be a lawful permanent resident.
A U.S. citizen relinquishes his U.S. citizenship at the earliest date when:
1) He renounces his nationality before a U.S. diplomat or consulate officer;
2) He provides a statement of voluntary relinquishment to the Department of State;
3) The Department of State issues the individual a certificate of loss of nationality, or
4) A U.S. Court cancels a naturalized citizen’s certificate of naturalization.
A lawful permanent resident (IRC Section 7701(b)(6), terminates their legal status if:
1) They commence to be treated as a resident of a foreign country under the provisions of an applicable tax treaty with the U.S.
2) Does not waive tax benefits available under an applicable tax treaty.
3) Notifies the IRS of the commencement of such treatment (e.g., by claiming treaty benefits on a Form 8833 filed with his U.S. income tax return (Form 1040 NR).
Tax Deferral (“Mark-to-Market Tax”)
Under IRC Section 877A, a covered expatriate can irrevocably elect, on an asset-by-asset basis, to defer the payment of the “mark-to-market tax” attributable to an asset, until the due date of the return for the year in which such property is sold or exchanged.
The taxpayer must:
1) Irrevocably waive the benefit of any U.S. tax treaty that would preclude assessment of the tax.
2) Provide adequate security (including a bond conditioned on the payment of tax and interest, and meeting the conditions of IRC Section 6325).
Interest accrues on the deferred tax at the normal underpayment note.
Under the Reed Amendment:
“Illegal Immigration Reform and Immigrant Responsibility Act of 1996 (PL 104-208)”, enacted 9/30/96, it bans re-entry to the U.S. of former citizens who expatriated for a principal tax avoidance purpose (in the Attorney General’s opinion).