Experts say that more and more Americans are relinquishing their passports than ever before. The numbers support this claim too. In 2008 only 231 Americans surrendered their passport compared to over 3,000 in 2014.
What has brought this recent surge? What drives Americans renounce US citizenship? The experts tell us that it is that the American expats have grown weary of the complicated paperwork when it comes to the IRS requirements. Over the past few years, it has become a burden, not to mention that the U.S. government taxes the worldwide income of its citizens.
Does the FATCA make many Americans renounce their citizenship?
The Foreign Account Tax Compliance Act was created to catch those who cheated on their American taxes. The requirements and mandates within the FATCA are extensive. For example, Americans must report foreign assets and disclose all foreign bank holdings. Banks are required to disclose all U.S. person-owned foreign accounts as well.
Other statistics show a different story, though. Some say that almost 100% of American expats aren’t finding that these new laws that burdensome. With over 6 million American living outside of the U.S., it is said that .17% has renounced their American citizenship for the past 4 years.
Was FATCA the motivating factor for the majority of people who renounced?
The U.S. is the only country that requires its citizens to report their income even if they live abroad. Banks in other countries wouldn’t talk to tax collectors from the U.S. until this FATCA law went into effect. It is believed that this is what facilitated money laundering and tax evasion.
According to the IRS, there is approximately $40 to $120 billion of unpaid taxes by American expats. Now foreign financial institutions are required to report financial information to tax collectors or to pay a 30% tax on their earnings.
Some big names are among those who renounced their American passport. Such as Facebook founder Eudardo Saverin who moved to Singapore or singer Tina Turner who moved to Switzterland. The most prominent American that has renounced his American citizenship is Roger Ver, a bitcoin investor. Mr. Ver is in the news recently for being denied a travel visa to America.
Then there are the “accidental” citizens. Those are the people born to American parents and live abroad. These citizens have begun to realize that any foreign bank account they have should have been reported all along and taxes were to be paid. Many choose to ignore the US tax laws and plead ignorant if caught. Now, in order to circumvent the financial hassles of FATCA, they are officially renouncing citizenship.
Since the information about US taxpayers’ filing obligations is being circulated, not to mention any information is now available anytime, anywhere, ignorance of the law is not an excuse. It is the search for offenders that opened the door that exposed millions of those accidental citizens and US expats having unfulfilled tax obligations. Being caught in that cross fire has had unfortunate financial implications that can be extreme.
The Citizenship Act History Lesson
In October 1994, a law was passed by President Clinton that may have had the most impact on citizenship and taxes. The INTCA (Immigration and Nationality Technical Corrections Act of 1994), granted citizenship to a child born to natural born citizens. What made this law stand out is that it retroactively granted citizenship by birth to any natural born citizen who lost citizenship for failing to meet “physical presence retention requirements” that existed before 1978. The previous version of the physical presence retention requirements specified that children born between 1934 and 1978 to US parents were required to have a permanent US residence before turning 18 years of age to retain the American citizenship. Those requirements were eliminated by the INTCA. In spite of rumors, a citizen was not automatically reinstated by the INTCA though. It did provide those who desired, the opportunity to reclaim their citizenship simply by taking an oath pledging their allegiance to the US.
The laws of citizenship are complicated, but in simple terms, for those born in America, you are an American citizen. This will hold true whether you have been out of the country for a lengthy period of time or you are stripped of American citizenship by a foreign country because you voted or took part in military activities of a foreign country.
You are also considered an American citizen if your parents or grandparents were/are American citizens, even if you were born in another country. You are considered an American citizen even if your parents or grandparents have not resided in America for an extended time.
The tax system in the US is extremely complex when it comes to citizenship. Other countries have different criterion that creates a challenging position for American citizens that reside abroad. Especially for those individuals that have not realized they were American citizens and required to report their financial matters to the IRS.
While most of those who live abroad hope that the IRS will change to residency-based tax system, the best option now is to stay compliant with your taxes or to renounce your American citizenship.