American Citizens Ditch Their Residency to Avoid Tax Bills

The U.S. Inland Revenue Service have revealed that over 1,800 American citizens relinquished their passports in 2011, the largest number ever recorded.

According to an article that was published on Reuters, the majority of U.S. citizens who gave up their passports last year did so in order to avoid paying taxes. As the only country in the world to operate a taxation system that is based on worldwide income, fears that U.S. expats would opt to relinquish their passports in order to avoid taxation have been rife for some time. Now, a report the figures that have been disclosed by the IRS indicate that more and more Americans will be prepared to leave America for good to avoid dual taxation.

One of the driving forces behind U.S. citizen’s willingness to give up their passports has been attributed to the fact that current reporting requirements are difficult and time consuming for taxpayers who are living abroad

At present American expats have two filing requirements. The Report of Foreign Bank and Financial Accounts (FBAR) and the Foreign Account Tax Compliance. Many expatriates living overseas are confused as to when if and when they need to make these returns and some opt to ignore them completely, risking potential criminal charges.

Marylouise Serrato, head of American Citizens Abroad, told Reuters that one of the principle reasons behind individual’s decisions to renounce their passport is fear: “Americans abroad are terrified. We’ve had people pay tens of thousands of dollars in fines. We’ve had people … pay huge amounts of back taxes,” she said. “Up to this point, we never heard of anyone renouncing, or if they did, they didn’t talk about it.”

The lack of overseas banking options is also giving Americans a good reason to relinquish their passports. As a result of the stringent reporting measures that the IRS is placing on overseas financial institutions, many overseas banks are now refusing to open or hold accounts for U.S. citizens and this is causing American expatriates a large number of issues. Describing the problem, Francisca N. Mordi, vice president and senior tax counsel at the American Bankers Association, said: “The foreign banks are upset enough about the regulations that they’re saying they just won’t keep American customers, and it’s giving (Americans living abroad) a lot of sleepless nights.”

The IRS have attempted to allay expatriates’ concerns by introducing FBAR amnesties and stressing that fines will not be applied if submissions are late due to a “reasonable cause.” They have also acknowledged that there is a need for more public awareness.

For more information about how to relinquish a U.S. passport, see our free guide to renouncing the U.S. passport.