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Expats Renouncing U.S. Citizenship rather than Pay Taxes

September 15, 2015  |   Tax News   |   Tags: , ,  

After the Foreign Account Tax Compliance Act (FATCA) began to be strictly imposed to limit tax evasion, it posed a dilemma for American expats: whether to handle the additional burden of reporting to the IRS or renouncing their U.S. citizenship.

taxes for expats

Statistics indicate that more Americans living abroad are choosing to renounce their U.S. citizenship than to report and pay taxes. More than 1,300 expatriates were reported for the first quarter of 2015.

The IRS requires expats to report income from all sources, including assets held anywhere in the world. The heavy penalty for non-compliance is also influencing expats’ decisions. CNBC shares:

“‘Many people have been getting caught up on their U.S. tax filings and then renouncing,’ said Andrew Mitchel, an international tax lawyer who analyzes Treasury Department data.

“For a U.S. citizen or resident alien, the rules for filing income, estate and gift tax returns and paying estimated taxes are generally the same whether one is in the country or abroad. A person’s worldwide income is subject to U.S. income tax, regardless of where he or she resides.

“The Foreign Account Tax Compliance Act is intended to ensure that the Internal Revenue Service obtains information on accounts held abroad by U.S. taxpayers at foreign financial institutions.

“The initiative comes after UBS in 2009 was accused of helping American taxpayers hide money overseas. In 2014, Credit Suisse pleaded to similar claims. UBS paid $780 million to the U.S. and turned over information on more than 4,000 Swiss accounts. Credit Suisse Group paid $2.6 billion.

“These scandals gained much publicity, launching law officials to go gung-ho on the mission, and led to an increased awareness among U.S. citizens about their tax requirements.

“‘I think that the rise in the number of people renouncing over the past few years has to do with people becoming more aware of their U.S. tax filing obligations and the potential penalties that can be imposed for failure to file certain disclosure forms,’ Mitchel said.

“The penalty for unintentionally failing to file the FBAR is the standard penalty: $10,000 per year.

“So taxpayers with ties to a supposed ‘tax haven’ are finding themselves in a tug of war between keeping their assets and minimizing taxes—or keeping their U.S. residency.

“In the first quarter of 2015, the Treasury Department reported 1,335 expatriates. That was the highest quarterly number of published expatriates ever, surpassing the previous record of 1,130 that was published in the second quarter in 2013.

“But in the second quarter this year, the department reported only 460 expatriates. That represents nearly a 65 percent decline from the record first-quarter number.

“So is the exodus losing steam?

“Freddi Weintraub, an attorney who specializes in immigration law believes that things may be changing. At one point, Weintraub was seeing a threefold increase in expatriation inquiries related to taxes. But for the last 10 to 12 months, she hasn’t had a single request for assistance when it comes to expatriation and taxes.

“‘This past quarter would suggest that the numbers are leveling off,’ Mitchel said. But he won’t make any bold confirmations just yet. ‘The quarterly numbers tend to vary quite significantly,’ he said.”