Exit Tax Revisited

June 1, 2012 — Leave a comment

Eduardo Saverin, co-founder of Facebook and multi-billionaire, renounced his U.S. citizenship prior to the ubiquitous social networking site going public. He would have been responsible for paying millions of dollars in U.S. taxes when the company went public, however, because he is not technically a U.S. citizen, he is un-taxable. As a result of such a large-scale tax dodge, Senator Charles Schumer (D-NY) and Bob Casey (D-PA) called for strengthening the exit tax that renouncers must pay to the government.

Currently U.S. citizens seeking to renounce their citizenship are taxed at a rate of 15% which applies to all untaxed appreciation on assets for those who have a net worth of $2 million or more. The exemption for 2012 was $651,000 of appreciation. Senators Schumer and Casey propose to change the overall penalty for renouncing citizenship to a 30% tax on all future investment gains earned in the U.S. This means even when the former U.S. citizen lives in a different country, he/she will still be taxed on gains made in the U.S. If the tax is not paid, the person will be restricted from re-entering the country.

The exception to this proposal is to those who prove they fled the country not for tax reasons. However, this proposal can be quite severe and has an unlikely chance of passing through the Senate and the House.

Another proposal which is further down the pipeline appears to be more practical. This calls for revoking or denying passports to delinquent taxpayers who owe the IRS $50,000 or more.  The proposal passed the Senate in February and is currently being held before the House now. The revenues used from this bill would fund a highway-transportation bill that extends provisions set to expire on June 30.

In recent research, the State Department issued passports to over 224,000 U.S. citizens who still owed approximately $6 billion in taxes. Most were individual income taxes and almost 2/3 was more than three years old. A few outstanding claims were found with one individual owing nearly $46.6 million in taxes and another owing $40 million in taxes. Despite filing tax liens against both of them, all of the taxes have yet to be collected. The Senate’s provision to the bill is allowing U.S. officials to deny passport requests for those who still owe more than $2,500 in child support.

There are many citizens travelling the world with thousands, if not millions of unpaid taxes and the U.S. government is beginning to crack down on these delinquents. It is important to realize that by not paying taxes, some liberties we take for granted can be denied.

JDKatz, P.C. is a full-service law firm focused on tax law and estate planning.  We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.

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