A recent measure from a Colorado district court may lead to negative consequences for US expatriates and those seeking to live and work abroad without renouncing their US citizenship. Is it fair if American expats have their income taxed as if it were earned in the US?
Americans are already familiar with paying taxes: Foreign Account Tax Compliance Act (FATCA), compliance and disclosure obligations, exit taxes payable by those who renounce US citizenship, and obligations to file foreign and US federal-income-tax forms. However, for those who are looking forward to living abroad or already are expats, a new tax might influence them to consider their full expatriation.
After a decision in July this year, the Fixing America's Surface Transportation Act gave the Internal Revenue Service the power to notify the State Department if an American owes more than $50,000 in federal taxes. With that, for those who would like to live abroad or already are, the State Department will be prohibited from issuing a new passport to them and has the authority to revoke a current one except on certain emergency or humanitarian cases.
Some could say international travel could be considered in the Fifth Amendment arguments if it is a fundamental liberty interest. However, during the appealing case of Jeffrey T. Maehr, who owed $250,000 in federal taxes, the court decided that international travel is not a matter of fundamental rights and the revocation of passports would not represent a threat to the Fifth Amendment. Moreover, it should be judged as a case of rational basis, in other words, by the lowest standard of review. Including, if an expat exceeds the IRS's income thresholds or has a net worth of $2 million or more, they will face an exorbitant exit tax on top of other expenses and fees.
Implications for American expats
Although the decision is still in Colorado court, if upheld by other states, the measure and its outcomes, in terms of issuing passports, could have serious implications for Americans living abroad and prevent others from leaving the US.
Therefore, Americans are more willing to give up their citizenship than to pay the taxes imposed on them as expats. Research from Americans Overseas, a European based organization specializing in US tax preparation and supplies information to governments for policy updates, found out that surprisingly 6,705 Americans gave up their citizenship in 2020, 260% more than in 2019.
In a May 2021 report, CNBC noted that a recent survey had found that “nearly 1 in 4 American expatriates say they are ‘seriously considering' or ‘planning' to ditch their US citizenship.” But, those who are willing to give up on that, besides being named and in this way suffering a bit of shame by the IRS, American expats must pay a $2,350 fee and renounce in person at the US embassy in their country of residence. Boris Ryvkin, a corporate attorney policy analyst and former National Security Advisor to a Senator, said to Capital Matters that “the US Congress should pass new legislation either removing the IRS's authority to compel the revocation of Americans' passports in the FAST Act altogether or narrowing its scope.” After all, a full expatriation is currently American expats' best financial option, but it should not be the only one.
