Some Americans overseas give up their citizenship rather than deal with the IRS

Tax rules called bane of U.S. expats


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.

  • Christopher-trier

    For all the good things about it having US citizenship has become a burden.
    One seemingly cannot go on a quiet holiday abroad without having to be harangued at the US border. One seemingly cannot move abroad for career opportunities without being constantly hounded and harassed by the US.
    I can relate to those who renounce US citizenship for this reason. I hold dual German/US citizenship and an preparing to repatriate to Germany next year.
    If it becomes a complete nuisance I will not keep both — it’s simply not worth the hassle. I cannot even go home for a few weeks without being treated like a criminal at US immigration for having the temerity to go to Germany on a German passport.
    Germany does not do this to its citizens — so long as they obey German laws while in Germany they have nothing to worry about. So long as they do not commit criminal acts abroad they have nothing to worry about. American citizens seemingly cannot do anything any more without being considered guilty until proven innocent.

  • Stephen

    I really identify with the people interviewed in this article. Compliance with the IRS and the Department of Treasury is becoming increasingly onerous, particularly if you own your own business in Japan. I have also ended up paying more in preparation of the US forms than actual taxes to the IRS. The rules are confounding, even to experts, and I feel constantly exposed to making a mistake. Some Japanese tax requirements are in direct conflict with the US ones. When I receive a tax benefit in Japan, it is typically not recognized by the IRS and effectively taken away. You get the worst of both worlds. What is more is that there are few tax accountants who understand both Japan the US who can look at your situation holistically and advise you. As the article mentions, I have had problems opening a bank account in the US at times, although I have never had problems opening an account with a Japanese bank. The article may be mistaken on one point: I believe the Philippines also taxes its citizens abroad.

  • Just_Me_Also

    The story of renouncing citizenship due to U.S. Tax complexity (FATCA / FBAR) is not new for those of us who have been following the story, but good to see that it is getting attention in the headlines now. Thanks for calling it out!

    The most significant part of the story to me, is this:.

    “A Senate Finance Committee aid told AFP that chairman Baucus was preparing proposals that might affect the taxation of US citizens abroad.

    The senator, he said on condition of anonymity, “is committed to improving the US tax laws to ensure that US competitiveness is not hindered by unnecessarily burdensome tax rules.”

    As Baucas was one of the six members of the JCT that bragged about FATCA in 2009, to hear him say this now implies he is aware of the problems of his own creation?

    Time will tell, but let’s hope so.

    The only way to deal with this, is to END the unique and anti-competitive US Citizenship Taxation regime, not just more complex exclusions or adjustments around the edges.

    I hope that is what he is talking about.

    If he is determined to keep FATCA, then keep it focused on Homeland Americans, not U.S. Persons living abroad.

    To see Senator Baucus 2009 Press Release, google

    “Baucus, Rangel, Kerry, Neal Press Release On Foreign Account Tax Compliance Act Of 2009″

  • Marco

    I too am an American seriously considering renouncing my citizenship. I live in Asia. Being an American abroad to me has essentially zero benefits, and is often a burden. Do you think it will ever be possible for the US to modernize its treatment of Americans abroad with regards to taxation? I know something like the Fair Tax could fix the problem, but it may be a stretch. Does being an American have to mean that you are taxed your whole life until you die, and even after you die?
    I also really hate the fact that there is a published list of Americans so called “name and shame” who renounce their citizenship. US politicians love to parade and say how great being an American is, but wish they would re-think their views.
    If only the US’s tax laws were like those of Singapore or Hong Kong or better yet, Dubai.

    • Christopher-trier

      Or, for that matter, the Netherlands, Austria, Switzerland, or even Australia.

      The USA has a lot of good sides but at times it feels almost like being part of the world’s biggest Mafia. Best not to “disappoint” the dons.

  • Michael

    Besides the the problems, my American friends of retirement age have discovered that their payments to the Japanese social security program do not make them eligible for Medicare. While there is a treaty that allows one to credit their years in Japan toward the American social security pension plan, this is not the case with Medicare. An American signs up for Medicare as if he/she had never contributed and has to pay $600-800/month for Medicare. His/her Japanese spouse is not eligible for Medicare until 5 years of US residency has been chalked up. In short, after paying 20-30 years of US federal taxes–on top of Japanese income and social security taxes–an American of retirement age finds him/herself not quite a full-fledged American. Some of my friends have found it easier to retire in New Zealand, Australia or Europe than to retire in the US.

  • I knew many Burmese expats in Laos and Thailand and they had to pay taxes on their income earned overseas. If they did not pay their taxes they could not renew their passports at an embassy in Thailand or other country. Very hard on them. Things may be different now.