Forbes, CNN, and The Washington Times were among press outlets recently reporting that record numbers of Americans renounced their US citizenship in 2015.
This was also the case in 2014, as we reported on this platform at the time. But the increase on what was then a record 3415 Americans renouncing citizenship in 2014 jumped over 25% to 4279 in 2015.
The graphic below gives a clear impression of the rate of increase.
The first two questions that arise thinking about the astonishing increase in renunciations are who are the people renouncing, and why are they doing so.
“Many of those severing links are Americans living overseas who are tired of dealing with complicated tax paperwork, a headache that has worsened since new regulations came into effect.” (CNN Money)
The majority of them are normal, everyday folks who have settled permanently abroad, and they are renouncing their American citizenship reluctantly but feel pressed to do so because the US is the only major country in the world that taxes citizens on their worldwide income regardless of where they live and where their income was earned. While this has always been the case, before the financial crisis of 2008/9/10, the US mostly took a laissez faire attitude towards enforcing tax compliance from Americans living abroad.
Both FATCA and FBAR have caused enormous stress, because of the way they've been enacted and enforced more than because of what they set out to achieve.
“Foreign banks are sufficiently worried about keeping the IRS happy that many simply do not want American account holders.” (Forbes)
The penalties for non-compliance are huge, the filing requirements are onerous, and the information insisted upon is arguably overly intrusive. Furthermore, the IRS has required foreign banks to report account information about American account holders, causing many foreign banks to have preferred to refuse Americans accounts rather than dedicate resources to fulfilling IRS requirements.
There is something ethically risible though about a tax system that aggressively pursues, burdens and penalizes its own citizens because they happen to live abroad. Citizenship is supposed to offer protection, not persecution. Expats represent an estimated 2-3% of US citizens, a small but not irrelevant minority. Because they are so geographically dispersed though, it is hard for them to collectively group together and represent themselves, making them an easy, seemingly powerless target for a federal government struggling to deal with the hangover of the financial crisis.
We still believe though that renouncing US citizenship is a drastic move, and should only be considered as a very last resort. In most cases, the cost and burden of filing isn't as dire as many people fear, even when there's a backlog, while renouncing is a permanent move that cannot be reversed.
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