Expatriate tax.

The Joint Committee on Taxation (JCT) released a report, Review of the Present-Law Tax and Immigration Treatment of Relinquishment of Citizenship and Termination of Long-arm Residency (JCS-2-03), which reviews the adequacy of current tax law on expatriate and former resident income.

Since 1966, the "alternative tax regime" (ATR) has been the principal mechanism by which the U.S. government has retained tax jurisdiction over expatriated U.S. citizens and former long-term residents. The ATR taxes a U.S. citizen's U.S.-source income at normal tax rates for 10 years following expatriation or termination of residency, if the principal purpose was tax avoidance.

Under the ATR regime, the presumption that tax avoidance is the principal reason for a revocation of citizenship or termination of residency arises if the citizen's U.S. tax liability averaged $100,000 annually for the five years preceding revocation or if, on the revocation date, his or her net worth is at least $500,000.

The taxpayer may request an IRS ruling to determine if the principal reason for expatriation or termination is tax avoidance. A citizen must also provide the IRS with tax information on the date of revocation, to aid in tracking the taxpayer, or face a penalty of the greater of $1,000 or 5% of the tax liability imposed under the ATR for the year in question. However, according to the JCT report, the IRS has yet to impose any penalties.

The report indicates that the ATR regime has been a total failure, due in large part to poor IRS enforcement and the fact that the IRS has no procedure for monitoring expatriates for the 10-year period after expatriation or for assessing and collecting income tax from tax-motivated expatriates. In fact, the IRS could not show that any tax has been collected from any expatriate, because it does not track such information. In addition, the IRS has no procedures for working with governments of nations where expatriates reside, to compel compliance.

The JCT report makes several recommendations, including:

1. Use the monetary standards as bright-line tests and eliminate the ruling process.

2. Maintain the Sec. 877 exceptions without the need for a ruling.

3. Create a tax-based system for determining the expatriation date.

4. Require expatriates and former residents to file annual returns, even if no tax is due, to assist the IRS in monitoring their activities during the 10-year window.