(Bloomberg) -- A growing number of Americans are renouncing their citizenship to escape a law that was designed 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. It was designed to go after wealthy Americans keeping money overseas to avoid taxes, but is also ensnaring regular people living abroad. Rather than risk steep penalties for failing to provide the information, some banks refuse to open accounts for US citizens at all.
This is particularly frustrating for so-called accidental Americans — people who are citizens of the US because they happened to be born there or because one parent is American but don’t have a connection to the country.
In response to European pressure, the US Treasury Department is planning guidance that would offer some relief to foreign residents and banks. The Supreme Court has also agreed to hear a case regarding the tax and compliance burden on expats.
But for some Americans who live abroad, it’s not worth waiting for things to change.
Julia Seiermann was born in the US to German parents, but remembers nothing of the first two years of her life there. Now she’s looking to ditch her citizenship.
The 36-year-old trade analyst, who lives in France, found out with her first job that she had to file tax forms to the IRS despite having no connection to the US. She has to pay 450 euros ($430) a year to her accountant and about $2,500 in taxes to the IRS for income from a rental property.
What’s worse, she can’t invest in local financial products, as French banks refuse to open even the most basic savings accounts to her.
“It’s really hard because I have my whole life in front of me and I’d love the possibility of working in the US, but this FATCA situation has made living in France and investing in my future impossible,” Seiermann said.
Under FATCA, foreign banks have to report a US tax identification number for every US client, something which accidental Americans often don’t have.
As a result, many banks abroad deny services to US citizens — including savings accounts, retirement funds, investing and lending — to avoid possible fines. Some Dutch banks have even closed the existing bank accounts of US citizens.
Meanwhile, an April review from the US Treasury found that while the law cost more than $574 million to implement, it only brought in $14 million in revenue through May 2021.
Joshua Grant, a 30-year-old communications engineer in Braunschweig, Germany, said FATCA was a major financial hassle and pushed him to renounce his citizenship in August.
“I just got married, and I can’t even have a shared account with my husband because I’m US-born,” said the Alabama-born 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.’”
Out of the approximately 9 million US citizens living abroad, about one in four have considered ditching their citizenship, according to the tax firm Greenback Expat Tax Services. For 40% of them, it’s because of the burden of filing US taxes every year.
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 don’t actually pay US taxes — because their home countries have higher tax rates and that’s subtracted from what they owe the IRS — they still have to file complicated forms and often need to hire accountants to help them comply.
If they fail to do so, they face penalties. These are the subject of the Supreme Court challenge brought by Alexandru Bittner, a Romanian-American businessman.
Bittner spent nine years in the US in his youth. He acquired US citizenship before moving back to his home country in 1990 and starting a handful of successful businesses.
Returning to the US in 2011, the dual citizen found out he was supposed to file what’s known as an FBAR, which reports foreign bank accounts to the IRS — something he wasn’t aware of when he lived in Romania.
The IRS determined that he was liable for failing to file FBARs for the years 2007 to 2011 and owed a $2.72 million penalty — $10,000 for each foreign bank account he failed to report each year. The Supreme Court will rule on whether violators should pay a penalty for each unreported account, or a single $10,000 penalty per year.
FBAR requirements have been in place since 1970 but only since the 2014 implementation of FATCA has the IRS started to crack down on people failing to report their assets abroad, said UK tax adviser Adam Rose from the firm Blick Rothenberg.
“We have seen a general increase in the number of cases going to court from 2015 onwards,” he said. “FATCA raised awareness about citizenship-based taxation so it became reasonable for the IRS to apply penalties for failure to comply on a more consistent basis.”
Philippe Boeffard, a 55-year-old French businessman who happened to be born in the US when his parents were visiting the country, has discovered first-hand the costs of being an accidental American.
Over a five-year period, he paid $13,000 in taxes to the IRS on his foreign investments and property holdings, $17,000 to a US accountant, $16,000 to a US attorney and 26,000 euros to a French lawyer.
His solution: Renounce his American citizenship.
Besides the $2,350 administrative fee for renouncing citizenship, expats sometimes face an exit fee, gauged by the IRS. A backlog of cases has also led to wait times ranging from a few months to several years.
For Boeffard, finalizing the process after three years of waiting allowed him to make plans again.
“For years, I’ve been afraid of making any big financial decisions, fretting about what my wife and I could do with our lives, if we could buy a house, if I could open a bank account,” he said. “Now I can finally breathe.”
To contact the author of this story:
Alice Kantor in London at [email protected]