Why are US Citizens Renouncing their Citizenship?

by Foodman CPAs & Advisors

A significant number of US Taxpayers living overseas have become “unbankable” where they live because of  high account servicing costs  for local banks (Foreign Financial Institutions – also known as FFIs) caused by the requirements of FATCA.  A number of FFIs will not open bank accounts for U.S. Citizens and/or U.S. Permanent Residents without a W-9, or other pertinent tax documentation.   For the Expatriates (Expats), there is the same complicated paperwork faced by other US Taxpayers, cumbersome processes and of course, the question of “fairness”.

Is it fair that U.S. Citizens and/or U.S. Permanent Residents are taxed under the concept of citizenship and worldwide income as opposed to where they reside?  Have the requirements of FATCA triggered the increase of the number of US citizens that are renouncing their Citizenship? 

If an Expat does not want to file a required US income tax return, he or she is required to renounce US citizenship (expatriate).  Individuals who want to renounce US citizenship are required to demonstrate to the IRS that they have satisfied all federal tax requirements for the 5 years prior to expatriation.  In addition, a person is considered a US citizen until the date the US Department of State issues a certificate of loss of nationality. 

This controversy revolving around U.S. Citizens and/or U.S. Permanent Residents taxed on their worldwide income, as opposed to where they reside is driving a number of U.S. Citizens and/or U.S. Permanent Residents to re-think their U.S. status.  There are Americans that have resided outside of the US for many years, are compliant with local tax authorities, and feel that they are under assault by IRS; despite the reality that they are non-compliant Expats. There are also Expats that have made a decision to remain non-compliant.  

Since 2015, there has been an approximate 25% increase year over year of US citizens that are renouncing their U.S. citizenship.  Although the reasons can be legal or family driven, many renunciations are reportedly caused by U.S. taxation issues.   Due to our extra-territorial tax system, U.S. Citizens living and working abroad are required by local law to report and pay tax in the country where they are living, and under U.S. law, continue to file tax returns in the U.S.  Although the U.S. foreign tax credit is meant to eliminate “double taxation”, at times it is not sufficient to “offset” the income generated tax in a foreign jurisdiction.   As a result, U.S. Expats may be faced with additional US tax bills. In addition to high taxes, Expats also feel “overwhelmed” by the level of reporting paperwork due to the IRS. Failure to file required forms carries hefty civil and potential criminal penalties.

Don’t be a victim of your own making.  The process of expatriation is costly and complex.  Besides possibly paying 5 years of back taxes, there could be an “exit” tax involved, as well as the requirement of going through the process of getting an appointment at a US consulate office to formally give up citizenship.  If you are an out of compliance US Taxpayer, there are programs available for assistance with coming back into compliance.  Consult a tax expert that specializes in the areas of Tax Disclosure Amnesty Programs, and is very familiar with the Streamlined Compliance Procedures or the Offshore Voluntary Disclosure Program. 


Written by:

Foodman CPAs & Advisors

Foodman CPAs & Advisors on:

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