You’ve just finished completing your tax return. You know that you paid a lot of taxes last year, but after filling out one form after another it turned out that you owed more than you paid.
The extra money that you lost to the Internal Revenue Service (IRS) was enough to give you heartburn, but even more infuriating was the process.
Time is money, and the amount of time you spent on your tax return was ridiculous. You would have spent a relaxing weekend with your family if you didn’t have to fill out 10 tax forms.
‘I hate the IRS,’ you kept thinking to yourself as you worked on your tax returns. ‘Sometimes, I think I should move abroad just to get away from the IRS.’
Think again. The IRS is everywhere. Americans periodically demonize the IRS (for good reason), but their anger is in many ways justified. Americans who live abroad might have even more justification for being angry because the American tax system is unique.
The United States, in fact, is the ONLY country in the world that taxes based on citizenship rather than residency, reports the CNBC article “Tough tax rules see expats ditch their US passports.”
The article adds that people who have never lived in the U.S. have to pay taxes to the IRS if they have a green card (a permanent resident card) or an American passport.
“If you are a U.S. citizen, the IRS doesn’t care where you live — you are still subject to its very long reach,” reports Nolo, which publishes legal advice guides, in its article “When U.S. Citizens Living Abroad Owe U.S. Tax.”
“Regardless of where you live or where you earn your income, you must file a tax return with the IRS and report 100 percent of your worldwide income.”
Do you think foreign countries that know Americans working in their nation are paying the IRS taxes on income earned abroad are going to cut their guests a break? That’s a rhetorical question (or a joke).
Do you think that the U.S. is going to seek agreements with other nations so its citizens aren’t double taxed? I know you know the answer to that joke question. The answers to these questions is, of course, ‘NO.’
Yes, Americans living abroad are double taxed — and a record number of them are renouncing their American citizenship because of it. Americans are eligible for a foreign tax credit, but it only excludes part of their foreign earnings from their taxable income.
In 2015, a record 4,279 Americans renounced their citizenship, according to Forbes magazine. In 2014, there were a then record 3,415 “published expatriates”. The previous record was 2,999 in 2013, which smashed the record of 1,781 set in 2011.
The IRS Has Become More Oppressive
Double taxation, though, is only part of the problem.
Enforcement has become a much bigger part of the IRS’ game than at any time in the past. Forbes magazine reports that until the past few years enforcement was “less of a concern with expats,” but enforcement fears today are “palpable.”
One major change was the Foreign Account Tax Compliance Act (FATCA), which became law in 2010. It’s no coincidence that the number of expatriates has soared since President Barack Obama signed FATCA into law. It also might not surprise you that part of the purpose of FATCA was to raise money for a federal job stimulus law.
FATCA requires Americans living abroad to annually file reports on their foreign financial accounts to the Financial Crimes Enforcement Network and requires all foreign financial institutions to report how much money Americans have deposited in their foreign accounts to the U.S. Treasury Department.
The CNBC article reports that Americans must pay “steep penalties” of at least $10,000 for filing mistakes, even if those mistakes were not intentional. Intentional mistakes could result in criminal charges.
“What is really driving Americans to expatriate is not that they do not want to pay taxes,” Thun Financial Advisors founder David Kuenzi told CNBC.
“What is driving them crazy is that now filling out tax returns is much more complicated — it requires tremendous work in terms of tax-record keeping and then it can cost thousands of dollars to get a competent person to fill it (the tax return) out.”
Forbes magazine said that the civil and criminal penalties that the IRS imposes on Americans who have made mistakes in their foreign financial accounts is “out of proportion to tax violations.” Furthermore, the civil fines can “quickly consume the balance of an account.”
“Many now find America’s global income tax compliance and disclosure laws to be a burden, some say downright oppressive,” Forbes says.
Expatriates Share Their Views
High taxes and the complexity and burden of filing multiple tax returns are the primary reasons that there were a record number of Americans renouncing their citizenship in 2013, 2014, and 2015.
This is the conclusion of major news and business publications as well as feedback from organizations that represent the interests of the approximately 7 million Americans who live in foreign nations.
American Citizens Abroad has argued that FATCA should be repealed and the U.S. tax system should be comprehensively overhauled.
CNN Money sought to convey the perspective of expatriates in an article entitled “Why expats are ditching their U.S. passports.”
The subhead of the article was a clear conclusion that the record number of citizenship renunciations has been fueled by “an overly complicated tax code.”
In addition, Americans abroad have had to contend with other problems because of the increasingly burdensome regulations, a few Americans told CNN Money.
Among other things, some financial institutions are no longer serving Americans because the IRS is asking them to spend a lot of time keeping records on Americans and threatening to fine them if it is dissatisfied with the records.
“My decision to renounce was triggered when my bank threatened to close my account because I was American,” Donna Lane-Nelson told CNN Money.
“What would I do without a bank? Americans in Switzerland were having trouble with their investments, getting credit cards, and some weren’t even getting loans.”
Lane-Nelson said she “threw up” after renouncing her citizenship so it’s clearly a very difficult decision for some people. Laurie Lautmann, who lives in New Zealand, said she still feels like an American, but the tax obligations imposed by the IRS drove her “crazy.”
“The accountancy fee is the main reason why (my partner Frank and I) both renounced our U.S. citizenship last year,” she said. “It wasn’t an easy decision — super stressful, and very emotional. But at the end of the day, I think it was the right thing for us.”
Christina Ammann, who lives in Switzerland, hasn’t renounced her citizenship, but said she is considering it “due to the invasive reach of the IRS and the U.S. government into my personal life.”
You probably won’t be surprised to know that the U.S. government even makes the process of renouncing American citizenship difficult. American citizens must be interviewed by consular officials at least twice and then must wait for federal lawmakers to approve their request.
They also must pay a fee and an exit tax. In recent years, the renounce fee has been increased to $2,350 from $450.
Still, more and more Americans each year are choosing to renounce their citizenship. And the trend isn’t expected to stop, especially if Barack Obama 2.0 is elected in November.
