Why more Americans are handing in their citizenship

How upset are some Americans about how the IRS deals with expats? More than 3,000 of them living overseas renounced their U.S. citizenship in the first two quarters of 2017, already ahead of the 2,999 who cut ties with Uncle Sam during all of 2013. It's the latest sign of rising resentment over a federal crackdown on tax evasion.

More than 1,700 people renounced their citizenship in the most recent quarter, the second-largest quarterly total ever but just a fraction of the 9 million or so U.S. citizens living abroad. Still, the rising number of Americans choosing to leave U.S. citizenship behind underscores a growing trend: Quitting Uncle Sam may make financial sense for some.  

That's because foreign banks are required to file yearly reports on assets held by Americans in their institution under the Foreign Account Tax Compliance Act, which aims to prevent U.S. citizens from hiding assets overseas. Complying with FATCA can be costly and difficult.

The law has made expats "aware of their U.S. tax filing obligations and aware that the IRS was going to be notified that they have foreign accounts," said Andrew Mitchel, who runs a U.S.-based firm that specializes in international taxation and tracks renunciation data. "So a lot of them are filing their U.S. tax returns and realizing how complicated it is."

The U.S. is one of the few countries that taxes the income of its citizens no matter where they live, a policy that groups representing expats such as American Citizens Abroad have been clamoring to change for years. In testimony submitted last month to Congress, the ACA noted that the only other country with a similar taxation rule was war-town Eritrea.

"An American citizen who … has resided outside the U.S. all her life, who owns no property in the U.S. and who earns no U.S. source income, is required to file returns and pay U.S. taxes the same as someone living in St. Louis," the ACA said. "The fact that she also pays tax to the country where she resides makes no difference."

Citizenship renunciations have been "going up consistently since the IRS has cracked down on these offshore disclosures," Mitchel said. "For a while, it may have been politically incorrect to give up your citizenship, but because more people are doing it  ... it's becoming less looked down upon."

Renouncing U.S. citizenship, however, doesn't absolve former Americans if they owe back taxes and penalties. Also, some may face "exit tax" that can total thousands or even millions of dollars, depending on their assets.

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    Jonathan Berr is an award-winning journalist and podcaster based in New Jersey whose main focus is on business and economic issues.