With the introduction of FATCA (Foreign Account Tax Compliance Act) many people have lost the ability to hide their money overseas. Under FATCA, there is increased pressure to ensure compliance with IRS tax and account reporting requirements. Still, renouncing your citizenship is usually an emotionally charged decision and an overreaction to an understandably stressful situation.Golding & Golding – International Business Tax Lawyers
The failure to properly comply with IRS tax law involving international and foreign accounts can result in extensive fines and penalties. Worse yet, if the IRS determines that you acted “willfully” there is the looming threat of criminal prosecution, which begins with a friendly visit from two special agents who are part of the IRS criminal investigation department.
Sometimes people a get so wound up with the idea of the IRS acting as big brother and/or having to report foreign income and accounts that they believe the best idea is to renounce their citizenship. In other words, to give up all the rights and protections afforded to US citizens simply because of tax and disclosure issue.
Trust us, as experienced international tax lawyers we fully understand the implications and possible intrusions that occur when a person has to disclose offshore assets and foreign income – but renouncing your citizenship can lead to much bigger problems down the line.
We have worked with multiple clients who have renounced their citizenship and the long road home back to the United States can feel like forever. The following is a brief summary of our reasons why you should consider whether renouncing citizenship is the right move for an emotional response to an unfair law.
Case Study: Peter – Peter was originally from Sweden but moved to the United States back in the late 1980s. He married, was issued a green card “legal permanent resident card” and remained in the United States for the next 10 years before deciding he wanted to become a naturalized citizen. Thereafter, he placed his application, passed the citizenship exam and became a naturalized U.S. Citizen.
When Peter’s parents died he inherited a nice sum of money. The money was located in Sweden and Peter did not touch the money aside from taking a small portion to update the home he lived in with his wife. As time went on and the tax rate increased – as well as the requirements for foreign disclosure – Pete had enough. and decided he wanted to go back to Sweden and not be bothered by the US tax system.
Peter spoken to both his wife and an attorney who pleaded with him not to pronounce his citizenship because it could have an impact down the line. Nevertheless, he did so with the idea that his wife would split her time between the United States and Sweden. Peter left the United States in 2005. In 2007, Peter’s wife fell ill and was diagnosed with cancer; she was unable to travel any further between the United States and Sweden.
Peter wanted to return to the United States, if even on a B1/B2 visa or other temporary visa. Unfortunately, when Peter went to the consult in Sweden, he learned that after renouncing your citizenship it can be a very, very long process to try to return to the United States. Essentially, you have to get back in line and start the process over – with the stigma of having already renounced your U.S. citizenship once before.
Unfortunately, for two years Peter was unable to return to the United States until finally wrangling a way to obtain a temporary visa – afterward he explains costing nearly hundred thousand dollars in legal fees. Luckily, Peter’s wife’s cancer went into remission and they ended up relocating back to Sweden.
Peter’s problems did not stop there, since Peter could possibly be subject to an ex-patriate tax due to a substantial wealth he had prior to renouncing citizenship and relocating back to Sweden (which is how we first learned of Peter). After talking with Peter, as well as other clients who have come away after having renounced his citizenship, we learned a few different key points to keep in mind that might help you in making a decision as to whether it is really in your best interests to renounce your citizenship.
First Try Living Like an Expat
When we discuss the renouncing of US citizenship with our clients, we received the same response from a majority of them – that is, instead of renouncing their citizenship they would’ve opted to simply live as an expat. The reason why is that many individuals we meet did not realize that there is a difference between disclosure and tax.
Taxes vs. Disclosure
If a person is gifted $100 million from an overseas non-US resident individual, that money is not taxable. Rather, that money needs to be disclosed – usually in an IRS 3520 form, FBAR and 8938 (2011 forward) – but there is no taxable event by simply receiving money from someone overseas. That is because the person overseas (unless they are a US taxpayer) is not subject to estate tax and the IRS does not have any “inheritance tax”; therefore the inheritance of foreign money is not a taxable event.
Foreign Earned Income Exclusion
Moreover, if you are a foreign national/legal permanent resident who is working for another company overseas then you may be entitled to the foreign earned income exclusion and/or foreign tax credit. Thus, if you qualify for the foreign earned income exclusion than upwards of $116,000 (income and housing) that you earn overseas may be tax-free; the earnings are literally excluded from your gross income.
Foreign Tax Credit
Alternatively, if you do not qualify for the foreign earned income exclusion, you may still qualify the foreign tax credit. The foreign tax credit is a credit a person receives for taxes that they paid overseas on earnings. This prevents a person from being taxed twice on the same earnings.
Passive Income Tax
In many countries, there is no tax on passive income such as dividends, interest income, and long-term capital gains. While this is great, it is not enough of a reason to renounce your citizenship. Even though these earnings are not taxed overseas, they still subject to tax in the United States since the United States taxes citizens and legal permanent residents on their worldwide income. To that end, the few thousand dollars worth of tax savings generally does not outweigh renouncing your citizenship. Conversely, if you are earning significant money overseas through passive income then you are probably doing quite well for yourself and enjoying your life in the United States — as well as all the benefits of being a US citizen.
Traveling to the United States
After renouncing citizenship it can be very difficult to travel to the United States, especially after 9/11. Whether or not tax authorities and government agencies want to acknowledge it, word on the legal street is that there is a very serious black mark on any person’s record who has renounced his citizenship. Those individuals are usually placed on lists with terrorists and other unpatriotic individuals who have either threatened the United States or condemned the United States and the freedom it provides.
While you are in a state of uproar about your taxes and disclosure requirements, the idea of returning to the United States might seem inconceivable. Nevertheless, you should consider whether you still have relatives, family and friends who reside in the United States and who you would like to visit in the future. Unfortunately there is no way to tell who is going to live to tomorrow, who may get sick, and who might just need your assistance. Speaking to them on the telephone is not the same as being in the same room as them and if you’d renounce citizenship, chances are even an emergency type situation is going to be extremely difficult for you to just pick up and return to the United States.
Just because you renounce your citizenship, it does not relieve of your tax liability. There are very complex rules regarding the taxation of your earnings/estate value when you “expatriate” as follows:
If you expatriated on or after June 17, 2008, the new IRC 877A expatriation rules apply to you if any of the following statements apply.
- Your average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than a specified amount that is adjusted for inflation ($147,000 for 2011, $151,000 for 2012, $155,000 for 2013 and $157,000 for 2014).
- Your net worth is $2 million or more on the date of your expatriation or termination of residency.
- You fail to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the 5 years preceding the date of your expatriation or termination of residency.
If any of these rules apply, you are a “covered expatriate.”
*If you decide to move forward with renouncing your citizenship, you should speak with an International Tax Attorney first.
OVDP, FATCA, Streamlined Program
If you have fallen out of compliance with the Internal Revenue Service – or were never in compliance – there are things you can do in programs designed to assist you in accomplishing tax compliance. There are many programs in place which can help you avoid criminal prosecution, provide you amnesty, as well as allow you to pay a one-time penalty in order to simply allow your case to be complete.
At Golding & Golding we have helped numerous clients who are individuals, estates, trusts, and businesses in getting compliant with IRS and Department of Treasury tax laws and compliance requirements. While it might seem overwhelming now, once you obtain the necessary documentation and we prepare and submit the application to the IRS and DOT most clients feel an air of relief.
Moreover, unlike other firms at Golding & Golding, we provide a flat fee or clients and engage representation for the entire process involving disclosure. Therefore, you can move forward with the knowledge that if for any reason the Internal Revenue Service four Department of Treasury contact you regarding disclosure foreign accounts an unreported income, we will stand by your side throughout the whole process from beginning to end.
**Please keep in mind that renouncing your citizenship is a very big step to take, which we have found many people regret they made after making it.