Two weeks ago we wrote a post about the record numbers of Americans ripping up their passports. Yes, its true. CNN reports that 2013 is on track to be a banner year for people renouncing their citizenship. While Congress debates immigration reform, more and more people are seeking to leave the U.S.
Our post from two weeks ago garnered hundreds of views and quite a number of questions. Today’s post – exclusive to our blog and Tax Connections – seeks to answer some of those questions.
While many people still yearn to come to the United States, high wage earners and even some middle class working Americans want to leave. The IFC Review says that 670 Americans tore up their passports in the first 3 months of 2013. Why? Taxes and the upcoming implementation of FATCA (the Foreign Account Tax Compliance Act) say the experts.
Since our first post was written, several people asked how one goes about renouncing citizenship. Unfortunately, it’s more complicated than simply tearing up a passport.
As an interesting side note, the government publishes the names of the people who have chosen to leave. Interested in seeing the list? It is available online from the IRS. There have been several notable names recently. Isabel Getty, an heiress to the Getty oil fortune appears on the current list. Last year there was recording star Tina Turner and Eduardo Saverin, co-founder of Facebook.
Did all leave because of FATCA? Probably not but taxes sure play a part in the rapid increase in departures. The United States is in the tiny minority of countries that requires world wide reporting. Uncle Sam wants to know where your bank accounts are and where you earn your money. Most other countries don’t care what happens outside their borders.
Beginning in 2014, FATCA will require foreign financial institutions such as banks and hedge funds to disclose account information to the IRS. Some Americans view FATCA as an invasion of privacy. Others have been hiding large sums of money from creditors or the IRS.
So how does one renounce citizenship? As we said before, it is not as simple as tearing up a passport.
First, you must have a place to go. Acquiring citizenship in a foreign country may be easy depending on where you were born or the citizenship of your parents and grandparents. At other times it may require several years. In some countries, passports are basically up for “sale.” Invest in the local economy and earn a passport.
Next, in order to renounce your U.S. citizenship, you must prove 5 years of tax compliance. If you owe the government money or failed to file, ripping up a passport means nothing. That reason alone makes it tough for FATCA violators to effectively renounce – federal law requires Americans with foreign accounts to report them annually to the IRS. If you have not reported, you are not considered in compliance.
Assuming you can show compliance, Congress says you must generally pay an exit tax if have a net worth of $2 million or more or have earned $139,000 for the last 5 years. There are some exceptions and exemptions but plan on paying a tax if you are an upper middle class earner.
The HEART Act, passed by Congress in 2008 during the “heart” of the recession, requires an exit tax, That makes the US one of handful of countries that seeks to impose a tax on people seeking to leave. (Canada, the Netherlands and South Africa have different forms of exit taxes. One of the first countries to pass such a law was Nazi Germany in 1933).
If you want to expatriate, speak with a knowledgeable tax professional first. Speaking with an immigration lawyer doesn’t hurt, either. Once you go through the process, it isn’t easy to come back. Similar rules also apply to green card holders (resident aliens) who leave the U.S.
FATCA has been an unwelcome surprise for many taxpayers with unreported foreign accounts. There are some amnesty programs that may help reduce the FATCA risk; programs that don’t require expatriation. Unfortunately, tearing up a passport probably doesn’t even work for Americans who are already out of compliance with their offshore reporting requirements.
The decision to give up one’s American citizenship shouldn’t be an emotional one and must be done with full knowledge of the risks and procedures. At the risk of repetition, renouncing citizenship because of tax or FATCA concerns probably won’t work and will immediately garner an inquiry from the IRS.
For more information about FATCA and foreign reporting, contact attorney Bethany Kroes at or by telephone at (414) 223-0464. All inquiries are protected by the attorney – client privilege and kept in strict confidence. Most cases can be handled for a flat fee.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and San Francisco, California. IRS tax services available worldwide.
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