Exit tax triggered by renouncing U.S. Citizenship

You need to find one!

More and more U.S. expats are voting with their feet and opting to renounce U.S. citizenship. Renouncing your U.S. citizenship may or may not make sense for you. If you are considering renouncing your U.S. citizenship, the question that most people ask before taking any step is:

“What are the tax consequences of renouncing U.S. citizenship?”

The following is an excerpt from a comment on the Americans Driven To Divorce article on the Globe and Mail site:

“And for the correction: the definition of “wealthy” is based upon total assets and having paid and average of $150,000 of tax over the past 5 years ( not annual income ). Since most do not trigger that threshhold, the entire process is really not that burdensome at all.”

Do you see any mistake(s) in this? I believe that there are (is).

The Importance of Competent Advice

Tax laws are complex and always in a state of change. Renouncing U.S. citizenship may or may not have significant tax consequences for you. This  post is NOT to state what the law is or to give you legal advice. The purpose of this post is to encourage you to seek competent legal advice.

Competent Advice Requires Strategic Thinking

In deciding whether to renounce your U.S. citizenship, you are making one of the most difficult decisions of your life. There are two reasons:

1. For most U.S. expats, the decision to renounce is extremely emotional. After all, you were taught that the U.S. was the greatest country in the world. You were taught the U.S. stood for freedom and justice.  You were taught that the U.S. was based on fairness and due process. You understood that the U.S. would protect American citizens abroad. You now realize that you need protection from the U.S. government. You feel that you have been betrayed.  The IRS has launched a brutal vicious attack on you, your non-U.S. spouse, and your children. The U.S. government has  “criminalized” you for failing to file forms that you didn’t even know existed. You fear the U.S. government and the IRS. Why should the fact that you are an expat make you a tax cheat? You have been living in a state of fear and confusion. You don’t know what to do. You don’t know who trust. You are simply not capable of thinking clearly (or at all).

2. Renouncing U.S. citizenship will have practical consequences for you. Among these consequences are the tax implications. You need a competent professional – who is a sound strategic thinker – to help guide you through this decision. Do NOT get your information from internet discussion groups, blogs (even this one) or anybody but a professional.

Where do you get “strategic thinking?” With the recent experiences of OVDI, learning about FBAR for the first time, and digesting the reality of FATCA, you have received inconsistent advice. Who can you trust?

A Lawyer Is Your Best Bet For “Strategic Thinking”

There is a joke about lawyers to the effect that “the personality of a lawyer is their best form of birth control”. I hate lawyers as much as the next person, and I realize that the next few sentences are full of generalizations, but you should:

Go to a lawyer who specializes in these kinds of issues. What kind of issues? To be specific these issues include (but may not be limited to):

– the law of citizenship

– the law of estates

– the law of tax

– the law of expatriation and what the tax consequences may be


Your Lawyer Must Understand The Financial Products In Your Country of Residence

You need a lawyer who has an understanding of the investment vehicles that you may be using in your country of residence. Because the U.S. taxes its citizens on world income, it is very difficult to manage your day-to-day living as an expat in other countries. Soon it will be near impossible for a U.S. citizen to even open a bank account in many countries. The effect of U.S. tax and information reporting requirements is such that there are many financial products  prohibited to U.S. citizens resident in Canada (from a practical point of view). If you use any of the following: RRSPs, TFSAs, RESPs, whole life insurance products, mutual funds, … you are in trouble.

Do NOT go to an accountant (or worse a tax preparation firm). Accountants and tax preparers (in general there are exceptions) are number crunchers. In my experience, they are less able to help you make one of the most important strategic decisions of your life.

A lawyer – WITH AN EXPERTISE IN THESE AREAS OF LAW – is essential. But, not all lawyers have this kind of expertise. I assure you that your neighborhood lawyer does not. The purpose of this post is NOT to recommend lawyers, but to recommend that you find a lawyer with this expertise.

Communications With A Lawyer Are Privileged

Although there are exceptions, as a general principle this means that the communication you have with a lawyer cannot be disclosed. This may be to your benefit.

Where Do You Find A Competent Lawyer To Help With This Strategic Decision?

Part of the job of the lawyer is to provide practical counseling. This implies that you need  a lawyer that whose practice includes working with individuals (they may or may not work with corporations). As a Canadian politician was fond of saying, you need a lawyer who understands the “kitchen table” not the “boardroom table”.

There are some links on this blog. By the way, I don’t know a single one of these people personally. I chose them because their practice seems to be aimed at individuals.  I have not had any direct experience with any of them – I repeat: I have not had any experience with any of them. So, the choice is yours. I would like to build a directory of lawyers to help with the expatriation process. So, if you are a lawyer who would like to be included – leave a comment here.

That said, I found the information on the following site to be particularly clear and helpful – and one again – I have no experience with this firm.


Think clearly! The future of you and your family depends on it!

A final thought – make sure that you really still are a U.S. citizen. Long term expats who taken out citizenship in another country should seek advice on the state of their U.S. citizenship.

And finally: I just reread this post. It sounds like an advertisement for lawyers. It is not intended to be that – it’s just that with the issues at stake here we need help. I just don’t see where else to get it. You will NOT get it from the IRS or other U.S. government agencies. On the political front you might consider writing Mitt Romney.


2 thoughts on “Exit tax triggered by renouncing U.S. Citizenship

  1. Petros

    I personally am not going to go through a lawyer. Lawyers are opportunists who take advantage of bad law in order to soak you. Same with tax accountants. I see them as necessary evils only to stay out of jail. But they are not going to help me with this issue, unless they are there to protect my fundamental rights which are being summarily violated. The first right which is violated is the right to no taxation without representation.

    My problem is that the exit tax forms are a direct violation of other Constitutional rights. It is for example not their business what my assets are. A sheep goes to the slaughter silently and lays down its life without a realization that they are about to be slaughtered. A citizen fights for his rights–when his government violates his rights he does what he can to abolish that government. Filling out the exit forms is a violation of my rights under the fourth amendment. If they want to know what I have, let them first charge me with a crime and get a judge to issue a warrant. But I am not going to be a sheep and hand over all the information that could land me, an innocent Canadian, in a federal prison, not because of tax evasion or any serious underlying crime, but because of misapplication of a federal law that wasn’t enforced for 30 years.

    If I don’t have those rights as a non-citizen, then I am receiving no protection under US law. That means I am an ex-citizen who is no longer under the jurisdiction of the United States. The exit laws contradict the laws regarding expatriation. I am not a citizen any more according to the law regarding the manner by which a person loses US citizenship. Therefore, I am not required to co-operate with a hostile foreign power. Indeed, my oath to the Queen of Canada would suggest that I owe all my allegiance to her, including paying my taxes in Canada and not paying attention to confiscatory, arbitrary tax laws of another country.

    If I had some assets in the United States, well then, things may be different. But I don’t.

    1. renounceuscitizenship Post author

      Thanks for a great comment – I agree that lawyers are opportunists who want to “soak you”. A number of people caught in this IRS nightmare have had very bad legal advice. It is clear that a number of them regret entering the OVDI program. It is worthwhile to consult a lawyer so that you understand your legal options. You would NEVER allow the lawyer to make the decision for you. On the other hand, it is in my view, important that one understands how the U.S. government views this situation. They need to be understood.

      There is a great line from “Godfather 1” where the Don says:

      “You keep your friends close and you keep your enemies closer”

      If I understand the point – it is that you need to understand the perspective that your enemy has.

      Thanks again – keep the comments coming.


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