“Covered Expatriate” Status is a “Scarlet Letter”
Throughout Tax-Expatriation, I have tried to emphasize the importance of avoiding “covered expatriate” status, if at all possible – and at all costs. It is a technical term defined in the tax law.
“Covered Expatriate” status is a “Scarlet Letter”.
There is much misunderstanding about how the tax expatriation provisions of the law apply. Many people think they only apply to wealthy individuals. This is not the case.
See various posts explaining the importance of the Certification Requirement of Section 877(a)(2)(C):
Why a Naturalized Citizen cannot avoid “Covered Expatriate” status under IRC Section 877A(g)(1)(B)
Can the Certification Requirement of Section 877(a)(2)(C) be Satisfied “After the Fact”?
As explained throughout, there are many ways for individuals to fall into the “covered expatriate” category. I liken it here to the “Scarlet Letter”. The fictional protagonist in Nathaniel Hawthorne book, could never shed herself of the consequences of her infidelity and wore the Scarlet Letter for life. It had devastating consequences to her, her loved ones around her and especially her daughter.
This is also true for “covered expatriate” status; but it is not fictional. Covered expatriate status can never be shed and can have disastrous consequences not only for the former USC or LPR; but also to the friends and family of the individual who carries around the “covered expatriate” status for life. See, The dangers of becoming a “covered expatriate” by not complying with Section 877(a)(2)(C).
In the book, the protagonist took the Scarlet Letter to her grave and had it on her tombstone. “Covered expatriate” status extends beyond the grave and beyond the tombstone. Any loved one who is a U.S. person of a “covered expatriate” who receives a gift or inheritance, will be subject to a tax; even if the inheritance occurs many years after the death of the covered expatriate. In this case, the Scarlet Letter transfers to the loved one who receives property in the future and continues on for another generation. At least in Nathaniel Hawthorne’s book, the daughter Pearl received an inheritance not tainted by the Scarlet Letter.