A record number of Americans have given up their citizenship and some claim that it is because of an obscure federal tax law. The law, known as the Foreign Account Tax Compliance Act (FATCA), requires that all Americans who have assets in foreign financial accounts make a yearly report to the IRS.
This law, which was passed to enhance enforcement of overseas bank accounts and discourage tax avoidance, has been criticized for being too draconian. Its penalties are breathtaking, even by the IRS’s harsh standards. The penalty is $10,000 per year that you were required to file the information with the IRS. If you were obligated to file a Report of Foreign Bank and Financial Accounts (FBAR) for five years and did not, your noncompliance could generate a $50,000 fine.
And that fine is for inadvertent noncompliance. If the IRS suspects you have engaged in some kind of tax evasion by use of your foreign account, your penalty could be $100,000 or half of the value of the account.
Since its enactment in 2010, the numbers of people renouncing their citizenship has rapidly increased. More than 4,000 did it last year, or almost 20 times the number who renounced in 2008.
Of course, many of these individuals live overseas and have likely not paid U.S. taxes for years, which may be why it is cost effective for them to give up their citizenship. For most people, the question would be much more complex and would demand a very careful economic examination of their income and assets.
If you were considering such a move, you should keep in mind that there is also an exit tax that citizens pay prior to the surrender of their passport and citizenship, and depending on your assets and income, it can be substantial.
Source: washingtonpost.com, “Why Americans are giving up citizenship in record numbers,” Ylan Q. Mui, June 1, 2016
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