The Expatriation List: Misunderstood But Important US Tax Policy Guide
A “List” of US citizens who have chosen to renounce their citizenship has some shortcomings as a measure but is nevertheless a “Canary in the coal mine” in highlighting a desire by a significant number of people to quit the US, often for tax purposes. This article explains the system.
An occasional contributor (see an example here) to these pages is David Lesperance JD, of Lesperance Associates. Based in Canada, he comments here about topics such as expatriation, cross-border matters as they affect HNW migration, tax, and other related areas. In this article, he examines in detail the phenomenon of HNW US citizens leaving the country. For perhaps understandable reasons, it is not a subject that is a popular one. But like the figures of internal migrations within the US – such as people leaving California to go to Texas and Florida – it is worth commenting on..
The editors are pleased to share these views; the usual disclaimers apply to comments from outside contributors. To jump into the debate, email email@example.com
One topic the US government doesn’t like to draw too much attention to is the number of wealthy US citizens and long-term Green Card holders who have decided to legally and permanently leave the US tax system.
How do we know this? First, the government has set up some very effective hurdles to slow down, discourage or even prevent American taxpayers from exercising their right to leave.
Second, the government only publishes the names of a fraction of departed taxpayers long after the time they have triggered their departure. Third, the government provides no additional information or breakdowns that might help anyone actually figure out why and when these taxpayers left. And finally, there is no information on the wealth or prior tax contribution levels of these permanently departed former taxpayers. In short, they make it virtually impossible to estimate the loss of annual future tax revenues to the US Treasury arising from these departures.
While complete information is not publicly available, a Canary in the Coal Mine is the Quarterly Publication of Individuals Who Have Chosen to Expatriate List. (“the List”). The List is the report that is published every quarter as required by 26 US Code § 6039G – Information on individuals losing United States citizenship.
Who’s included on “The List”
At first glance one would reasonably assume that the List includes every US taxpayer who is leaving the US tax system. Sadly, this is not the case. In reality, the List only contains some of the names of the former taxpayers…namely those who the US government considers “wealthy”…which they define as having:
-- a net worth in excess of $2 million; or
-- a five-year average annual US federal tax liability in excess of $190,000 (indexed for 2023).
Interestingly, the US government does include on the List:
-- those former taxpayers who fail to certify their US tax compliance for the five years before departure.
Those departing citizens and Green Card holders who set off any one of these three triggers are classified as “covered expatriates.”
Amazingly, the List does not include:
-- US citizenship renunciations which are not covered expatriates;
-- Green Card relinquishments which are not “long-term” (i.e. eight out of 15 years) no matter their net worth or prior federal tax contributions; or
-- Long-term resident relinquishments whether or not they are covered expatriates.
As a result of these shortcomings it is not possible to determine the total lost tax revenues each year from departed taxpayers because there is no indication whether a covered expatriate is worth $2 million or $200 million or more; and long-term Green Card holders who trigger the covered expatriate thresholds are not publicly reported at all!
So what does the government report [do]…and is what it reports helpful in understanding US expatriation?
Covered Expatriates on The List as Reported Each Quarter
These bar charts show what is reported and conceptually illustrate the number of departing taxpayers. I say “conceptually” because neither the IRS nor the State Department provide any numbers for who is not on the List…so the chart does show how many departed taxpayers exist in reality. The only numbers on this chart are the number of Americans who have renounced citizenship and who are covered expatriates.
Another common misconception regarding the List is the timeframe between the date the former taxpayer triggered their departure and the date their names appeared on the List. Most people assume that the List reflects the covered expatriates who departed during the preceding quarter. However, based on tracking my clients, I can confidently say that the average time lag between expatriating and reporting is actually between 12 and 18 months…and sometimes as long as two or more years if the departed taxpayer left early in the year and then triggered legal tax filing extensions.
In addition to the IRS filtering who’s on the List by citizenship and wealth and the time lag limitation, there are other factors that also impact the number of names that are reported each quarter in the List.
Structural/internal factors within control of the US Government:
-- The State Department artificially restricts the number
of renunciation appointments that are available at a given US
-- Not all US missions perform renunciations;
-- Closure of missions in 2021 and 2022 due to the Covid pandemic; and
-- Temporary re-allocation of mission staff due to local or regional issues
-- Government policies, like the Foreign Account Tax
Compliance Act (FATCA) that motivated foreign-based US citizens
of all financial levels to renounce their US citizenship; and
-- Concerns among HNW American taxpayers such as populist tax proposals, gun violence, political polarization/deadlocks and increased violence against specific groups.