A clampdown on taxing US citizens living abroad is having an unintended consequence with growing numbers preferring to ditch their passport rather than face disclosing their overseas assets.
The figures come from the Internal Revenue Service (IRS), which reveals that in the first quarter this year 670 Americans ripped up their passports.
By doing so, they have also given up the prospect of receiving any future tax bills since America is the only country to tax citizens no matter where they live in the world.
This growing trend is the biggest number since the IRS began publishing the figures in 1998 and has already reached around 75% of the total number of passports handed in last year.
Not unpatriotic
Critics say 2013 will set a new record for Americans giving up their citizenship to escape onerous US income and estate taxes.
Perhaps the biggest reason for the escalation in the figures is the introduction of the Foreign Account Tax Compliance Act (FATCA) which is seeing increasing numbers of countries sign up.
The idea behind the US law is to reveal overseas assets being held by Americans worth more than $50,000.
FATCA is becoming increasingly controversial as the declaration deadline of January 2014 draws near.
However, tax lawyers in the US say that those dumping their passports should not be seen as unpatriotic or trying to avoid paying their taxes, but instead, the blame should be laid squarely aimed at America’s complex tax regulations.
Complex and confusing rules
Jeffrey Neiman was a federal prosecutor who helped in the US government’s recent offshore banking investigation and he says the rules for Americans, particularly rich ones, are complex and confusing.
“The rules are so complicated that those Americans with good intentions could easily find themselves on the wrong side of the law and it’s for this reason we might be seeing record numbers recounting their US citizenship,” he said.
The ongoing campaign to unveil foreign bank accounts and the assets they hold has already led to more than 40,000 Americans voluntarily declaring their secret accounts to the IRS in a bid to receive reduced fines and penalties rather than face prosecution.
However, US officials suspect that this number is only a fraction of the total held and point to the fact that more than 6 million Americans live abroad, but only 2 million filed tax returns last year.
Paying the estate tax to the United States is a big deal if you don’t live in the U.S. anymore but the compliance costs of tracking phantom capital gains/loss against the rise and fall of the USD is a nightmare.
The 670 figure is inaccurate it is unknown what it is based on. Some listed renounced during other quarters, some who renounced have not yet been listed, some mentioned in the press were listed the same quarter, some who filed form 8854 were not listed, etc. The FBI NICS count for those who renounced is much larger, even though it excludes relinquishments. In any case, it is clear that there is no transparency on this issue. Maybe FATCA will lead to more financial transparency but less citizenship transparency.
As I understand it, not all of the 40’000 who entered OVDI/P had “secret” accounts. Rather, many had unreported local accounts and simply responded to threats resulting from new policies.
Right you are!
FATCA isn’t just about the “rich” many of whom can afford expensive tax attorneys that do international tax forms each year for them so it isn’t going to be as big of a hit to them really. It’s those who are lower and middle class abroad who never would have owed any tax but, just cannot find or afford someone in their community to handle U.S. tax forms and we all know the ones we have to file from abroad are far more complicated than the ones “home landers” get to file. Further in my case I will have to relinquish as my spouse who is Canadian and makes ALL of our income here in Canada has flatly refused to go along with FATCA reporting on his accounts. Well, renounce or divorce or give up having my name on our checking account and home. I’m not willing to become a pauper at this age and I’m sure not divorcing a good man who has supported me for over thirty years. That leaves me having to divorce myself from my country of birth. There is no solution to FATCA for some other than that and it’s been exceedingly painful to find out a country I once believed in so strongly could do this to it’s citizens without a care in the world. For a long time I met with tons of anti Americanism here and I always felt insulted by it but, tried hard over the years to represent the face of a “good American” to those nay sayers. Now I am not sure they were wrong about the U.S. being a bully. There’s NO GOOD REASON the people I see suffering under this should be getting treated this way. Ex pats are I see now hated inside and outside the country. If I knew thirty years ago what I know now I might have advised my spouse not to marry me so as to save him from all of this as it was impossible for him to move to the U.S. at that time. I don’t think I’ll ever forgive Obama, Levin and all the rest of them who pushed this so hard on us. Ever.
The penalties are moronic and draconian.
The whole concept of taxing people based on their citizenship vs their country of residence is asinine.