GENEVA – Scott Schmith is a patriot and a U.S. military veteran, but he is no longer a U.S. citizen. Sick of complex tax rules making his life in Switzerland miserable, he recently handed back his passport.
“It was a pretty big decision and there was a bit of anxiety,” said the 50-year-old photographer, who served in the 1990-91 Gulf War and has been living in Switzerland since 1993.
But once he received his Swiss passport and handed back his U.S. one last September, “it was like a load of weight off my shoulders.”
Schmith is one of a growing number of American expatriates who are opting to give up their citizenship rather than deal with the increasing difficulties imposed on them by U.S. tax authorities, observers say.
John, a 60-year-old business strategy specialist who asked that his last name not be used, said he decided to give up his U.S. passport after losing sleep for years over the intricate tax filing requirements that Washington places on all U.S. citizens, regardless of where they live in the world and where they make their money.
When the United States recently began pushing through regulations aimed at fighting offshore tax evasion, the implications for him — a “squeaky-clean” law-abiding citizen — became too overwhelming, he said.
“I just got more and more anxious about my ability to protect myself and my family from the administrative overhead of the U.S. government,” said John, who has been based in Switzerland since 2002.
Six European countries, including Switzerland, recently agreed to comply with the 2010 U.S. Foreign Account Tax Compliance Act (FATCA), requiring banks to report all holdings by their U.S. clients to the Internal Revenue Service.
“Offshore tax evasion costs the U.S. jobs and billions of dollars each year, and it puts an unfair burden on the average American taxpayer to make up the difference,” Sen. Max Baucus, who chairs the Senate Finance Committee and sponsored the legislation, told the New York Times last year to explain why FATCA was needed.
However, Jackie Bugnion, a Geneva-based tax expert working for the American Citizens Abroad lobby group, said that while the aim in theory is to “go after the wealthy resident in the United States who is hiding money overseas,” only a small minority of those affected fall into that category.
An estimated 4 million to 7 million Americans live outside the country, ranging from U.S. military personnel, diplomats and others on temporary assignments, to “accidental” Americans who happened to be born in the United States to foreign parents and dual citizens who may have lived most or all of their lives abroad.
According to observers, most of these people do not owe any taxes to the United States, but they still have to go through the process of filing complex IRS returns each year.
“Over the past 10 years, I have paid more to tax preparers than I have in tax,” John said, insisting his decision to give up his U.S. passport had nothing to do with the amount of tax he was being asked to pay, but rather the filing burden and fear of penalties if he messed up.
The United States is the only country in the world besides Eritrea that levies taxes based on citizenship rather than on residence or the source of revenue, Bugnion said.
This also means that anyone who happens to have a U.S. passport falls under the new FATCA rules, regardless of their background or fortune.
Fearing the workload of ensuring compliance with FATCA and especially the consequences if they slip up, “banks have been actively eliminating American clients,” Bugnion said, lamenting that Americans often “can no longer get mortgages, and are being told their bank does not want their business.”
While this is happening all over the world, Americans are especially feeling the heat in Switzerland — the main target of a U.S. campaign to track down institutions and individual bankers who help American clients open secret accounts overseas.
For instance UBS, Switzerland’s largest bank, sent out letters to all its American clients late last year telling them to prove compliance with U.S. tax rules or to take their business elsewhere.
That letter came as a shock to many, Bugnion said, adding that she has been receiving desperate calls from people who have spent their entire careers abroad and never realized before they were supposed to file U.S. tax returns. “Suddenly, they realize their entire life’s savings could be at risk,” she said.
In addition to making it difficult for Americans to simply open bank accounts abroad, U.S. tax rules also trip up citizens’ attempts to do business in other countries, observers say.
John, for instance, said he had long wanted to go into business with a good Swiss friend, but “every time we got close to a deal, my citizenship became a huge stumbling block.”
According to U.S. law, any business anywhere in the world which is more than 10 percent owned or controlled by American citizens or interests must file its annual balance sheet to U.S. tax authorities.
Bugnion said she has spoken with people who have been forced to shut down businesses, while John said he knows people who lost their jobs because companies did not want to put up with the hassle and cost of employing an American.
There are some signs that relief could be on the way. A Senate Finance Committee aide said that Baucus is preparing proposals that might affect the taxation of U.S. citizens abroad.