The threat of a massive tax bill is causing some U.S. citizens who live abroad to renounce their citizenship. Many of these expatriates are middle-income earners, but because of increased enforcement of a four-decade old tax law, which they may have failed to comply with, they could face owing tax penalties and interest that could potentially drain much of their assets.
The numbers of citizenship renunciations are now at record levels, with 2014 on a pace to eclipse last year's previous record setting total. While the overall number of taxpayers affected by the program is relatively small, at about 43,000, the tax collection program could reach some of 7.6 million Americans who live abroad.
The law in question requires that expatriates must file a Foreign Bank Account (Fbar) Report form if they own foreign accounts that total more than $10,000. While the law has been in place since the 1970s, it was rarely enforced, until recently.
That changed in the last few years, as the Internal Revenue Service (IRS) stepped up efforts to stop the hiding of assets in foreign bank accounts. High-profile cases against Swiss banks led to changes in policy, including the ending of bank secrecy for accounts.
The IRS obtained significant settlements from some of these banks, including $780 million from UBS and $2.6 billion from Credit Suisse Group. As part of the settlements, they released account information to the IRS.
Because the penalties can be 50 percent of the amount in an account, and the penalty accrues every year the taxpayer is in violation of the Fbar filing requirement, one woman decided to renounce her citizenship to avoid the potential $455,000 in penalties on an account of about $100,000.
The IRS is examining the process, and is considering some of the unintended consequences on middle-class taxpayers, who were never the target of the law. If you have overseas assets and failed to comply with Fbar, you should seek legal advice on how to negotiate with the IRS to avoid the most draconian of penalties from the law.
Source: The Wall Street Journal, "Expatriate Americans Break Up With Uncle Sam to Escape Tax Rules," Liam Pleven and Laura Saunders, June 16, 2014