Americans abroad denounce offshore tax law’s unintended consequences

Last week’s “Global Muckraker” post on “The mystery of the fleeing Americans” produced heated reactions from readers.

In the post, I noted the skyrocketing numbers of Americans renouncing their citizenship or US residency and invited readers to help figure out what was driving the trend. The post described recent changes in US tax law, including the approval of the Foreign Account Tax Compliance Act (FATCA), and examined the reasons that Americans abroad might want to cut their ties – including tax avoidance by the wealthy.

I quickly got an earful from readers, more than two dozen of whom responded via email and on our Facebook page. Most of these readers told me that they were working and middle-class Americans abroad caught up in a byzantine and unfair tax system – far from the FATCA fat cats they felt they were being portrayed as.

At ICIJ, we’ve encountered FATCA as one of the most powerful laws against offshore tax avoidance that is currently on the books. For example, a recent survey of the offshore industry found that FATCA was far and away the most pressing regulation from any nation in the eyes of tax haven professionals. The Government Accountability Office has estimated that American taxpayers who use offshore accounts to illegally reduce their tax liabilities have cost the Treasury billions of dollars.

But we recently learned about other consequences of the law from our American readers abroad.

The U.S. taxes its citizens no matter where they live, and counts as its citizens all persons born in the U.S. or born to citizens of the U.S., and requires that citizens living abroad file annual tax returns. According to the State Department in May 2013, 7.6 million U.S. citizens live abroad. This includes people who were born in the U.S. to non-citizen parents and people born overseas to U.S. citizens living abroad, even if they have not lived in the U.S. for decades, or ever. Many people did not know of their tax filing obligations to the U.S. until recently, when enforcement of the regulations was strengthened in response to efforts to clamp down on offshore evasion by U.S. taxpayers.

One reader wrote:

I am a "dual" citizen who is impacted by FATCA. If I could renounce or relinquish my U.S citizenship I would in a heartbeat, but I cannot afford to. I am in the middle class with a total family income of about $80,000 a year with 2 kids in post-secondary.

I moved to Canada when I was six, and at 18 became a Canadian citizen in 1980. I lived back for eight years in the states for school and work and then moved back to Canada full time in 1989.

I have zero ties to the U.S… except for my citizenship. However, if I were to renounce and have to [follow the rules requiring me to] be tax compliant for five years, according to my accountant it would cost me about $30,000 in penalties and $15,000 for his services. 

 Another wrote:

I moved to Canada to be close to my family, for better healthcare, and for a better job.  I am a teacher by profession, so you know I am not a fat cat…  I pay higher taxes now than I did in the US.

I am expatriating because of the compliance nightmare.  I can't afford a cross-border specialist, and I am fearful of what the IRS would do to me if I made a mistake.  The FBARs (Foreign Bank Account Reporting) are particularly taxing and intrusive.  Imagine if you had to disclose every account you had over $10,000.  Oh, and I feel so safe handing over all of my banking information to the IRS…

Also, because certain things are not covered by that current US/Canada tax treaty, I can't properly save for retirement or my son's education.

I shall give you an example. In the US, I could open a 529B account to save for college.  Canada has a similar tax-deferred savings plan, called an RESP.  However, the US wants to tax any gains this account makes because it is considered a foreign investment account…. 

It is not foreign to me.  I live, work, and pay taxes in Canada, and I ought to be able to save for my son's college education. Being American makes me a second-class citizen in Canada.

 Ruth Anne Freeborn, a Canadian who has relinquished her U.S. citizenship, wrote:

It makes sense to have some way to catch those living in the U.S. and hiding money in the Cayman Islands. It makes sense to go after money launderers and drug lords. It does not make sense to lump in every expat family with the above sorts of people. That's what FATCA does. FATCA uses a sledgehammer to crack a nut.

The same penalties that apply to UBS and criminal drug lords have no business being applied to innocent expats, low and middle income who are not "off shoring" Our local banks down the street are not "offshore" to us. Off whose shore? We bank where we live the same as anyone else.

Most of the comments I received came from Canada, where the Isaac Brock Society web site provides data on relinquishment and renunciation of U.S. citizenship and advocates protest against the FATCA requirements. But comments posted on ICIJ’s blog also came from European residents.

From France, where Victoria Marie Ferauge blogs at The Franco-American Flophouse:

It's not the taxes, folks. Nor is it about being rich and wanting to get away with something. Middle-class Americans abroad are groaning under the weight of all those reporting requirements, our foreign spouses are not amused because their information has to go to the IRS along with ours and because our local banks (foreign to the US) are treating us like pariahs. For info I'm an unemployed IT professional living in France. I and others have been writing about this since 2011. I call it The American Diaspora Tax War of 2012-2013.

Another issue brought up by a fellow journalist in Canada is a discrepancy in the statistics on expatriations from the U.S. government agencies. Patrick Cain has covered this in the Global News and points out that the list in the Federal Register conflicts with statistics kept by the FBI.

I intend to follow up on this inquiry in upcoming postings. 


Margot Williams is ICIJ's research editor. You can reach her at mwilliams@icij.org


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