Florida residents may have read about the continuing story concerning Facebook co-founder Eduardo Saverin. After news broke that he potentially saved tens of millions of dollars in taxes by renouncing his citizenship ahead of Facebook's initial public offering, Congressional legislators sprung into action. U.S. Senator Charles Schumer has created proposed legislation that has the potential to impose significant penalties on those who give up their passports allegedly to incur a lower tax bill.
Schumer's law is designed to prevent tax evasion and to punish those deemed to have engaged in it. The legislation would give the Internal Revenue Service the power to look into the reasons why people gave up their citizenship. This scrutiny would apply only to people with either an average tax bill of at least $148,000 or a net worth of $2 million or greater. A finding by the IRS that tax evasion was a "main reason" for giving up U.S. citizenship would subject a person to a 30 percent tax rate on future capital gains.
In addition, the legislation would preclude such a person from ever returning to this country. At present, the law in this area is more lenient. Currently, those taxpayers the government determines gave up their citizenship to lower their tax liability can be refused a visa.
Some expressed concern over how the IRS would be able to determine a taxpayer's intent regarding the renunciation of U.S. citizenship. Facebook's Saverin, whose actions seemed to have prompted this legislation, has maintained that taxes had nothing to do with his decision to give up his citizenship.
As mentioned in the prior post, the Internal Revenue Code provides an incentive structure for taxpayers. If Senator Schumer's proposed legislation becomes law, it would certainly alter the incentives to give up one's citizenship and could affect the decision-making process for those Americans with offshore accounts.
Source: Bloomberg, "Schumer Proposes Tax on People Like Facebook's Saverin," Kathleen Hunter, May 17, 2012.