It’s exceedingly simple. The United States, since 2009, has been engaged in a “war against tax evasion.” This came about due to the number of resident Americans stashing money outside the country; the first wave was directed toward Switzerland. Once the damage done to the Swiss banks was evident, laws that had never been intended for, nor applied to, began to be imposed ruthlessly on Americans living outside the country. Why would this be? Again, simple; the United States bases taxation upon citizenship, no matter where in the world those citizens reside. There had never been any attempt to collect tax from non-resident citizens, nor were there any efforts to inform them of the requirements. There was no warning that all of a sudden, the citizens and residents of other countries (paying tax in those countries) who happen to be American, would be expected to file returns, and more problematic, file information returns. Generally speaking, most will not owe annual income tax to the U.S. There are procedures/practices in place ( Foreign Earned Income Exclusion, Foreign Tax Credit and the various double-tax treaties) which generally prevent this. However, there are NO protections against the penalties for not filing (though after three years of trying to force people into the OVDP/OVDI*- a Streamlined Program was created where one can become compliant absent penalties if there is “reasonable cause”) and particularly, for not filing information returns. The first assault was the “FBAR Fundraiser” in 2009. For not filing a form detailing “foreign” bank accounts, one could be fined $10,000 per account per year OR enter the *Offshore Voluntary Disclosure Program/Initiative and depending upon the year, agree to pay an in-lieu-of penalty. The OVDP, was called an “amnesty” program. This would lead one to conclude that the past would be forgotten and people would move forward. Not at all. It was an “amnesty” only in the sense that one would not receive criminal charges for not filing/paying tax/not filing information returns even when tax evasion was at the core of the behaviour. The problem was, that the tax compliance community insisted that this was the only way to come into compliance and people who were NOT criminals were also put through this punitive treatment. How on earth can one be guilty of tax evasion if no tax were owed?
The next reason is FATCA (the Foreign Account Tax Compliance Act). Contained within the .I.R.E. Act (2010), FATCA has been imposed upon the world by the United States, forcing governments (or banks in some places) to turn over information on those deemed to have “U.S. Indicia” associated with their “foreign” bank accounts. Another form was created for reporting foreign assets as well. There are many explanations of FATCA and suffice it to say, this is another strong reason “Americans” outside the country are giving up their citizenship. In addition, FATCA has resulted in discrimination against these people, with bank accounts being closed, mortgages not being renewed, being unable to open accounts and so on.
Many people who had not been in the system decided they likely could remain undetected. It also began to be noticed that the I.R.S. was only penalizing people who decided to come into the system. There are also 5 countries (Canada, Denmark, Sweden, France & the Netherlands) who will not collect taxes or FBAR penalties from their citizens if they were citizens at the time the tax/penalty was applied. And then came the expectation of relief from the Tax Reform that was to occur in 2017. So people waited.
And lo and behold, not only was there no relief but a new, horrific application intended for large multinationals has been proclaimed by the tax compliance community to apply to small corporations with single shareholder owners. The Transition Tax.” It brings back memories of the 2009 OVDP/2011 OVDI. The intent of the law is being ignored. The professionals claim the plain wording of the bill applies. This in spite of the fact that unlike the large multinationals who will no longer be taxed on their foreign income once the Transition Tax is pad, these single shareholder owners will continue to be subject to the Subpart F regime. Perhaps younger people and those with minimal amounts in their retained earnings can “take the hit” as they will have time to “make it up.” This is NOT the case for those who are close to retirement/or are in retirement. Generally these people have used the corporations to function as their pensions (given they are not employed, don’t have defined benefit plans, etc). The amounts represent a lifetime of savings and the amount of the tax is very high. These people are in no position to “take the hit.” They will suffer financial ruin. And many have been filing all along, including Form 5471 (information return for non-domestic corporations-CFCs) which makes them sitting ducks.
The fallout for expats from these issues are huge. Account closures, strained relationships, promotions and business partnerships denied, the cost and complexity of maintaining compliance…..
The situations expatriates face concerns a great deal more than simply filing taxes with the United States. These expatriates are not just “American” (if they are even that) but are the citizens and residents of other countries, law-abiding and tax compliant. They are not “tax cheats” “scofflaws” or any of the other unkind labels thrown at them by those who have no knowledge of all that is entailed.
To renounce is expensive, final and very difficult to do.
Can you blame them for wanting to live a life without all this?