Citizens overseas renounce U.S. status
An increasing number of Americans drop citizenship to duck tax hassles
More than 5,400 Americans overseas renounced their U.S. citizenship last year, a 26% increase over 2015 and more than triple the number in 2010, when Congress passed a law that significantly increased tax penalties for unreported foreign transactions and holdings, according to a Connecticut tax attorney.
Advocates for about 7 million overseas Americans and attorneys who advise them say that although some are trying to avoid higher taxes or stricter bank rules that make it more difficult to shield wealth, others are dual citizens with a loose connection to the USA who want to avoid the hassle of filing returns to the IRS.
“It’s increasing at an exponential rate,” says Andrew Mitchel, an attorney who began compiling quarterly lists of expatriates released by the IRS after a scan- dal erupted over allegations that the Swiss bank UBS helped American customers conceal information from the IRS and Congress enacted the Foreign Account Tax Compliance Act in 2010.
Mitchel’s data, which draw from IRS and State Department records, show that from 1998 through 2009, the number of renunciations ranged from a low of 231 to a high of 762. Then they began to take off.
The FATCA law, projected to raise $8.7 billion over 10 years, required taxpayers to disclose foreign accounts on returns, sharply increased penalties for non-compliance and pressured banks worldwide to help the IRS enforce the rules by using the threat of withholding 30% of payments such as stock dividends from U.S. sources.
“Foreign banks are basically acting as the police to flush these U.S. citizens out of the bushes, so the IRS can see them,” Mitchel says.
Unlike most countries, which base taxes on residency, the United States bases its taxes on citizenship. Citizens overseas are required to file returns, though taxes paid to a foreign country often count as credit against any U.S. liabilities, Mitchel says. Renouncing citizenship requires expatriates to settle any outstanding liabilities or face significant penalties.
Among those who gave up their citizenship in 2016 was Boris Johnson, former mayor of London. He was born in New York City and left the USA when he was 5 years old. As a dual British-American citizen in 2014, he complained that it was “absolutely outrageous” that he was required to pay tax to the United States on the sale of his London home.
Marylouise Serrato, executive director of the advocacy group American Citizens Abroad, says her group has heard from people who were shunned by foreign banks because of the added burden of compliance.
“Many are doing it because, simply, their lives and livelihoods are overseas and they can’t function any more. What do you do when you can no longer bank your paycheck?” Serrato says. “This narrative that Americans don’t want to pay their taxes, that’s not a fair representation of the situation.”
Dean Zerbe, national managing director for Alliantgroup, said increases in income taxes on families earning more than $250,000 in 2010 “probably got more people motivated to look at their situation.”
Andrew Mitchel, an attorney who compiles lists of expatriates “Foreign banks are basically acting as the police to flush these U.S. citizens out of the bushes, so the IRS can see them.”