Dear Secretary Snow:
We are writing to bring to your attention a matter of mutual concern involving taxpayers whorelinquish their U.S. citizenship and long-term resident status with the purpose of avoiding U.S. taxes.In 1966, Congress enacted special rules to determine the appropriate tax treatment for those whorenounce their U.S. citizenship for tax avoidance purposes. Under the alternative tax regime, formercitizens are subject to an alternative method of income taxation for 10 years following citizenshiprelinquishment.
In 1996, several extensive changes were made to the alternative tax regime as part of the HealthInsurance Portability and Accountability Act. These changes followed press reports and Congressionalhearings indicating that a small number of very wealthy individuals had relinquished their U.S.citizenship to avoid U.S. income, estate, and gift taxes, while nevertheless maintaining significantcontacts with the United States. The 1996 Act also extended the revised alternative regime to longtermresidents and added an immigration provision which denies re-entries into the U.S. for individualsif the Attorney General determines that they renounced their citizenship for tax motivated reasons.
In a study published in 2003, the Joint Committee on Taxation (JCT) concluded that there isvirtually no enforcement of the special tax and immigration rules applicable to tax-motivatedcitizenship relinquishment and residency termination. Further, a study conducted by the GAO in 2000concluded that the IRS does not yet have a systematic compliance effort in place to enforce the presentlaw alternative tax regime. Based on the GAO and JCT staff review, since that time, the IRS generallyhas ceased all compliance efforts directly relating to the income, estate, and gift tax obligations offormer citizens and former long-term residents under the alternative tax regime. The only enforcementeffort by the IRS is to publish the names of individuals who have filed a Certificate of Loss ofNationality (CLN) in the Federal Register. It is our understanding that the INS and the Department ofState have not denied re-entries into the United States to a single former U.S. citizen or long-termresident under the 1996 tax avoidance immigration rule. Moreover, the GAO stated in its 2000 reportthat the IRS has never pursued an audit or otherwise examined those former citizens or former longtermresidents who were determined in the ruling process to have a principle purpose of tax avoidance.
According to the JCT, monitoring the activities of individuals who no longer reside in theUnited States is inherently difficult, and that the need to do so poses serious challenges in enforcingthese rules. We understand that under the present regime an expatriate could wait until the 10-yearperiod expires before he or she disposes of U.S. property or hold foreign assets to avoid taxationaltogether. An expatriate could also borrow against these assets and have access to additional capitalwhile avoiding taxation under the special expatriation rules.
We are requesting that you provide data on the number of expatriates subject to the alternativetax regime and how much revenue has been collected by the IRS under the alternative tax regime since1996. Please provide this information on a year by year basis. We are also interested in theDepartment of the Treasury=s views on whether former citizens and former long-term residents arecomplying with the regime, whether any compliance problems can be adequately addressed by JCT=srecommendations, or whether more fundamental reform, such as a mark-to-market approach asapproved by the United States Senate as part of the AArmed Forces Tax Fairness Act of 2003,@ wouldbe more effective.
Our interest is to ensure that those who pay their fair share on income they earn within theUnited States are not taken advantage of by those who renounce their U.S. citizenship or long-termresidency. When expatriates avoid or evade their share of taxes, it falls on everyday Americans tomake-up the short fall. This is not acceptable. We appreciate your prompt attention to this matter andlook forward to receiving your response.
Sincerely yours,
Max Baucus Charles E. GrassleyRanking Member Chairman
