The investigation into offshore accounts used for tax evasion was intended to increase compliance with the Tax Code while capturing taxes on previously sheltered income. But it has had an additional consequence. According to the Federal Register, more Americans living abroad--perhaps some formerly from Florida--are renouncing their citizenship, particularly those residing in Switzerland, where the Internal Revenue Service has focused the brunt of its examination into offshore accounts.
Expatriates face an increasingly difficult decision now that the Foreign Account Tax Compliance Act has imposed more stringent rules for disclosing assets held overseas. FATCA requires the disclosure of a broad array of foreign assets and prescribes heavy penalties for failing to file the appropriate form.
The stricter reporting requirements are also a burden on foreign banks, to the extent that some have prevented American citizens from opening new accounts. Others have even closed the accounts of U.S. clients. Over a period of three years, Swiss banks lost an estimated 60 percent of their accounts belonging to taxpayers in North America when the IRS initiated its voluntary disclosure program.
Many Americans residing overseas may find themselves between a rock and a hard place when it comes to taxes. On the one hand, they can retain their citizenship but must comply with IRS disclosure requirements and may lose the ability to conduct business with foreign banks. On the other hand, they can eschew IRS compliance, bank overseas and take advantage of some beneficial foreign tax laws. For example, Switzerland's tax code does not impose a tax on capital gains. But this comes at the cost of giving up the rights and protections given to a U.S. citizen.
In addition, those who give up their citizenship may have to pay a so-called "exit tax" depending on their accumulated wealth and how much they pay in taxes. But about 1,780 Americans weighed the consequences and decided in 2011 that they were better off without their U.S. citizenship.
Source: Bloomberg, "Wealthy Americans Queue to Give Up Their Passports," Giles Broom, May 1, 2012.