Americans Renounce Citizenship to Escape IRS

An increasing number of Americans are living abroad and handing in their passports to escape the IRS.


Earlier this month it was reported that the number of Americans renouncing their citizenship increased sixfold in the second quarter compared to last year. According to The Wall Street Journal, more Americans renounced their citizenship in the first two quarters of 2013 than the whole of 2012 combined. The increase comes ahead of a July 2014 deadline (which has been moved back six months) imposed by an absurd piece of legislation called the Foreign Account Tax Compliance Act (FATCA), which compels foreign financial institutions to disclose the holdings of their American customers to American authorities as part of the U.S. government's latest attempt to crack down on Americans who avoid taxes by keeping assets abroad.  

Of course, American authorities can't legally force a foreign entity to do anything. However, they can threaten to impose a 30 percent withholding tax on income from American sources on a foreign financial institution if those institutions don't comply with the U.S. Treasury Department's demands, thereby turning foreign businesses into an IRS enforcement tool. The recent news of the huge increase in the number of Americans renouncing their citizenship is only the latest reminder of not only the arrogance of the IRS but also of the fact that American tax laws place an unreasonable burden on American who live abroad.

One of the most notable instances of an American renouncing his citizenship is Eduardo Saverin, the Brazilian-born co-founder of Facebook, who has lived in Singapore since 2009. Ahead of Facebook's IPO Saverin renounced his American citizenship, although Saverin denied that his decision was based on economic incentives. Saverin's decision upset some legislators on Capitol Hill, and prompted Sen. Chuck Schumer (D-N.Y.) and some of his colleagues to sponsor a bill, which died in committee, called the Ex-PATRIOT Act, which would have punished Americans who chose to make the rational decision to take legal means to move assets and wealth abroad in an attempt to hand over less money to the government. One of the most objectionable parts of Schumer's Ex-PATRIOT Act is its title. While perhaps a clever backronym, the implication that you must be somehow unpatriotic for living abroad or for choosing to take legal means to lower your tax bill is disrespectful and symptomatic of a worrying attitude towards the relationship between citizens and their government.   

What may come as a shock to many Americans is that the U.S. is one of the only countries in the world that taxes its citizens who live abroad. This issue was made painfully aware to me when I moved back to the United States in January 2012 from the U.K.

Paying U.S. tax is and will continue to be a major issue for my family. Among my three siblings, my parents, and myself there are three nationalities represented. All of us are American citizens, some of us are New Zealand citizens, and some of us are British. Only one of these countries requires that each of us submit a tax return every year until we die: the United States.

Perhaps I have an unusual sentimentality attached to my American citizenship because it is something I earned, having become an American citizen in 2009 after a process that is itself a subject worthy of its own article. I am very happy that I am an American and I feel very privileged and lucky to be allowed to live in the U.S. However, this does not mean that I would not reconsider my citizenship if I left the U.S. (at the moment unlikely) and the American authorities decided to hound me every year for the rest of my life.

It's astonishing that the American government would punish some of the world's most patriotic people by making them choose between their citizenship and the headache that comes with trying to be compliant with awful laws like FATCA. The requirements imposed by FATCA on foreign financial institutions and the punishments that come with non-compliance mean that sometimes foreign banks don't let Americans open accounts at all.

Instead of seeking to punish Americans who make rational economic decisions, American legislators should perhaps consider how absurd U.S. tax laws are compared with other developed nations. Why not make it so that U.S. taxes are based on residency, not citizenship? While such a move would bring the U.S. in line with other wealthy countries, it would not be conducive to the goal of legislators who passed legislation like FATCA, which is to squeeze every American for whatever money they might owe in order to help finance our overspending government. Reassuringly, even with the growing reach of the IRS there is still something, albeit regrettable, that Americans can do to keep their own money; namely, renounce their citizenship.