The United States has suffered many political and economic upheavals but Americans never wavered in their commitment to this great country. During the Great Depression, people stayed put. During the Vietnam war, some Americans moved to Canada, but they didn’t renounce their citizenship.
Then came FATCA.
FATCA is short for the Foreign Account Tax Compliance Act. Passed in 2010 as part of President Obama’s stimulus package, the law is aimed at combatting tax evasion using offshore accounts. While the law is expected to bring in billions, it has also caught millions of Americans unaware of their foreign reporting obligations.
Having an offshore account isn’t illegal but not telling the IRS about those accounts could be a felony. Since 1970, U.S. taxpayers have been required to report offshore accounts. The law was widely unenforced. After the incidents of 9/11, the IRS and Treasury Department began ramping of enforcement efforts. More recently, the civil penalties associated with unreported accounts have been increased to almost unconscionable levels.
If the IRS says your failure to report an offshore account is “willful,” the penalties are up to the greater of $100,000 or 50% of the highest historical account balance. These penalties are per account and can be imposed for each year an account is unreported.
Sounds scary, right? Hundreds of Americans thinks so and have renounced their citizenship. According to an article in the Wall Street Journal, many are leaving because of FATCA.
The previous record of expatriations was set in 2011; 1, 781. That sum nearly doubled last year. According to media reports, the government says that 2,999 left for good last year.
Expatriation does not mean simply moving to the French Riviera or Cozumel. It means renouncing your citizenship; a move that is permanent.
In our opinion, tens of thousands of folks would renounce if they could. Why do we say this? Several times a year we get asked about expatriation. Invariably the reason is FATCA and the fear of huge civil penalties or invasion of privacy. Unfortunately, the government has some pretty strict rules about expatriation. Those rules include 5 years of accurate returns and for many, an exit tax.
Congress says that you must show 5 years of tax compliance and if you have a net worth of over $2 million or paid an average tax of $155,000 over the last 5 years, you must also pay an exit tax. If you don’t comply, the government can prosecute you. Even if another country provides you with citizenship, the IRS can still come after you.
Simply tearing up your passport or mailing a letter to the IRS indicating you are leaving the roles of U.S. taxpayers doesn’t work either.
Most Americans caught up with unreported offshore accounts are not wealthy business owners looking to commit tax evasion and hide money from the IRS. Instead, they are dual nationals, foreign born Americans, expats living and banking overseas and green card holders legally living and working here.
For the record, we don’t advocate renouncing one’s citizenship, although we certainly understand and respect why many folks feel that way. Even though the IRS penalties are onerous, virtually everyone can take advantage of the IRS’ amnesty program or other even better options such as opt outs and traditional disclosures.
If you ultimately decide that expatriation and giving up your citizenship are your only options, speak to an experienced IRS tax attorney well versed in offshore tax reporting. There may be some transfers and gifts that you can make that will minimize any exit tax bill.
Make sure you also talk to an immigration lawyer. Once you renounce its difficult to change your mind.
The FBAR lawyers at Mahany & Ertl have helped many taxpayers with a wide variety of foreign reporting problems. For more information, contact attorney Bethany Canfield at or by telephone at (414) 223-0464. The author, Brian Mahany, can also be contacted at or by telephone at (414) 704-6731 (direct). All inquiries are protected by the attorney – client privilege and kept in strict confidence.
Mahany & Ertl – America’s Tax Lawyers. IRS tax services available worldwide.
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