WASHINGTON – The decision was not easy for the Gulf War veteran.
After 20 years of living in Switzerland, Scott Schmith renounced his U.S. citizenship, to escape the obligation to report his income and assets to the U.S. government despite living overseas.
“I have nothing to hide. But I don’t want to be punished because I chose to live outside the U.S.,” said the new Swiss passport holder, a photographer who lives near Zurich.
Schmith is just one of a rising number of Americans giving up their citizenship to avoid the increasing efforts of U.S. authorities to collect taxes on its citizens who keep money offshore, even those who live and work outside the country.
Starting next January, the U.S. Foreign Account Tax Compliance Act — now known worldwide as Fatca — has required banks in a rising number of countries, including Switzerland, to report to U.S. authorities all accounts held by Americans.
Americans discovered to be not reporting their offshore accounts, and not paying taxes on them where due, face stiff penalties.
The U.S. is the only major country that requires its citizens who are residents abroad to report their income to their country’s tax authority, the Internal Revenue Service.
For years, Americans abroad have mostly been able to ignore that requirement. But Fatca, by requiring their banks to report the accounts, is now serving as a painful reminder of the obligation.
U.S. expats “are now learning that not only are they going to be reported by their local banks, but also that the IRS could treat them as criminals,” said Allison Christians, a tax law professor at Canada’s McGill University.
Increasingly, U.S. expats are choosing another way out: renouncing U.S. citizenship entirely.
In the second quarter of this year, the number of Americans that gave up their marine-blue U.S. passport hit a record of 1,131. That was 66.5 percent higher than the previous quarter and up nearly sixfold from a year earlier, according to official data .
While still a small part of the 7 million U.S. citizens living overseas, experts are certain the rise is driven by the new tax and account reporting rules. “Fatca is an aggravator to the renunciation figures. It’s making it very difficult for Americans to live overseas,” said Marylouise Serrato, executive director of American Citizens Abroad, which lobbies the government on expatriate issues.
Some banks around the world have already stopped taking new accounts from U.S. citizens, to avoid having to report them or falling into the sights of U.S. regulators, as happened to the Swiss bank UBS in 2009.
Schmith said his bank closed his two accounts in the summer of 2012 due to Fatca.
“More and more U.S. expats are finding themselves abandoned in a financial black hole,” said Nigel Green, chief executive of deVere Group, a financial consultancy.
Peter Spiro, professor of law at Temple University in Philadelphia, said Fatca is “creating a terrible dilemma” for U.S. expats.
“If you make a rational calculation, you wonder if it’s worth it to keep your U.S. citizenship in the face of the higher administrative burden and the risk of higher penalties,” he said.
And that solution could still prove problematic.
An IRS representative said that even someone who renounced their U.S. citizenship could still be required to file an annual income report, depending on when they gave up their passport and how they earned the money.
To be in the clear, someone renouncing their citizenship would have to establish that they had completely satisfied their tax obligations for the preceding five years.
Christians said the real problem was the U.S. authorities’ unique approach to taxing their nationals who live and work abroad. “It’s not Fatca, it’s citizenship-based taxation that is the problem.
“If you had residence-based taxation like every other country in the world, you can have a Fatca regime and go after the taxpayer that tries to hide money abroad,” leaving those who live abroad alone.
Schmith himself says he is not too worried about it, saying he has “nothing to hide” in his finances. But still he is paying a price: from now on he can only travel to the country of his birth as a tourist.