Tax Laws Pushing Americans Living Abroad to Renounce Their U.S. Citizenship

By Staff | June 16, 2015 | 10:32am EDT
Dr. Amanda Klekowski von Koppenfels, a lecturer in migration and politics at the University of Kent at Brussels. (University of Kent)

( U.S. residents living abroad are renouncing their U.S. citizenship in record numbers due in part to “costs associated with complying with US [tax] filing requirements,” according to a University of Kent study.

A key factor is the Report of Foreign Bank and Financial Accounts (FBAR) law and the Foreign Account Tax Compliance Act (FATCA), according to the study,which was conducted in February by Dr. Amanda Klekowski von Koppenfels, a graduate of Georgetown and Harvard Universities who now lectures on migration and politics.

These two laws require Americans living abroad to file all their overseas bank accounts and other financial holdings with the U.S. Treasury Department, which has the power to charge a 30 percent withholding fee if the bank does not report the accounts to the Internal Revenue Service (IRS).

To comply with the laws' requirements, citizens living abroad typically enlist the help of an accountant, but often find themselves unable to cover the cost of the accountant’s fees, according to the study.

Klekowski told that “even for lower-income individuals, [accountant fees] could be as much as USD 1000. I spoke with someone earning 10,000 British pounds per year who paid $1,000 to file her taxes annually. She renounced [her U.S. citizenship], simply unable to bear the cost of the accountant's fee, which amounted to 10% of her after-tax income.”

Another woman who had given no thought to renouncing her citizenship still expressed frustration with the long process. "It makes me so stressed and angry every year in June when I spend SO many hours filling in forms to just show I don't owe a dime,” Klekowski said the American expatriate told her.

The FBAR “is required when a U.S. Person has a financial interest in or signature authority over one or more foreign financial accounts with an aggregate value greater than $10,000. If a report is required, certain records must also be kept.”

The University of Kent study noted that in 2004, American citizens learned that they could face stiff fines associated with FBAR compliance even if they inadvertently failed to disclose an offshore account. “Prior to 2004, only ‘willful non-compliance’ with FBAR filing was penalized; after 2004, ‘non-willful noncompliance’ also had fines of up to $10,000 per non-reported bank account.”

If a U.S. citizen fails to report any foreign account, the penalty could be 5 percent for all unreported accounts that do not exceed $2,000, or a $100,000 penalty for any unreported accounts over $1 million.

The FATCA law passed in 2010 also affects U.S. citizens living abroad. The IRS states that “the objective of FATCA is the reporting of foreign financial assets; withholding is the cost of not reporting.”

But American Citizens Abroad (ACA) says that because of FATCA, “foreign divestment of U.S. investments is a serious risk.”

“The FATCA threat of a 30% withholding tax and the potential exposure to transfer of personal data is enticing foreigners to divest out of U.S. securities and investments. Some foreign banks throughout the world have already indicated their intention to do so and have advised their institutional and private clients accordingly,” ACA pointed out.

For example, the Japanese Bankers Association said that “in the event that the implementation of FATCA is not practically feasible for the Japanese financial services industry, it would result in substantial confusion in the industry and could ultimately lead Japanese financial institutions to withdraw their investment from U.S. financial assets.”

Klekowski told that besides the high cost and increasing complexity of compliance, “closure of bank accounts by banks who no longer wish to have American customers was a third factor” in Americans’ renunciation of their citizenship.

Under FATCA, even non-U.S. spouses must file their financial accounts with the IRS, she explained, and these reporting requirements include “bank accounts with income earned by a non-US spouse, but for which a US individual has signatory powers (e.g. a stay-at-home mother).”

Joint accounts with spouses then become nearly impossible, as does “retaining – or opening – investment accounts, bank accounts and, in some cases, securing mortgages, as banks increasingly refuse U.S. customers,” she said.

One woman disclosed her frustration over the FATCA law to Klekowski:

"Under current tax laws I am obligated to disclose all bank account information, including my husband's, to my government. My non-US husband does not wish to reveal his personal bank information and I really do not think my government has a right to ask him for it. I believe this is a violation of my rights.The government is not collecting bank information about my parents, nor my brother or any of my friends. There exists no reason to believe that we are partaking in illegal activity nor do we earn enough to be hiding large sums of taxable income.  So shall I lie to the government, divorce my husband or give up my citizenship? And I may still have to go to jail,” the woman said.

Despite the onerous costs of complying with the two laws, Klekowski says that “it is important to note that the many respondents emphasized their pride in being American, even as they feel targeted by the increased reporting requirements.”

Of 1,546 U.S. citizens and former citizens living abroad, "31% of the US citizens are seriously thinking about renouncing their US citizenship, and 3% are currently in the process of doing so,” the survey found.

“Renunciation intentions are not linked to income: 43% of former citizens have annual household incomes under $100,000 (USD). Of US citizens with annual household incomes of more than $250,000, 33% have actively thought of renouncing and 4% are in the process of doing so. This compares to 28% of those US citizens with incomes under $100,000 (USD) having actively thought of doing so, and 3% currently in the process, and to 31% of all US citizen respondents who have actively thought of doing so and 3% who are in the process.”

The study shows that of those living abroad, “45% have annual pre-tax household incomes of under $100,000 (USD) and an additional 18% between $100,000 and under $150,000.”

Related: Record Number of Americans Renounced Their U.S. Citizenship in 2015

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