by Geoffrey Weg
Since 1998, under Internal Revenue Code Section 6039G, the U.S. Government publishes in the Federal Register the names of all US citizens who choose to expatriate (i.e., renounce their U.S. citizenship). From 2004 through 2008, the number of expatriations per year averaged approximately 625 (from a high of 744 in 2009 to a low of 232 in 2008). However, from 2009 to 2011, something interesting happened – the number almost tripled to approximately 1800 expatriations in 2011, with the number expected to be as high or higher in the first quarter of 2012.
So what’s going on?
The Federal Register does not reveal an individual citizen’s purpose for expatriation (nor is any citizen required to provide a reason to the government). However, for tax professionals, one huge change in tax law stands out like a sore thumb – FATCA – the Foreign Account Tax Compliance Act. According to the IRS, the purpose of FATCA is, “an important development in U.S. efforts to improve tax compliance involving foreign financial assets and offshore accounts”. Under FATCA, U.S. taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS. In addition, FATCA requires foreign financial institutions to report directly to the IRS information about financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest. As a practical matter, both tax practitioners and US citizens living abroad now face a huge administrative burden in order to comply with FATCA. And while direct evidence is lacking, anecdotal evidence from tax practitioner and taxpayer advocate groups indicates that it is this burden – FATCA – that is directly responsible for the dramatic increase in US expatriation.
So why should we care?
Indeed, 1800 expatriates constitutes something like 0.001% of all US taxpayers – a proverbial drop in the bucket. On the other hand, in order to be listed in the Federal Register, a taxpayer must have a net worth above $2 million (and/or income above a specified and significant level). In other words, these are individuals with significant income and assets, and they are deciding to leave our country, taking their skills, assets and tax-paying abilities with them. Moreover, the number of people doing this is simply skyrocketing. If it continues, at some point there will be a noticeable impact on the US economy. Congress and the Department of Treasury should take this new trend seriously, and think long and hard about whether to continue to impose this burden on these taxpayers, and ultimately, on all Americans.
Contact Geoffrey Weg
Actually, the Federal Register listing of expats is comprised of all expatriates whose names have been forwarded to the Treasury Department by the State Department, not just those with a minimum net worth. For example, Mike Gogulski, who is listed amongst the February 2011 renunciants is most assuredly not rich.
ReplyDeleteI see this "$2 million minimum" figure getting repeated quite a bit in this context. I think what's going on is that people are confusing the "covered expatriates" with all renunciants. Covered expatriates are those US citizens (or non-Americans with permanent residency in the US) who meet certain conditions (such as a net worth greater than two million dollars). The US government than forces you to calculate your net worth and taxes you as if you sold all of your property the day prior to expatriation.
This exit tax is, in effect, a way for the US government to confiscate a large chunk of your wealth if you decide to take the citizenship of another country.