A few weeks ago, the IRS published its quarterly “name and shame” list in theFederal Register. That’s the list federal law requires the agency to maintain of individuals who give up their US citizenship. The official name is “Quarterly Publication of Individuals, Who Have Chosen to Expatriate.”
Whatever you call it, getting on this list makes you an enemy of the state – in an instant, you are blacklisted.
The image of former US citizens living tax-free in some tropical paradise is an irresistible populist target. Rep. Sam Gibbons (D-FL), referring to expatriates, spoke of “the despicable act of renouncing allegiance to the United States.” Rep. Martin Frost (D-TX) supported an “exit tax,” which is now in effect, under President Clinton on the basis of “basic patriotism and basic fairness.” Congressman Neil Abercrombie (D-HI), described expatriates as, “Benedict Arnolds who would sell out their citizenship, sell out their country in order to maintain their wealth.”
Some of the attacks have been downright personal. When Facebook co-founder Eduardo Saverin gave up his US citizenship in 2012, Sen. Charles Schumer (D-NY) accused him of de-friending the US “just to avoid paying taxes.”
But the hate-mongering hasn’t slowed down the number of Americans expatriating. Since President Barack Obama took office in 2009, the number of citizens expatriating has skyrocketed from 231 in 2008 to 4,279 in 2015. That’s an increase of 1,752%!
Here’s a chart of expatriation trends since 1998, after the law took effect in 1996 requiring the IRS to publish this data quarterly.
Why Are So Many Americans Jumping Ship?
Given the populist rage against expatriation, you’d think these numbers would be plummeting. Obviously, they’re not. So what’s behind the explosive growth in expatriations?
Tax obligations are one reason, although that’s not as much of a factor as you might think. Alone among major countries, the US imposes a tax and reporting obligations on all of its citizens, even those living permanently outside the US. Having to file two sets of tax forms annually – one for the US and the other for a citizen’s adopted country – obviously is a burden.
For wealthy expatriates, there can be some tax savings, but not as much as the popular media and loudmouth members of Congress might want you to think.
Eduardo Saverin is a great example. Bloomberg News, for instance, claimed that Saverin saved at least $67 million in federal income taxes when he gave up US citizenship. Given the way such statements spread on the internet, within a few days, just about every news source in the US picked up that figure.
Only, it’s not true. When Saverin expatriated, he had to pay an exit tax on capital gains from the pre-IPO value of his Facebook stock. Since it cost him next to nothing to acquire his original interest in the company, every dollar of gain was subject to the exit tax, less the $651,000 exclusion than in effect. Based on the pre-IPO value of that stock, I’d wager Saverin paid an exit tax of more than $350 million. And that includes just his Facebook shares. Any other asset he owned at the time of expatriation with an unrealized gain was also subject to the exit tax.
Does that sound like unfriending the US to you? Far from criticizing Saverin, Charles Schumer and his friends in Congress should have given him a gold medal for being “taxpayer of the year.” Sure, Saverin won’t have to pay US taxes going forward on his non-US income. But he certainly didn’t save $67 million off the bat.
Another reason Americans expatriate is the practical difficulties of being a US citizen living in another country. Worldwide taxes are just the beginning.
For instance, Americans face an overwhelming compliance burden with respect to their non-US investments and business activities. Take, for instance, the onerous FinCEN Form 114, the “Report of Foreign Bank and Financial Accounts.” Fail to file this form and you could face a five- year prison term and a fine of $250,000 or more. True, sanctions typically are much less severe, but many other mandatory disclosure forms exist, all of them easy to miss and all with significant penalties for noncompliance.
Don’t forget too that if you owe more than $50,000 in taxes or penalties, the State Department can revoke your passport.
US laws like the infamous Foreign Account Tax Compliance Act (FATCA) have also made it extraordinarily difficult for Americans living abroad to carry on the most basic financial and business relationships in their adopted countries. FATCA, for instance, forces foreign financial institutions to enforce US tax and reporting rules with respect to their US clients. If these institutions fail to do so, they face a 30% withholding tax on many types of US source income and other capital transfers.
In many cases, it’s easier to “fire” US clients than deal with this risk. As a result, Americans living abroad report bank accounts being closed, mortgages called in, and insurance policies canceled. One client’s employer told him he’d be fired unless he gave up US citizenship within 30 days.
It’s also nearly impossible for an American living abroad to enjoy a normal retirement in their adopted country. That’s because, with only a few exceptions, the IRS considers the buildup in value in a non-US retirement plan to be taxable.
Thus, the approximately nine million Americans living overseas often feel like they’re under siege from their own government. But if they expatriate, they become enemies of the state. Not only are they subject to hate-mongering by ignorant politicians, but wealthy expatriates like Eduardo Saverin also face the onerous exit tax.
Don’t Come Back!
Then there’s the matter of being readmitted to the US to visit family, friends, and business associates. Some expatriated Americans can’t obtain visas to the US, even for brief visits. One of our insider sources says this policy stems from “the highest levels” of the Obama administration – perhaps from Obama himself.
But just to make sure expatriates know “who’s the boss,” in 2012, Senators Schumer and Bob Casey (D-PA) introduced legislation to retroactively punish them. The “Expatriation Prevention by Abolishing Tax-Related Incentives for Offshore Tenancy Act,” or Ex-PATRIOT Act, would punish wealthy expatriates by forbidding them from ever reentering the US. The proposal would apply to anyone with a net worth of $2 million or more at the time of expatriation. It would also be retroactive for the 10-year period prior to enactment of the statute.
The Ex-PATRIOT Act didn’t pass in 2012, or in 2013 when Schumer reintroduced it as an amendment to another act. But I wouldn’t be at all surprised if it reappears in 2017. It’s hard to see how someone like Donald Trump, who bashes everything non-US, could oppose this bill. And Hillary Clinton has long slammed corporations that move their base of operations from the US to save on corporate taxes. It’s not a huge jump to conclude that if elected, she’d sign the Schumer-Casey proposal into law.
Think of it this way: If you were in Congress and wanted to get reelected, would you dare to vote against the bill?
The bottom line is, if you expatriate from the United States, you should be mentally prepared never to return. Current policy merely makes it difficult to qualify for a visitor’s visa, but the Ex-PATRIOT Act could make you a permanent exile.
Reprinted with permission from Nestmann.com.