Why are more Americans renouncing their US citizenship? Whereas most taxpayers likely don’t pay sufficient attention to part III of Schedule B when having their Form 1040 prepared, some Americans are renouncing their US citizenship because of these questions. The questions deal with Foreign Bank Account Reporting (FBAR). Since FBAR reporting and the severe penalties for non-compliance were covered in our blog postings dated June 4, 2013 and June 21, 2012, we suggest that you read those posting for the details of FBAR.
First, let’s focus on the number of Americans renouncing their U.S. citizenship. Bloomberg has reported a six-fold surge in Americans renounced their U.S. citizenship. 1,131 Americans renounced their citizenship in the second quarter of 2013 compared to 189 in the same quarter in 2012. During the first half of 2013, 1,810 Americans renounced their citizenship compared to a 235 Americans who renounced their citizenship in the entire 2008 calendar year. While we are not talking about millions or even hundreds or tens of thousands of Americans renouncing their U.S. citizenship, the trend is revealing.
Why are Americans renouncing their citizenship? According to Bloomberg, it is because the US government is preparing to introduce even tougher asset disclosure rules than exist today. The US government is searching for “tax cheats” who hold offshore financial accounts and are not reporting the income from those accounts on their personal tax returns. The reported 6 million Americans living abroad need to decide whether the additional taxes they will have to pay and the compliance filings on their assets in foreign countries outweigh the advantages of holding a U.S. passport. While many may view these Americans as tax cheats and must pay their fair share of taxes, many of these Americans argue that they were not aware of this tax obligation. According to Bloomberg, the US is the only country in the Organization for Economic Cooperation and Development that taxes citizens on their world-wide income, regardless of where they reside. In addition to Americans living abroad, Americans who emigrated from foreign countries and who decided to maintain financial accounts in their country of birth are also surprised to find that they are subject to FBAR when filing their US tax return. It is likely that while some Americans have no issue with reporting their income to the IRS and are lawfully doing so, they find the cost of compliance excessive and the disclosure of their financial assets held overseas to the IRS obtrusive and none of the government’s business.
While US tax law requires foreign financial institutions to report to the IRS information about financial accounts held by US taxpayers, or held by foreign entities in which US taxpayers hold a substantial ownership interest, many of these institutions are precluded from doing so by privacy laws in their jurisdictions.
While the IRS continues it efforts to get foreign countries to report on US citizens, which has been delayed and may be further delayed, US taxpayers must comply with the current FBAR rules.
Note: Because each individual has unique factors that need to be examined when determining that individual’s tax situation, we invite you to call 610-594-2601 today to make an appointment to discuss your personal tax situation. If you have not been FBAR compliant in prior years, you should also request tax counsel representation. You can also schedule a free consultation at Click Here. To learn more about various tax and business services, visit Tax Preparation Services and Small Business Accounting Services
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