More than 5,400 Americans overseas renounced their United States 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 data compiled by a Connecticut tax attorney.
Advocates for the estimated 7 million overseas Americans and attorneys who advise them say that while 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 United States who want to avoid the hassle of filing returns to the IRS.
“It’s increasing at an exponential rate,” said Andrew Mitchel, an attorney who began compiling quarterly lists of expatriates released by the IRS after a scandal 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 draws from both IRS and State Department records, shows 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 noncompliance, and pressured banks worldwide to help the IRS with compliance 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 said. “That’s when people start to realize, ‘Oh, I’m not filing and I should be filing.’ “
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 said. 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, the British foreign secretary and former mayor of London. Johnson was born in New York City, where his parents were living, and left the United States when he was 5 years old. As a dual British-American citizen in 2014, he complained it was “absolutely outrageous” that he was required to pay tax to the U.S. on the sale of his London home.
Marylouise Serrato, executive director of the advocacy group American Citizens Abroad, said 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 said. “This narrative that Americans don’t want to pay their taxes, that’s not a fair representation of the situation.”
But Dean Zerbe, a former senior counsel to the Senate Finance Committee who is now 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.”
“We’re fairly expensive in the tax code in terms of what we tax,” Zerbe said. “I think for a lot of folks, it’s gotten them to revisit where they are in terms of citizenship status.”
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