WSJ: Overseas Americans: Time to Say 'Bye' to Uncle Sam?

[Aquaponicsman]

http://online.wsj.com/article/SB10001424127887323455104579014772169287210.html

Overseas Americans: Time to Say 'Bye' to Uncle Sam? Chased by the U.S. Government, Thousands Are Severing Ties With America. Here's What You Need to Know

• Comments (221)

• By LAURA SAUNDERS and LIAM PLEVEN

Here is a sign that life is getting complicated for U.S. taxpayers with assets abroad: More of them are deciding they are better off cutting official ties with America.

In the first half of 2013, 1,809 people renounced their American citizenship or permanent-resident status, according to a tally by Andrew Mitchel, a tax lawyer who tracks U.S. data. At that pace, the 2013 total would double the previous high of 1,781 renunciations in 2011.

Daniel Kuettel, a Colorado native who lives near Zurich, says he gave up his U.S. citizenship in October because he feared he wouldn't be able to get a mortgage now that some Swiss banks are cutting ties with American clients.

"It was a really difficult decision. I had to think about what was best for me and my family, to reduce the risk," says Mr. Kuettel, a 41-year-old software developer. He says his income was below the limit the U.S. allows overseas taxpayers to exempt and he owed no U.S. taxes.

'Bye' to Uncle Sam?

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Chris Payne

The increase in renunciations is one sign that ordinary Americans who have lived and worked abroad for years, as well as green-card holders in the U.S. and overseas, believe they are at growing risk because of the intensifying government pursuit of undeclared foreign assets.

The crackdown started in the wake of the 2001 terrorist attacks, and it gathered force after Swiss banking giant UBS AG UBSN.VX -1.97% agreed in 2009 to pay $780 million to settle charges it had helped U.S. taxpayers hide assets.

Since then, more than 80 U.S. taxpayers have been criminally charged, and Switzerland's oldest bank, Wegelin & Co., closed down after pleading guilty to helping U.S. taxpayers hide more than $1.2 billion abroad.

On Friday, a prominent Swiss lawyer pleaded guilty in U.S. court to helping U.S. taxpayers hide millions of dollars abroad.

U.S. officials are enforcing rules established by Congress—some widely ignored for years, and others added more recently—that threaten stiff penalties and even prison for failure to comply. The crackdown has brought more than $6 billion in taxes and penalties into U.S. coffers, and experts say another $5 billion is in the pipeline. A representative for the IRS declined to comment.

As required by law, the IRS compiles a list of those who renounce their citizenship, and the names are published in the Federal Register.

Much of the money comes from well-heeled taxpayers. The top 10% of taxpayers who went through one of the Internal Revenue Service's limited-amnesty programs had account balances over $4 million, the U.S. Government Accountability Office estimated in a March report. The programs are one way for taxpayers who have missed past filings to come into compliance.

But many U.S. taxpayers who aren't wealthy also are finding it harder to attend to routine financial matters abroad, because some foreign institutions don't want to face the cost of complying with U.S. requirements.

Amid the crackdown, some face stiff U.S. tax bills and crippling fines over undeclared assets. Paying lawyers and accountants to help meet the various reporting and filing requirements routinely costs at least $1,000 a year, and often much more, experts say.

Other people say they are considering whether to renounce but are reluctant to take such a drastic step. Renouncing can cause additional complications, including another steep bill because of an exit tax the U.S. imposes on those who meet certain income or asset thresholds.

More U.S. citizens are giving up their American passports as the government cracks down on tax evaders. The WSJ’s Deborah Kan speaks to lawyer Eugene Chow about the main reason why many don’t want to be American anymore.

Although the U.S. State Department doesn't keep official statistics, it estimates that 7.2 million U.S. citizens live abroad. And the U.S. Department of Homeland Security estimates there were 13.3 million green-card holders living here as of Jan. 1, 2012.

Despite the campaign against undeclared accounts, U.S. taxpayers filed only 825,000 foreign-account reports last year—meaning that millions of people likely aren't complying with the law.

"It's clear that compliance is dismal, and also why the IRS is being aggressive in its enforcement efforts," says Jeffrey Neiman, a former federal prosecutor now practicing law in Ft. Lauderdale, Fla.

So many people could be affected by the crackdown that mass-market tax preparer H&R Block has expanded services for taxpayers with international ties. In May, the company launched a tax-preparation service via the Internet that is targeted at expatriates and highlights the firm's ability to help taxpayers with unfiled prior-year returns.

U.S. laws and rules provide few options for people who are in a showdown with Uncle Sam. Here is some of what U.S. taxpayers need to know:

Understand what is different about the U.S. Unlike almost all other countries, the U.S. taxes citizens and permanent residents on all income, wherever it is earned in the world. So a U.S. taxpayer living in India could owe U.S. levies on income from a British investment.

The U.S. tax code does allow taxpayers living overseas an exemption for wages earned abroad of up to about $100,000, plus a housing allowance, but taxpayers must file a return to claim the benefits.

Tax treaties might help U.S. citizens or green-card holders who live abroad avoid double taxation, but there can be gaps, experts say. For example, treaties typically don't provide an offset for foreign sales or value-added taxes. And if the tax rate is lower abroad than in the U.S., the U.S. taxpayer could owe the difference to Uncle Sam.

The U.S. also has an expansive definition of who is a citizen. It includes people born on U.S. soil as well as people born to U.S. citizens living abroad.

Kevin Packman, a partner with law firm Holland & Knight in Miami, has a Canadian client who was born in the U.S. to Canadian parents but moved to Canada as an infant. "She had no idea she was a U.S. citizen until she was nearly 50," he says. Experts say there are many similar "accidental citizens."

Know what has changed. While U.S. taxes on world-wide income have existed for decades, experts say laws regarding such income were seldom enforced.

That changed after the attacks of Sept. 11, 2001, in part because of concerns about terrorism. In 2004, Congress imposed severe penalties—up to $100,000 or 50% of the account, whichever is greater, per year—on U.S. taxpayers who choose not to tell the IRS about foreign financial accounts totaling $10,000 or more.

Critics point out that this penalty is for not filing a form, not for evading taxes. Bryan Skarlatos, a New York partner with law firm Kostelanetz & Fink who has handled hundreds of offshore accounts cases, says the total includes more than a dozen in which the tax and interest owed on offshore accounts was less than $20,000. Yet the IRS assessed penalties of more than $1 million, he says. The IRS declined to comment.

U.S. officials ramped up their campaign after the 2009 settlement with UBS. As part of the deal, the Swiss bank turned over the names of more than 4,000 U.S. taxpayers with secret accounts. Other banks have since made payments to the U.S. and named names.

In 2010, Congress passed the Foreign Account Tax Compliance Act, known as Fatca, which requires further disclosures by U.S. taxpayers with offshore accounts. The law also requires foreign financial institutions to report information to the IRS about U.S. account holders or face steep costs for not doing so.

Important Fatca provisions have been postponed until July 1, 2014, but the law has a long reach. For example, it could require a foreign-based trust to report information to the IRS about a beneficiary who holds a green card, even if that person gets no money from the trust and doesn't know it exists, says Dean Berry, a partner with law firm Cadwalader, Wickersham & Taft.

Accidental tax cheats may be able to avoid large penalties. The IRS has a limited-amnesty program that offers protection from criminal prosecution, typically in exchange for stiff penalties.

Taxpayers deemed less culpable—for instance, because they inherited money in a foreign account they didn't touch—can face lesser penalties. But the exceptions are often narrowly defined.

There are other options. People who have already entered the IRS's limited-amnesty program sometimes choose to opt out. That leaves them vulnerable to a regular IRS audit, though the penalties are often lower.

But there are risks: Outside the program, there is less protection from prosecution and penalties can be higher, although experts say both outcomes are rare.

Advisers often recommend that taxpayers whose violations were unintentional and haven't entered the limited-amnesty program should consider making "quiet disclosures" instead. That means catching up with back returns as well as filing them in the future.

The IRS hasn't officially sanctioned such filings, and going this route may not offer protection against prosecution. But experts say the IRS seldom challenges quiet disclosures. In practice, says Mr. Skarlatos, the IRS almost never looks back more than six to eight years.

Taxpayers need to be able to show their violations weren't willful, however. Experts say the evidence could include never having filed a U.S. return if you live abroad, having the undisclosed account in the country where you live, rather than a tax haven, or not having lived in the U.S. for many years.

It also helps to have little to no income earned in the U.S. and not to hold the undisclosed account within a trust or foundation.

Expatriation can have stiff costs of its own. People who renounce often have to certify they have complied with U.S. tax laws for the past five years. That means expatriation is a bad strategy for cleaning up past problems.

In addition, U.S. citizens and some green-card holders who formally expatriate are treated as though they sold their property on the day before they renounce. There are few exceptions, says Stow Lovejoy, another lawyer with Kostelanetz & Fink in New York.

Such people owe an exit tax if their net worth is $2 million or more or their average annual income tax for the past five years is greater than $155,000. The exit tax is due on net gains, above an exclusion of $668,000. Deferred income in IRAs and some other tax-deferred accounts becomes taxable at ordinary rates, up to 39.6%, according to Mr. Lovejoy.

Expatriation can also bring severe estate-tax consequences. The U.S. heirs of people who paid an exit tax often owe a 40% tax on assets they inherit from the expatriate, whether the assets are in the U.S. or not. Unlike with typical estates, there usually isn't a $5.25 million exemption.

In addition, law requires that the names of people who surrender their citizenship be published by the government, which some consider embarrassing.

At the same time, there are important exceptions to the exit tax. For example, people who have been dual citizens from birth can be exempt. For more information, see the instructions to IRS Form 8854.

Green-card holders might have other options. People with permanent-resident status who turn in their green cards are subject to the exit tax if they have held the card in at least eight of the previous 15 years. As with citizens who renounce, their names are also required to be published.

However, under complex treaty provisions the U.S. has with some countries, years when a green-card holder lives abroad might not be included in the eight-year tally. So careful planning can help some holders stay under this threshold.

Cushion the blow of U.S. taxes and disclosure with planning. Although the U.S. rules are strict, there is room to maneuver.

Cadwalader's Mr. Berry points out that a wealthy person who plans to expatriate might be able to use the U.S. gift-tax exemption of $5.25 million per individual to shift assets into a trust in order to reduce total assets enough to avoid the exit tax.

If trust assets are used to purchase a life-insurance policy, then U.S. heirs could inherit cash from the expatriate who isn't subject to the special inheritance tax, he adds.

In some cases, a wealthy family may choose to have one family member expatriate and hold assets for the benefit of the rest of the family. Using a "foreign grantor trust," the non-U.S. person could hold assets and make taxfree gifts to other family members who are U.S. citizens or green-card holders. However, the non-U.S. person is often required to have authority to revoke the trust and keep the assets, giving that person enormous power.

Write to Laura Saunders at laura.saunders@wsj.com and Liam Pleven at liam.pleven@wsj.com

More

• Will Renouncers' Names Be Public?
• U.S. Expats Balk at Tax Law

[Viajero-Tiempo]

Just how much is your US citizenship worth?

It was worth the lives of many.

Would you sell out for a few thousand bucks?

Or some paperwork?

Are these folks patriotic

Or just more "Me First"s

[Mainecoons]

Are you subject to FACTA?

Do you wonder why the U.S. is the only country in the world doing this?

Just curious.

[Jim Bowie]

Seems to me that it is only right that a person pay US taxes on foreign earnings if they are a US citizen. If they don't want to do that, they can RENOUNCE US citizenship (or Green Card ) and then pay the tax to their new country. Seems simple to me. Too many people look for loop holes and ways to cheat.the government. What a sad state for them.

[Jim Bowie]

Any American citizen who has $10,000 or more (that's TOTAL) in a bank outside the US is supposed to let the US Gov know about it.

Why?

I think because it earns interest and as a US citizen, you have the responsibility to pay tax on that interest. You could just renounce your US citizenship and then you wouldn't have to pay the tax to the US. You would, however, lose lots of benefits that are supported by those taxes that you currently pay. Your choice. It it were me, and it PMO this much, I would renounce.

[El Saltos]

Those benefits would include? Not Medicare.

[redpepper]

You will find that most are not natural born US citizens, and have ties with another country.

[gringal]

I don't think they're talking about the average expat, a "few thousand bucks" and some paperwork. The article sounds like they are really after millions of bucks stashed in overseas accounts. Of course it's "me first", but especially so if the amount is very large.

[Jim Bowie]

Those benefits would include? Not Medicare.

I believe Medicare is supported by US citizen tax dollars. It is a benefit I enjoy when living in the US. When living in Mexico, I do not have that benefit, as it is only available in the US (I agree with this for lots of reasons). I make the choice to live for times in Mexico and make the choice to forgo my Medicare benefits (and don't bitch about it, as it was my choice). Too many want their "cake and to eat it too". Americans have seen a lot in my lifetime, and sadly lost a lot that made us once a great Nation. Many blame the government, but the people need do no more than look in their mirrors for the real source of the problem. Sad.

[hensley]

But why should you pay taxes to a country you do not live in?

[Sunshine Girl]

But why should you pay taxes to a country you do not live in?

The only answer to this, is because you are an American OR a designated American tax resident. Other countries do not tax on this basis. Canadians also, need to understand the dreadful implications in the IRS regulations. After 31 days in the US, they risk being claimed as US tax residents.If they own property in the US, then they are even more at risk. IRS regulations for being a US tax resident are totally different from the INS regulations for being lawfully in the US as a tourist. I have expatriated as a long term green card holder,and even though I had not lived in the US for a long time, I still needed to file a list of all my world wide assets with the IRS, and get a clearance from them before I was considered expatriated. You don't just say "I divorce you" 3 times and are through with them. If you have over 2 million in assets, then you have to pay all capital gains on all your assets before being allowed to renounce citizenship and expatiate. Once free, I am never going back...

[Jim Bowie]

Once free, I am never going back...

I wonder why you ever became a green card holder in the first place if you can't handle the rules? Surely not to just "use" the advantages it gave you? And, you are right, you just can't "skip out" on your tax obligations.

[Jim Bowie]

Canadians also, need to understand the dreadful implications in the IRS regulations. After 31 days in the US, they risk being claimed as US tax residents.If they own property in the US, then they are even more at risk.

Anyone that owns property in the US is liable for taxes on that property, why shouldn't they pay like everyone else?

[Jim Bowie]

I agree Hensley, and also because I am now paying taxes to Mexico on the interest I earn here, so why double taxation? I already paid income tax once to the US when I earned that money originally. What if I just stuck it under my mattress. Seems to me I should be able to do whatever I want with my savings. Without having to 'inform' the US.

Double taxation, I think not. Sure you payed tax on the money, but not on the new interest it created for you in Mexico to the US, where you have an obligation. You can do what you want with the interest, just renounce your citizenship and you are completely free of the US, forever. Simple.

[Aquaponicsman]

Blood shed for the US was not shed for citizenship, it was shed for freedom of which there is precious little left. Financial prudence is not a "me first" attitude, it is a responsible imperative so you do not become a dependant on some other taxpayer.

The onerous burdens imposed by this overreaching administration and its questionalble spending is also of great concern, not to mention the outrageous waste and distribution of tax dollars to cronies and political allies (and even to terrorist organizations and murderous governments.)

This administration is treating US citizens as crimals or potential criminals and we are not. I personally believe that it could even be argued that the reverse is possibly true.

Hunting down US citizens living abroad so they can give benefits to illegals (I just saw in the news that illegals are demanding free organ transplants. See: http://www.judicialwatch.org/blog/2013/08/illegal-aliens-demand-free-organ-transplants/ ) while the completely unaffordable "Affordable Care Act" prohibits coverage for US Citizens living abroad.

Add this to the out-of-control spying and the rampant disregard for the Constitution and Rule of Law that is unabated and unremediated and I think there are significant considerations above and beyond mere financial impositions and unduly burdensome paperwork requirements.

I am not advocating a position either way, but at some point every person needs to weigh cost vs benefits of everything they do and determine if they want to continue to financially support an agenda to which they may be morally and/or ethically opposed.

With all the mental patients and criminals who are in the US that are all about to granted amnesty, maybe a renouncer could just go back to the US illegally and get covered under the wave of that magic wand and get more benefits than they could have obtained as citizens.

[bmh]

Many people who are renouncing their citizenships are people with serious assets, companies abroad not retirees , There is nothing new and people who have been evading taxes via off shore accounts Swiss bank accounts and so on are getting squeezed a little but they have financial advisors lawyers and will still get away with a lot anyways, it is not about the little retirees and their house in Mexico. We all know that many people with houses here do not pay tax on the income neither to Mxico nor to the States so they may have to start..

. It is about people cheating on their taxes not the average guy and his little savings..

In France we pay lots of taxes, we get a lot for them but still taxes are very high and sleeze like the actor Gerard Depardieu and others gave up their citizenship and became Russian...pretty funny, hope he likes the winters there.

Aquaponics man most countries do not cover health care does from their citizens living abroad. I am not covered under the US system or the French system, that is the way of the world. If you think it is so wonderful to be an illegal why don´t you try it for a while, I am sure you will be begging to become a US citizen again. Most of our field workers at the winery where I worked where illegal and I was glad I had a green card. Social Security was deducted from their pay check but as their numbers were made up they will never collect, they were participating to the pot not taking from it.

People working as slabe labor in the US contribute to the econmy and the lower cost of food , clothes, chicken , name it. The companies employing them contribute to the economy and are paying taxes as well , do not believe that all illegals are a bunch of leaches they are not.

[snowyco]

I agree Hensley, and also because I am now paying taxes to Mexico on the interest I earn here, so why double taxation? I already paid income tax once to the US when I earned that money originally. What if I just stuck it under my mattress. Seems to me I should be able to do whatever I want with my savings. Without having to 'inform' the US. I don't earn enough income these days, so luckily I no longer have to file with the IRS.

There is no double taxation for at least the past 20 years. US income tax rates are almost universally lower than Mexican income tax rates, especially if you have income of $16,100 – $223,000 USD.

There are simplified explanations about how the US-Mexico Tax Treaty actually works at Tax Issues for Americans Living and Working in Mexico – A Redux for 2013 and Summaries of US Tax Laws Affecting Citzens Living Abroad . Eager beavers can read the rules for themselves at IRS: UNITED STATES – MEXICO INCOME TAX CONVENTION – 1993 and IRS: Publication 901 – US Tax Treaty Summaries

[luisa]

Blood shed for the US was not shed for citizenship, it was shed for freedom of which there is precious little left. Financial prudence is not a "me first" attitude, it is a responsible imperative so you do not become a dependant on some other taxpayer.

The onerous burdens imposed by this overreaching administration and its questionalble spending is also of great concern, not to mention the outrageous waste and distribution of tax dollars to cronies and political allies (and even to terrorist organizations and murderous governments.)

This administration is treating US citizens as crimals or potential criminals and we are not. I personally believe that it could even be argued that the reverse is possibly true.

No! For decades, at least, the US has taxed earnings differently than most countries. As a US citizen working in Australia, for example, I was liable for income taxes for both Australia and the US. My peers from other countries did not pay taxes to their home countries, but US citizens did. In my case, my employer paid my Australian taxes so I was not affected.

It is not this administration, it is the way the US government does things.

[Jim Bowie]

As long as you claim to be a US citizen, you should be liable for meeting the rules and the taxes. Period. You can renounce any time you want, so you don't have to complain any more. Your choice.

[Jim Bowie]

No! For decades, at least, the US has taxed earnings differently than most countries. As a US citizen working in Australia, for example, I was liable for income taxes for both Australia and the US. My peers from other countries did not pay taxes to their home countries, but US citizens did. In my case, my employer paid my Australian taxes so I was not affected.

It is not this administration, it is the way the US government does things.

You have things wrong here (in reference to Mexico). Please read Snoyco's 1st reference, and you will see that the 1993 Treaty does not do these things. It does, however, state that any Capital Gains realized on sale of property in Mexico are subject to IRS taxation. I'm sure those who have sold property and sell in the future are aware of this

[Jim Bowie]

Maybe this will help curb the draw on SS and Medicare/medicad, food stamps, etc. in the future.

[bmh]

If you are a dual citizen of Mexico and the US you can always give up you US citizenship and if you have any IRA or investements in the US you will be happy to hear that the government has the investment houses and bank automatically withold 30 % of your money , you will have to file to get it back .

Your money will be used by the US government interest free wether you like it or not. I know I am a non resident alien and this is what is being witheld from my money.

The law is that the banks may withold up to 30% and are responsible if the taxes are not paid so they all chose to withold 30%.

[conejorapido]

All this talk of renunciation is really very amusing. Let's see now....the population of the US is roughly 300 million and so far this year 1800 people have renounced, I make that .0006 percent of the population!

[Jim Bowie]

If you are a dual citizen of Mexico and the US you can always give up you US citizenship and if you have any IRA or investements in the US you will be happy to hear that the government has the investment houses and bank automatically withold 30 % of your money , you will have to file to get it back .

Your money will be used by the US government interest free wether you like it or not. I know I am a non resident alien and this is what is being witheld from my money.

The law is that the banks may withold up to 30% and are responsible if the taxes are not paid so they all chose to withold 30%.

What is a non resident alien? Why would you use the US banking system if you want your citizenship in Mexico? Have your cake and eat it too?

[cbviajero]

Why would you use the US banking system if you want your citizenship in Mexico?

For any number of good reasons.Lots of Mexicans have bank accounts in the US.