According to Bloomberg the American law FATCA, designed to combat offshore tax evasion, is hurting accidental US citizens who can’t open bank accounts.
A growing number of Americans abroad are renouncing their citizenship in order to avoid a law intended to crack down on offshore tax evasion.
The Foreign Account Tax Compliance Act, or FATCA, requires foreign banks to report the assets of US account holders to the Internal Revenue Service.
FATCA was intended to target wealthy Americans who keep money overseas to avoid taxes, but it has also ensnared ordinary people living abroad. Some banks refuse to open accounts for US citizens at all rather than risk steep penalties for failing to provide the information.
This is especially frustrating for so-called accidental Americans, who are citizens of the United States because they were born there or because one of their parents is American but has no other ties to the country.
As a result of European pressure, the US Treasury Department is preparing guidance that will provide some relief to foreign residents and banks. In addition, the Supreme Court has agreed to hear a case involving the tax and compliance burdens imposed on Americans abroad.
However, for some Americans abroad, it is not worth the wait.
Seiermann, for example, was born in the United States to German parents but has no recollection of her first two years in the country. She is now attempting to renounce her citizenship.
With her first job, she discovered that she had to file tax forms with the IRS despite having no ties to the United States. She must pay her accountant 450 euros per year, as well as approximately $2,500 in taxes to the IRS, for income from a rental property.
Meanwhile, according to a review by the US Treasury, while the law cost more than $574 million to implement, it only generated $14 million in revenue through May 2021.
Grant, a 30-year-old American living in Braunschweig, Germany, is another example. He describes FATCA as a major financial burden that compelled him to renounce his citizenship.
“I can’t even have a shared account with my husband because I’m US-born,” said the American who moved to Germany 10 years ago to study and is now a citizen. “I can’t do retirement planning, write a will, or even buy a property at a decent rate without fearing expensive US taxes or banks simply saying ‘no.’”
One-fourth of the approximately 9 million US citizens living abroad have considered giving up their citizenship. For 40% of them, it’s because of the annual burden of filing US taxes. The US is one of just two countries in the world, along with Eritrea, that taxes based on citizenship and not residency.
While many Americans living abroad do not pay US taxes because their home countries have higher tax rates, which are deducted from what they owe the IRS, they must still file complicated forms and frequently hire accountants to assist them.
FBAR requirements have been in place since 1970, but the IRS has only begun to crack down on people who fail to report their assets abroad since the implementation of FATCA in 2014.
FATCA increased public awareness of citizenship-based taxation, making it more reasonable for the IRS to impose penalties for noncompliance on a more consistent basis.
Boeffard, a 55-year-old Frenchman who was born in the United States while his parents were visiting, has experienced firsthand the costs of being an unintentional American. He paid the IRS $13,000 in taxes on his foreign investments and property holdings over a five-year period, $17,000 to a US accountant, $16,000 to a US attorney, and 26,000 euros to a French lawyer.
His solution: Renouncing his American citizenship.
In addition to the $2,350 administrative fee for renouncing citizenship, Americans abroad may face an exit tax assessed by the IRS. A backlog of cases has also resulted in wait times ranging from months to years.
We, the founders of Americans Overseas, were born in the Netherlands and obtained our American nationality through our (American) mother. When we heard about this for the first time around 2013, we were in total disbelief (it can’t be true!), anger (how can they do this?), fear (am I going to get fines or pick up other problems?), and panic (what should I do?).
It is (unfortunately) true that there is an additional American tax levy. But there’s no information from local government, and when approached, the consulate referred us to the IRS, and the IRS was impenetrable.
That’s why we started this initiative to help people from all over the world by providing proper information to avoid unnecessary panic, and offering help free of obligation and free of charge. If needed, we have a network of affordable professionals (accountants) who can help you with your tax obligations.
If you have more questions about the US tax obligation you can contact us at Americans Overseas.
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