Large percentage increase attributed to requirement to report foreign accounts
About 3,000 Americans handed back their U.S. passports or green cards to end their citizenship or long-term residency in 2013. The 630 expatriations in the fourth quarter of 2013 brought the total number for the year to 2,999, well in excess of the previous high of 1,781 in 2011, according to a list of names published quarterly by the U.S. Treasury Department.
Andrew Mitchel, a tax lawyer in Centerbrook, Connecticut, who tracks the data on his blog, attributed the 221 percent increase over 2012 to rising awareness that U.S. citizens and green card holders have a duty to file tax returns and report their foreign bank accounts every year, even if they live abroad.
The increasing burden of compliance and the fear of large penalties for failure to file U.S. returns are also driving the increase in expatriations, Mr. Mitchel noted.
Some people who expatriate, and thus avoid paying taxes in the United States in the future, may be subject to an exit tax. However, the rules governing this process have been relaxed in 2008 and may have in part contributed to the surge.
Now, only those with net assets exceeding $2 million, an average net income tax liability of $157,000 or more for the five years prior to expatriation or those who fail to certify that their U.S. federal tax obligations for the past five years have been complied with, face a tax assessed on their worldwide assets, Mr. Mitchel said.
When those assets, including real estate, are assessed, they are treated as if the property is sold on the day the expatriation takes effect. The tax, generally 15 percent, is then applied to the unrealized gains, but the first $680,000 remain untaxed. As a result, most people who renounce their citizenship will not have to pay an exit tax.
U.S. tax law no longer differentiates between the reasons why someone expatriates. Renouncing one’s citizenship to avoid taxes used to be subject to different rules, but the law was changed in 2004. From time to time politicians attempt to change the approach again.
When Facebook co-founder Eduardo Saverin left the U.S. permanently for Singapore in 2012, Senators Chuck Schumer and Bob Casey introduced a bill that aimed to double the exit tax to 30 percent for anyone leaving the U.S. for tax reasons. However, the bill was not passed.
Mr. Mitchel believes the primary reason for the increase in expatriations is neither political nor for tax reasons. A more important factor contributing to the exodus is the Foreign Account Tax Compliance Act, which forces financial institutions worldwide to report the bank accounts and certain financial interests of U.S. taxpayers to the Internal Revenue Service.
The law has caused an upsurge in Americans taking advantage of reduced penalties for tax offenses in various voluntary disclosure programs. Harsh tax penalties not only apply to unfiled tax returns, but also for failure to file a foreign bank account report. The standard penalty for unintentionally failing to file the FBAR is $10,000 per year.
In January, a report by the IRS ombudsman noted that IRS penalties hit benign actors comparatively harder than tax evaders who tried to hide assets overseas. The report also said that exiting the voluntary disclosure programs is in some cases the better option.
Mr. Mitchel said fear is a driving factor for some taxpayers who renounce their citizenship.
Since 2009, more than 43,000 U.S. taxpayers have come clean and reported previously undeclared offshore accounts in the hope of avoiding criminal prosecution.