GENEVA, SWITZERLAND – This is the day when Americans back home are scrambling to get their tax forms to the IRS, but outside the US the difficulty of remaining tax compliant is leading a growing number of citizens to hand in their passports: on average, 7 Americans a day took the oath to stop being a US citizen in 2011.
For many of them, and this writer is one, 18 April offers a reminder of sorrow, not to be part of the nation one grew up believing in, but also relief that a major burden, often perceived as unjust, is gone.
“I’m just really relieved now”, says one former US citizen, who was grappling with the impact on pension money that could have been taxed twice, by the US and by the country of residence because their retirement fund laws differ.
The number of renunciations of citizenship (called “loss of citizenship” by the US Department of State) rose to 1,780 in 2011, the highest number ever. It is well up from the 235 figure for 2008, although overall the numbers have been steadily climbing since the US Department of Treasury began publishing them in 1998. Names of anyone who renounces and whose name is provided to the Treasury by the US Department of State are listed in the Federal Register.
Several people who have renounced have told US overseas citizen groups that their names have not appeared, so accurate figures are hard to come by.
US citizens subject to double taxation: issue is not money owed but compliance burden
How many are related to tax issues? Impossible to say, since the oath taken by those who renounce makes it clear that if you do so for tax reasons the renunciation can be considered invalid. Few ex-US citizens will therefore openly say taxes were the reason.
One person who gave up a US passport said that at the “cut-and-dried, impersonal” interview at a US embassy the explanation given was simply that it has become too complicated to become an American citizen abroad, and the official nodded, having clearly heard this before. “Few dare to go into much detail.”
The issue as reported by US media often implies that Americans outside the US are avoiding paying taxes, with little understanding or awareness that the US is the only government of a sizable country to tax its citizens who live abroad and pay taxes in their country of residence.
GenevaLunch in the past year has talked to a number of former US citizens who say they owed no tax to the US, they paid their taxes regularly in their country of residence, but the US tax obligations had simply become too heavy, too unmanageable.
US citizens cannot renounce unless they already have a second nationality
The numbers are very low compared to the number of new US citizens every year, and as a percentage of the 5 to 7 million US citizens living abroad, but a key factor in renouncing US citizenship is that the person must already hold another nationality; international law does not allow a person to become stateless. Acquiring another nationality is often a long, slow process.
One ex-citizen notes that Americans abroad fall into two groups, those who are overseas for relatively short periods, often not learning the language of the place and sending their children to international schools. A second group stays longer, marries someone of another nationality, has dual nationality children, becomes fluent in the language and the culture of the new home. And pays taxes in the new country, buys into the pension and housing systems.
Awareness, for many in this second group, of new US tax and citizenship obligations began to surface only in about 2009, although some of the requirements, such as the FBAR, date back to post-911 anti-terrorism legislation and new rules, about which little information circulated publicly for several years.
The non-compliant group is a time bomb ticking
No one has figures on the number of Americans abroad who are not up to date on filing US taxes, but estimates are high. This is a group who will rarely speak openly, but several have spoken to GenevaLunch in the past year, usually after asking for first-hand information about what renouncing citizenship involves. Most say they stopped filing because it was too complicated and expensive, requiring specialist tax advisors even to declare no taxable income. They would like to file back taxes, but it is simply too complicated.
Given that renunciation involves promising to fulfill IRS obligations, they are afraid to move ahead on renunciation.
The FBAR, which is anti-terrorism rather than tax legislation, requires Americans to disclose financial assets over $10,000 (on any given day of the year), to which they have signatory power. This includes joint accounts and for Americans married to non-US citizens this rule alone often creates uncomfortable situations, which become far more so in the case of divorce.
One young man told GenevaLunch he would have serious reservations about marrying an American woman now that he sees what is involved.
Three couples married for more than 25 years have told GenevaLunch they took the drastic steps of closing down all joint accounts, including mortgages, to separate their finances and allow the American spouse to continue filing while protecting the other spouse’s pension and pre-marriage assets. Others have told GenevaLunch that being pulled in two directions led to or contributed to divorces.
At least a dozen people have said their almost-adult children consider a US passport a burden rather than a privilege and they intend to renounce before they starting earning money.
Meanwhile, banks in Switzerland and, with a time lag, in other countries are refusing to provide basic banking services to Americans due to soon to be implemented Fat legislation. Fatca will require foreign banks to report to the US government any assets and income of US citizens.
Passport legislation now in Congress could force people’s hands
The latest unnerving information making the rounds in the long-term overseas American community is that passport renewal may be linked to tax compliance. A law moving through Congress would give US officials the right to not issue new passports to those who are not up to date on taxes, but to stop Americans from traveling if they are suspected of being in arrears.
There is a precedent, reports The Atlantic in a 17 April article: a parent who is behind on child support payments can be stopped from leaving the country if a tax lien exists.
Lausanne meeting will benefit from recently published media and government information on changes
The growing complexity of tax compliance rules for US citizens abroad will top the agenda for the fourth of five American Town Hall meetings in Switzerland, Wednesday night 18 April in Lausanne. The meetings are jointly organized by the US Embassy in Bern, American Citizens Abroad and the Democrat and Republican parties abroad.
Questions about giving up citizenship are likely to be raised as well. These have come up at other Town Hall meetings, but now with increasing media attention in the US leading to greater awareness of the obligations and related difficulties for Americans abroad, “quiet” Americans abroad are getting noisier.
- The Atlantic,“No Taxes, No Travel: Why the IRS Wants the Right to Seize Your Passport”, 17 April 2012
- The Economist, “Guides through the swamp, A big shake-up for America’s tax-preparation industry”, 12 March 2012
- The New York Times, “For Americans Abroad, Taxes Just Got More Complicated”, 17 April 2012
- Reuters, “Tax time pushes some Americans to take a hike”, 17 April 2012
- Isaac Brock Society, very active blog in Canada for US citizens abroad