Tax Liability: Rising Trend of U.S. Citizenship Renunciation

According to recent studies, over 25 million foreign immigrants have gained U.S. citizenship since the year 1907. However, since 2009, there has been a steady increase in the number of immigrants choosing to give up their U.S. citizenship and settling abroad. This is a fairly new trend that could be triggered by the new aggressive U.S. tax code and IRS enforcements. These new rules for reporting foreign assets are not finding favor with immigrants who are willing to give up their U.S. citizenship to avoid tax liability on financial assets that they have built up over the years. But if this present practice
of targeting their assets continues, there could be severe repercussions. Already, there is a brain drain of some of the most talented and intelligent minds that have helped in making U.S. economy one of the best in the world.

The United States is the only country that taxes all of its citizens on their worldwide income, whether they reside in the U.S. or abroad. Other countries impose taxes only on income that is earned within their borders. All permanent residents of U.S. or holders are considered to be tax residents and they must report their entire income to the IRS and pay taxes accordingly. Whether the money was earned within the country or internationally, all the citizens are required to file pay taxes annually on their total earnings. In 2009, the IRS began a concerted effort to pursue U.S. citizens who did not disclose their assets held in international bank accounts. All such taxpayers with secret off shore accounts were faced with penalties, fines and even jail time in some cases. The IRS held limited amnesties for U.S. taxpayers with secret
offshore accounts, collecting more than $5 billion in the form of taxes and penalties.

Concealing one’s income in offshore bank accounts is not the best way reduce taxes. For U.S. citizens, their income from all over the world is subject to U.S. income tax, irrespective of where they are living. In addition, U.S. law requires its citizens to report more than $10,000 kept in a foreign bank or trust, failing which will attract severe penalties. Over the years, the IRS has tracked millions of transactions to find out that many U.S. citizens were hiding their money in offshore bank accounts. It has even obtained lists of clients from investment banks, accountants and promoters who were selling such tax shelter schemes. They are indicted on charges of fraud and criminal conspiracy.

The Foreign Account Tax Compliance Act established strict asset disclosure rules for U.S. citizens with bank accounts abroad and also on banks where the accounts are held. Now U.S. citizens must file a new Form 8938 with the IRS, listing all foreign financial assets, including loans, insurance policies and shares in non U.S. companies. If such assets are not filed, it can result in a fine of up to $50,000. This combination of scaled up IRS enforcement as well as legislative and regulatory changes are causing a steady increase in the number of people choosing to give up their U.S. citizenship.

However, renunciation of one’s U.S. citizenship need not be the first strategy if the aim is to lower the tax burden. There are better and legitimate ways to lower taxes without uprooting lives and moving to foreign countries. Maximizing itemized deductions, using tax sheltered retirement accounts, life insurance or tax-exempt bonds or even moving to a low-tax state are all good options.

Recently, the IRS has made the FBAR penalty enforcement actions a lot tougher. The penalties are huge for U.S. citizens having overseas bank accounts but who have not informed the IRS. Because the penalty charges are based on the size of the foreign accounts and not on the amount of tax avoided, it can mean
serious financial implications for the account holders.

This system can be unfair to foreign-born U.S. residents whose financial assets are in danger though they were legitimately earned outside of U.S. Also, new American citizens may not even be aware of the new tax code in the U.S. and their tax liabilities, as they do not have such a system in their own countries. To prevent people from giving up their U.S. citizenship to avoid huge penalties and financial risks, the U.S. government could come out with an amnesty program without penalties or criminal charges.

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