US Citizenship No Longer Worth Red Tape and High Taxes for Some | AccountingWEB

US Citizenship No Longer Worth Red Tape and High Taxes for Some

By Teresa Ambord 
A surprising number of Americans living abroad are giving up and saying "uncle" to Uncle Sam. In quarter two of 2013, more Americans – 1,130  renounced their citizenship than in all of 2012. That's in addition to 679 in the first quarter. 
What's the driving force?
It's a combination of things. The federal income tax rate for the wealthiest Americans rose to 39.6 percent this year. The capital gains tax rose to a maximum of 20 percent. The red tape is mounting. And soon the pressure will be multiplied by the enforcement of the US Foreign Account Tax Compliance Act (FATCA).
Beginning mid-2014 when FATCA kicks in, foreign banks and other financial institutions  in countries that have agreed to comply  will be expected to provide financial information to the IRS on the assets held by Americans and businesses with American ownership. Those institutions will also have to withhold income tax on income in those accounts. 
Which countries are involved?
As of mid-July 2013, the following countries have signed on to FATCA's demands, and the US Treasury continues to negotiate with dozens of others:
  • United Kingdom
  • Denmark
  • Ireland
  • Mexico
  • Switzerland
  • Italy
  • Japan
  • Norway
  • Germany
  • Spain
How is the IRS able to coerce these countries to cooperate? Technically it can't, but the IRS can assess a 30 percent withholding tax on payments from the United States to those banks that fail to cooperate. According to the Treasury Department, countries are lining up, eager to sign. There's an "overwhelming interest from countries around the world," said a Treasury spokesperson. 

Why Are Americans Jumping Ship? reports that Canadian accounting firms there are handling dozens of US citizenship renunciations regularly. Calgary-based tax lawyer Roy Berg said there's been an "astronomical increase" from just a year ago. Some of his American clients failed to file their taxes in the United States, and others did file but made mistakes. Either way, they get hit with "a really nasty notice of assessment from the IRS. . . . It's potentially ruinous." 
Berg notes that for the IRS efforts against expatriates he serves in Canada, the United States doesn't get much money. What they do get is a great deal of personal information from people forced to provide it. Berg sums this up by saying, "It's very Orwellian." 
Because of various exclusions and international agreements, said Berg, Americans living outside of the United States rarely owe US taxes. It's the penalties for not filing a mountain of paperwork that's the killer. In Canada, if you miss an information return, the penalty generally maxes out at $2,500. "The US starts at $10,000 and goes up from there."
This "overwhelming interest" is the reason given for the delay of the start of FATCA. Originally, it was to take effect on January 1, 2014, but it has now been pushed back to June 30, 2014. That means the first reports will be due in 2015 on accounts held in 2014.
Mountains of red tape
The purpose of FATCA is to identify people who might be evading taxes using offshore investments. Many expatriates say the combination of high taxes and the mountain of paperwork no longer make it worthwhile to retain their citizenship. Still others are less concerned about the taxes and just don't want the paperwork hassle anymore. quotes one investment banker as saying, "My decision was less about the actual amount of taxes I had to pay and more about the system. I'm not an ultra-wealthy dude. It was the hassle with all the paperwork." Like many others, this former US citizen is now a citizen of Hong Kong, where the top tax rate is 15 percent.
How much can we expect from FATCA?
With the Treasury Department in hot pursuit of Americans abroad, it seems natural to assume FATCA will really bring home the bacon. But in its first decade, FATCA is expected to collect an additional $7.6 billion. calculates that over ten years, spread across the estimated six million Americans abroad, this equates to $170 per taxpayer, per year.
It's hard to say at this point whether it's worth the loss of citizens; the strained relations with other countries; and the added burden on individuals, businesses, and financial institutions. There might be a better use of our resources. When you look at this new law in terms of the added tax dollars, it makes one wonder if this is one big FATCA mistake. 
Read more of our articles on FATCA
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