Expatriate Americans Break Up With Uncle Sam to Escape Tax Rules
Record Numbers Living Abroad Renounce U.S. Citizenship over IRS Reporting Requirements
Patricia Moon was born in Dayton, Ohio, to a family descended from Quakers who settled in the New World before the American Revolution. As a young woman, Ms. Moon fell for a Canadian man and moved to Toronto. The 59-year-old homemaker, who still visits the U.S. to see relatives, said she feels American in her bones, even after three decades abroad. Yet despite her deep roots, Ms. Moon walked into a U.S. consulate two years ago, raised her right hand and recited an oath renouncing her U.S. citizenship. Afterward, she said, "I bawled my eyes out."
Ms. Moon is among record numbers of Americans cutting ties. U.S. offices abroad reported that 1,001 U.S. citizens and green-card holders had renounced their allegiance in the first three months of the year, according to Andrew Mitchel, a lawyer in Centerbrook, Conn., who analyzes Treasury Department data. That figure puts 2014 on track to top last year's total of 2,999 renunciations, he said, which was the most since the government began disclosing the data.
Helping boost the exodus, experts say, is a five-year-old U.S. campaign to hunt for undeclared accounts held by Americans abroad. Aggressive enforcement of tax rules for American expatriates and their families has prompted some middle-income earners to renounce their U.S. citizenship rather than risk sizable taxes and penalties. Since 2009, the government campaign has collected more than $6 billion in taxes, interest and penalties from more than 43,000 U.S. taxpayers. Federal prosecutors have filed more than 100 criminal indictments, including the high-profile case of Beanie Barbie inventor Ty Warner, who last year pleaded guilty to tax evasion involving secret Swiss bank accounts.
The tax dragnet has also swept up many middle-income Americans living abroad, prompting some to give up their U.S. citizenship. While people who renounce aren't freed of taxes due for past years, they don't want to risk sizable taxes and penalties for them and their children in the years ahead, experts say. Nearly 8,000 taxpayers have renounced U.S. citizenship in the past five years, Mr. Mitchel found, compared with fewer than 5,000 in the preceding decade.
"The increase is due to current and future changes in tax law and enforcement," said Freddi Weintraub, a New York attorney at the Fragomen firm who specializes in immigration law. She said in recent years she has seen a threefold increase in expatriation inquiries related to taxes.
Ms. Moon, for example, feared the IRS could charge her family nearly a half-million dollars in penalties on undeclared savings and checking accounts—even though, she said, the accounts never held more than $102,000, weren't intentionally hidden and didn't have any U.S. taxes owed. "I was afraid we would have to cash in our retirement accounts and sell our home," she said.
Experts say the U.S. campaign could affect millions of Americans like Ms. Moon—people who aren't wealthy, pay taxes in their host country, and who say they weren't trying to dodge U.S. taxes.
"We have reached the point where middle-class American citizens abroad are being forced to renounce—especially if they have assets and are moving toward retirement—because of taxes, paperwork and huge potential penalties," said John Richardson, a Toronto lawyer with dual U.S. and Canadian citizenship. He and Ms. Moon help run a nonprofit group seeking to keep Canada from sharing private account information with U.S. authorities.
As word spreads, experts said, more Americans are likely to consider surrendering their citizenship. The State Department estimates that 7.6 million American citizens live outside the U.S., but only a fraction file required financial disclosure forms.
Mark Mazur, the Treasury Department's assistant secretary for tax policy, said the government's new enforcement was intended to help make sure all taxpayers pay what they owe "regardless of where they live. "At the same time", Mr. Mazur said, "Treasury needs to "maintain a balance between enforcement efforts and equity, including the burdens that may be placed on taxpayers."
Mr. Mazur said Treasury was looking into how best to work with Congress and the IRS to fine-tune the system: "You can always improve."
In May UBS AG admitted in 2009 that it helped wealthy American taxpayers hide money overseas. To avoid criminal charges, the bank paid $780 million to the U.S. and turned over information on more than 4,400 accounts, ending decades of Swiss bank secrecy.
U.S. officials launched their campaign after Swiss banking giant Credit Suisse position pleaded guilty to similar charges and agreed to pay $2.6 billion. Dozens of other Swiss banks are currently negotiating penalties with the U.S. Department of Justice, officials said.
Following the UBS revelations, U.S. officials announced they would begin vigorously enforcing both new and long-dormant tax rules. Unlike other developed nations, the U.S. government taxes citizens on income they earn anywhere in the world. The rule dates to the Civil War, when Ms. Moon's great-great grandfather served with Union forces. (This sounds a bit extreme to me. It is well a known requirement? )
U.S. tax liabilities also cover children born to Americans abroad, extending the reach of the IRS across generations, as well as oceans. For decades, wealthy taxpayers were able to hide foreign assets in countries where bank-secrecy laws fostered attractive tax havens, including Switzerland, the Cayman Islands and Panama. (Is this also well known or a surprise to people with US dual citizenship?)
But the UBS case signaled the beginning of the end for such havens. Armed with information from the Swiss bank, U.S. authorities pursued individuals for back taxes, and pressured the tax professionals who helped them.
As a result of the crackdown, Ms. Moon and others learned they had failed to comply with the law. "We call it the 'Oh, my God! moment.' Every expatriate has it," Ms. Moon said. "They were going to take every dime we had, that was my fear."
