NEW YORK (MainStreet) — Some 73% of Americans living abroad are considering renouncing their U.S. citizenship in response to additional tax reporting required by the Foreign Account Tax Compliance Act (FATCA), according to a new survey. The number of Americans renouncing U.S. citizenship increased by 39% in the three months leading up to September 2014 after the new global tax law came into force, according to Federal Register data.
As eager as many are to reap the tax benefits of renouncing their citizenship, it's not a completely joyous scenario.
"It is our experience that most Americans are extremely saddened at the prospect of giving up their U.S. citizenship to avoid the harsh implications of a new and utterly flawed tax law," said Nigel Green, founder and chief executive of deVere Group.
A deVere Group global poll found that 16% Americans abroad would not consider relinquishing their U.S. citizenship and 11% did not know.
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But experts agree that giving up a U.S. passport is an extreme reaction to the new requirements.
"For individual taxpayers, the additional reporting requirements are not complex," said Shomari Hearn, certified financial planner and vice president with Palisades Hudson Financial Group in Fort Lauderdale. "It's a matter of reporting information about your foreign financial accounts, the income earned in those accounts during the year and where on your tax return you have reported that income to ensure that you are not evading taxes."
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For those determined to run from the IRS, however, giving up an American passport isn't as easy as mailing it in to the nearest U.S. Embassy.
"When renouncing, you generally have to prove that you've been tax compliant for the last five years, and if your net worth exceeds $2 million or you have an average annual net income tax liability of $157,000 or more for the previous five years, you have to pay an exit tax," Hearn told MainStreet.
The exit tax is the gain from the deemed sale of assets based on their fair market value the day before expatriation less an exclusion of $680,000 for 2014.
"Besides the monetary aspect, your ability to travel to and stay in the U.S. will be limited, and it may be difficult to reapply for citizenship in the future," said Hearn. "Giving up your citizenship is not a decision to be taken lightly."
Under FACTA, most foreign entities receiving payments of U.S.-source income are now required to complete W8-BEN-E, which is now eight pages as opposed to the former one page W8-BEN.
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"We are advising foreign clients that qualify as foreign financial institutions to register for a Global Intermediary Identification Number (GIIN) and enter into an agreement with the IRS to comply with the requirements of FATCA, including complying with due diligence procedures to identify account holders who may be U.S. taxpayers and reporting information regarding their accounts to the IRS," said Kirsten Burmester, an attorney with Caplin & Drysdale.
The enactment of FATCA is part of a recent focus on offshore tax evasion stemming largely from the UBS scandal that began in late 2007. The scandal was based on former Swiss UBS Banker Bradley Birkenfeld's testimony to the U.S. Department of Justice (DOJ), the U.S. Securities and Exchange Commission (SEC) and the U.S. Internal Revenue Service (IRS) that the bank had guided its sales force to hide assets of U.S. taxpayers for the purpose of avoiding taxes.
"The disclosure by UBS of its U.S. account holder information and subsequent targeting of other Swiss banks and foreign financial institutions by the Department of Justice has led thousands of individuals with offshore accounts to disclose information regarding their accounts and pay back taxes and penalties to the IRS in order to avoid criminal prosecution," said Michael Pfeifer, an attorney with Caplin & Drysdale.
-Written by Juliette Fairley for MainStreet