Expatriation – Lack of Tax Avoidance Purpose

For expatriates who leave the U.S. prior to the 2004 Tax Act (from 2004 on), they are under the 10 year alternative tax regime (i.e., they are taxed on U.S. source income through 2014).

U.S. tax avoidance is not restricted to the avoidance of a specifically designated tax. For example, the tax expatriation provision included in the estate tax provisions is not limited to a federal estate tax avoidance purpose. If expatriation for estate tax avoidance purposes is identified, the income tax expatriation tax provision could be applied.

U.S. expatriates must negate an IRS argument that any tax avoidance purpose exists upon the termination of U.S. citizenship (or, if applicable, the termination of U.S. residency). A “no tax avoidance” purpose may be explained by a development of law in a foreign country; e.g. several decades ago, certain South American countries announced the planned expropriation of properties of non-citizens, so certain U.S. citizens became citizens of those countries to avoid the expropriation of their substantial business and investment properties located in those countries.

Additional non-tax expatriation motivations may include:

1. Their preferred domicile is a foreign jurisdiction; e.g. Israel, France, United Kingdom, Spain or Greece;

2. To avoid possible U.S. tort liability risks;

3. To live in a preferred retirement location; e.g. the Caribbean, the Mediterranean or the South Pacific.

4. To enable closer management of a foreign business;

5. To move to their spouse’s foreign jurisdiction (i.e. non-U.S. country of origin and domicile).

In the event of an IRS tax audit, the U.S. expatriate must demonstrate legitimate non-tax motivations for their change in U.S. status.

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