US Expatriates Renounce Citizenship to Avoid Tax Obligations
As the U.S. escalates its crackdown on American citizens who are not paying taxes on their foreign assets, many Americans living abroad are giving up their passports and renouncing citizenship rather than paying taxes to the U.S. government. While it’s true that the number of U.S. citizens renouncing their citizenship is low, the number is growing exponentially.
There are an estimated 6 million Americans living abroad, and the number is climbing. More than 1,000 Americans gave up their passports during the second quarter of 2013, thereby renouncing their US citizenship. According to numbers published by the U.S. Internal Revenue Service, that’s up from 679 in the first quarter of 2013, and up from 189 for the second quarter of 2012.
It’s widely agreed that the reason behind this increase in activity is the Foreign Account Tax Compliance Act (FATCA). FACTA requires foreign financial institutions to disclose the overseas assets of U.S. citizens and green-card holders to the U.S. government. This requirement is part of an ongoing effort to identify Americans who may be seeking to evade tax obligations using offshore investment vehicles.
American expatriates can, in many cases, claim a $97,000 exclusion when they file their U.S. tax return, but those who now live and work in other nations may earn salaries that far exceed the exclusion limit. Additionally, expatriates should already be paying income taxes in their country of residence. Facing mounting complex IRS rules and the possible burden of double taxation, a steadily growing number of American expatriates are choosing to renounce their citizenship.
The effectiveness of FACTA depends on the cooperation of foreign financial institutions that include banks, investment funds, and insurance companies. To enforce the compliance of foreign financial institutions, FACTA applies hefty penalties on those that do not comply with the obligation to disclose the financial information of their American customers with foreign assets valued in excess of $50,000. Penalties include a 30% withholding tax on income that originated in the U.S.
In addition to international reporting requirements, American citizens are required to make a Report of Foreign Bank and Financial Accounts (FBAR) filing if they have ownership of or signature authority over financial accounts in a foreign country. This reporting obligation extends to bank accounts, securities, and other categories of financial accounts.
According to the U.S. Congress, tax evasion by U.S. citizens amounts to a tax revenue loss of as much as $100 billion each year.