Report: Complicated Tax Codes Forcing Americans To Give Up Citizenship

To put this situation into perspective, in 2008 just 231 Americans gave up their citizenship but this number rocketed to 4,279 in 2015, a rise of 20% on the year before. One survey found that 70% of those who had given up their citizenship pointed to tax and financial regulations for being the motivation.

However, US citizens don’t escape that easily since the government publishes their names in its Federal Register every year.Indeed, in a bid to stem the flow of applications and help deal with the backlog of paperwork, the US government increased the fee for people to give up their citizenship by 400% to $2,350 last November.

However, even that amount may not be enough, with the business magazine Forbes reporting that many more Americans are considering giving up their citizenship – Forbes estimates this number to be around 5.5 million American taxpayers.

It appears that the main reason so many Americans are severing links with their homeland is they are growing increasingly tired of having to deal with complicated tax paperwork – a situation that has worsened since new regulations came into force.

Among the famous faces that have renounced their citizenship in recent years is singer Tina Turner whose husband Erwin Bach explained that while the decision wasn’t motivated by tax, ‘the tax system doesn’t help’.

And it is expats who are particularly fed up with having to meet the requirements of the American tax code and other financial regulations that have come into being.

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One reason for the frustration is that the US is one of just two countries that taxes every citizen regardless of where they live.

For expats working and living overseas it means growing numbers of them are having to pay out high fees for lawyers and accountants to help deal with the amount of complex paperwork; those who opt to fill in their tax returns every year will spend many hours doing so, trying to work out the labyrinth of rules and regulations.

The burden for US expats has grown

However, since 2013 the burden for US expats has grown because of the Foreign Account Tax Compliance Act (FATCA) which compels Americans to report all of their foreign assets to the IRS. The law first surfaced in 2010 and immediately hit the headlines because of the intrusive measures to find US citizens with overseas accounts.

The law also compels banks and financial institutions to disclose the foreign accounts that are held by American customers or face hefty financial penalties when they fail to do so. This particular element of FATCA is the reason why many Americans when they move overseas will struggle to find a bank willing to take them as a customer.

But that’s not all; there’s also the FBAR law that requires all American taxpayers to reveal any foreign bank account holdings worth more than $10,000.

It’s understandable why the US government would go to such lengths to crack down on tax evasion but the new laws are making life increasingly difficult for the 7.6 million US expats living overseas.

So it’s no wonder then that growing numbers of American citizens decide it’s easier to give up their passport rather than complying with complex tax laws.

Double taxation

The big issue for US expats is that they will be paying taxes in the country where they live and work but still have to file a tax return for the IRS and potentially pay US taxes on top of their current liabilities – even if they haven’t spent a single day on US soil in that tax year! This is known as double taxation and many countries have agreements in place that take into account these payments.

Along with this, FATCA expands the scope of what can be taxed to include savings and pensions and not just income.

Indeed, The Guardian newspaper reported research published by Democrats Abroad which revealed that FATCA is having an impact on US expats with their financial accounts being closed and relationships with non-American spouses coming under great strain.

The report also states that some US expats are being denied promotions by their employer and also being denied partnerships in businesses because the employer is worried by FATCA’s reporting requirements. This is, the newspaper points out, leading to greater numbers of Americans to start contemplating planning renouncing of their US citizenship.

Another problem with FATCA is that it deems anyone born in the US to be an American citizen so they may have left the country as a baby or small child to live elsewhere in the world but they are still compelled under the law to reveal their financial assets.

For these ‘accidental’ US citizens they may not have proof of being a citizen, so renouncing their status is not easy.

The growing problem has attracted the attention of the National Taxpayers’ Union, which claims to be the voice of the country’s taxpayers, and it says that the US tax code is failing American people.

In an article, the NTU explains: “The individual tax code has, over the years, become increasingly complex, and compliance costs require billions of hours as well as hundreds of billions of dollars.

“A sound tax system needs to be based on five basic principles which are transparency, simplicity, responsiveness, predictability and efficiency; our system fails all of those principles.

“It also fails the American people and to serve them better, the White House and Congress need to work together to pass tax reforms that are simple, uniform and encourage investment.”

Indeed, the US tax code is a complex system with a variety of perks and tax allowances for citizens. It now weighs in at 9,000 pages and four million words – little wonder that many US expats need professional help to navigate a route through it.

It’s also been calculated, as the NTU hinted, that just to comply with the tax code means US citizens spend more than 6 billion hours every year completing their tax return – that’s the equivalent of 3 million full-time workers working every day for a year.

However, not every US citizen pays tax, around one in three tax returns have a zero tax liability or the person filling in the return receives a tax refund.

In a special report published earlier this year, the National Taxpayers’ Union said its annual analysis of the country’s tax complexity revealed that American taxpayers and its businesses were facing ‘unacceptably heavy burdens’.

More worryingly, the report predicts that ‘the future does not look bright’. The NTU says that 1.9 billion hours are spent completing the 1040 tax form series every year, or the equivalent of $64.6 billion in lost productivity.
Americans are also spending nearly $30 billion on software and supplies, as well as tax preparation fees to help with their annual tax filing chore.

The NTU also says that even the IRS struggles to comprehend the country’s tax laws and things need to change before the system ‘collapses under the weight of its complexity’.

It adds: “There is a need for a simple way of taxing that minimises damage to the US economy and our civil rights and it’s never been more imperative.”

In their report, the NTU says the basic 1040 form is used for filing federal income taxes along with the simplified versions, the 1040A and the 1040EZ. The organisation says that many middle-class citizens use the standard 1040 form which takes around 16 hours on average to prepare and submit.

For those completing form 1040 there are 79 lines spread over two pages but they require 211 pages of instructions to complete it correctly.

The tax code itself consists of 66,812 sections, subsections and cross references; the tax code grew by 46% between 2004 and 2012, or an average of one change every day.

Alongside the growth in paperwork, the risk of an average taxpayer being audited by the IRS has fallen by 23% in the last three years. This is down to reductions in the IRS budget and just 0.9% of taxpayers were audited in 2013.

However, for US taxpayers who earn more than $200,000 but less than $1 million every year, their chance of being audited is around 2.2% – for the ultra-wealthy their chances of being audited are 7.5%.

US citizens living overseas

US citizens living overseas are the only group of taxpayers who saw their chances of being audited increase.

And even with FATCA in place, it’s estimated the US Treasury is losing around $100 billion every year through offshore tax non-compliance.

The issue of Americans struggling with the costs of complying with tax filing requirements was highlighted in a study published by the University of Kent last year.

In it, the report writers highlight that the fact along with FATCA, US taxpayers are also struggling with the Foreign Bank and Financial Accounts (FBAR) law which compels US taxpayers with more than $10,000 in savings to reveal them and keep accurate financial records.

The study found that many US expats who live overseas typically need the help of an accountant but then find they are unable to pay the accountant’s fees.

The American-born researcher behind the study, Dr Amanda Klekowski von Koppenfels, said she had interviewed one US expat who earned £10,000 ($13,200) but who spent $1,000 having to file her taxes every year. The expat then renounced her citizenship because she did not want to spend money on the accountant’s fees which was 10% of her net income.

Another expat told the researcher: “It makes me so angry and distressed every June when I spend so many hours having to fill in forms to show I do not owe a dime.”

Failure to comply with FBAR

The study also notes a major change in tack when dealing with Americans for failing to comply with FBAR by inadvertently not disclosing an offshore account. That’s when in 2014 only ‘willful non-compliance’ was penalised but afterwards taxpayers faced fines of up to $10,000 for each non-reported bank account under its ‘non-willful noncompliance’ rules.

In addition, all US citizens who fail to report a foreign account face a 5% penalty charge on any amount that does not exceed $2,000. For unreported accounts worth more than $1 million, there’s a $100,000 penalty.

Ms Klekowski told one news outlet that the closing of bank accounts by foreign financial institutions was the ‘third factor’ for US citizens to give up their passport.

That’s because, she explained, one major issue is that non-US spouses also had to file financial accounts with the IRS, which made joint accounts almost impossible to operate, as were mortgages and investment accounts.

One interviewee told Klekowski for her study: “Under tax laws I’m obliged to disclose all of my bank accounts, including my husband’s, but my non-US husband does not wish to reveal his personal banking information and I do not think my government has the right in asking him for it.”

Ms Klekowski said many of those she met were proud to be American but felt they were being targeted for increased reporting requirements to comply with two laws because they live overseas.

Reports also highlights that those who are intending to give up their citizenship are not doing so for financial reasons necessarily; of those questioned, 43% had a household income of less than $100,000.

For those US citizens with household incomes of $250,000 or more, 33% said they had considered giving up their citizenship.

Those are worrying numbers for the US government as well as the IRS and help to underline the Forbes estimate that 5.5 million US citizens around the world may be looking to give up their citizenship because of the onerous tax code that American taxpayers are obliged to report under.

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