Caplin & Drysdale's Dianne C. Mehany spoke with Tax Notes concerning the considerable drop in U.S. expatriations. Previously, there was a major uptick in U.S. expatriations due to the reporting requirements imposed under the U.S. Foreign Account Tax Compliance Act. The recent change in trajectory has left some observers with theories but no definitive answers for the reason behind the change. For more on the story, please visit Tax Notes' website (subscription required).
Excerpt taken from the article "Theories for U.S. Expatriation Numbers Abound, but Answers Elusive" by Andrew Velarde for Tax Notes.
"Frankly . . . I think it's anyone's guess at this point," Dianne Mehany of Caplin & Drysdale Chtd. said.
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Mehany speculated that the dip in quarterly expatriations could be explained by the lag time in reporting by the U.S. government. Even though the names of individuals who expatriate should appear in the Federal Register each quarter, the reporting does not always happen immediately, she said, and the IRS may not receive information immediately, given that an expatriate usually does not receive a formal Certificate of Loss of Nationality for more than a month because of processing time at the State Department. And low expatriation numbers for some quarters, notably the 45 reported for December 2012, has led some to wonder whether the quarterly data are sometimes incomplete. (Prior analysis 2013 WTD 165-4: News Stories.)
"I have had clients whose names did not appear for one quarter at least," Mehany said. "In that case, the March numbers would actually reflect those Americans who expatriated before December, while the June numbers would show those persons expatriating by March. This would make sense, logically, as there is always a rush to the embassy before the year-end to avoid an extra year of status as a U.S. person, and a noticeable slowdown in the beginning of the following year." She added that often those seeking to expatriate have found the wait for an appointment toward the end of year to exceed two months, while in the new year, one can receive an appointment within days of the request.
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But, a delay in reporting is only one theory behind the drop in reported expatriations. Mehany also hypothesized that the decline may be due to a realization by the community at large that an expatriation during 2015 does not successfully remove a person from classification as a "specified U.S. person" for FATCA reporting purposes. Under reg. section 1.1473-1(c), a specified U.S. person is defined by excepting U.S. persons who are not included under the definition. Mehany said that many American citizens and green card holders may have previously, and mistakenly, believed that because their countries of residence would begin reporting under an intergovernmental agreement in mid-to-late 2015, expatriating by that date would enable the expatriate to avoid application of the FATCA regime.
"That is, of course, patently false. Classification has already occurred, and expatriating in 2015 does not accomplish anything from a FATCA perspective. Clients are becoming educated to this truth, and this may explain the corresponding downturn in expatriations," Mehany speculated.
While arguing that the seasonal fluctuations in expatriation numbers would probably remain regardless of future trends, Mehany guessed that a continued overall downturn in the numbers could depend on IRS budget cuts and levels of enforcement.
"People are starting to hear about the dramatic budget cuts, the drop of enforcement personnel at the IRS," Mehany said. "If FATCA materials obtained are not processed in a way that leads to prosecutions of so-called tax-dodgers, then I think it will calm down and I think we will see a return to the pre-2008 numbers, because it won't be in the forefront of everyone's mind." Conversely, future highly publicized prosecutions may also result in an upward trajectory of expatriations, she surmised.
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Mehany argued that the implementation of a bona fide residence exception to FATCA could lower the number of expatriations: It could lessen investigations into U.S. citizens abroad who have not historically filed tax returns or FBARs and also dampen press coverage regarding the long reach of U.S. taxation, which puts the U.S. citizens abroad on notice of the issue, he said.
"I've had many clients reside for 20 or 30 years outside the U.S. and still at their heart consider themselves U.S. citizens, until they are faced with what they see as an unfair targeting, especially if they are in a higher tax jurisdiction. And that forces the difficult choice of deciding whether [they] still have ties to this country," Mehany said.