US citizens living outside their country of birth should consider how best to renounce citizenship without facing crippling restrictions on being able to re-enter the US, Moodys Tax Advisors, a firm based in Calgary, Canada, has warned.

As the US – unlike most other countries – operates a worldwide system of tax, and has sought to enforce this through tough legislation such as the FATCA Act – there has been an upsurge in the number of citizens trying to remove their citizenship.

“If you are one of the many US citizens contemplating renouncing your US citizenship, Congress recently sent a fairly clear message that now, as opposed to later, may be the right time to get out of the club. On June 12, 2013, US Senators Jack Reed and Chuck Schumer attempted to add yet another hurdle in the ongoing saga for those individuals looking to renounce their US citizenship in filing an amendment to the immigration reform bill, which attempted to ensure that the US Department of Homeland Security could exclude certain individuals from re-entry into the US forever,” Alexander Morino, of Moodys, said in a note.  

“If the proposed amendment had made its way into law, it would have excluded from re-entry not only former US citizens who renounce for tax avoidance purposes (as is the current law), but also renouncing individuals who are considered "Covered Expatriates" under Internal Revenue Code 877A,” he said.

“What is most important to take away from this failed passage of legislation is that the issue of renouncing one's US citizenship is again front and centre on Congress's radar and the only guarantee moving forward is that any potential changes will not make things any easier to get out,” he continued.

“The first quarter of 2013 saw the highest number of US citizens renouncing in history. This record number of US citizens looking to get out represents substantial losses in the number of taxpayers and tax dollars collected on behalf of the IRS (during life and at death).  Congress is clearly aware of this fact and appears poised to put the brakes on the mass exodus,” he continued.

Although accurate figures are hard to obtain, most reports and commentaries indicate there are around between six and seven million expat Americans. According to Federal Register data, 1,131 people gave up their US passports at American embassies in the year to June, 2013. Only 189 US nationalities were renounced by expats the year before.

According to Moodys’ Morino, under the failed amendment, a renouncing individual who was classified as a “Covered Expatriate” would have had to prove to the Department of Homeland Security by "clear and convincing" evidence that he or she did not renounce for tax avoidance purposes. The burden of proving this negative would have fallen on the renouncing Covered Expatriate if he or she desired to ever re-enter the US.

“If similar legislation to the failed Reed-Schumer Amendment later becomes law, the importance of avoiding the US exit tax under 877A will be even more important than before,” he said.

“This automatic presumption of having renounced for tax avoidance purposes would have resulted in the Covered Expatriate having to retain counsel and present evidence before the Department of Homeland Security to prove that he or she did not renounce for tax avoidance purposes. The burden of proving a negative is extremely difficult in any situation,” he said.

“The Reed-Schumer Amendment recently failed to become US law, but the danger of inadvertently being barred from the US while also being hit with the US exit tax may still be of real concern for those considering renouncing in the near future and beyond,” he continued.

(Moodys Tax Advisors has no connection to Moody's, the global credit ratings agency.)