The number of Americans living, particularly retiring, overseas is unknown, but the number of those renouncing their citizenship mainly because of onerous tax-reporting requirements is easier to get a hold of.
Kathleen Peddicord, publisher of a popular journal on overseas living, estimates that some 1.4 million Americans are retiring abroad out of a total of 2.4 million expatriates (excluding government and U.S. military personnel).
And while the number of Americans renouncing their U.S. citizenship is small, the trend has been accelerating dramatically.
While we don’t yet have final numbers for 2013, as of the third quarter they already exceeded—at 2,369 renunciations—the previous peak year of 2011, when the annual total stood at 1,781, according to attorney Andrew Mitchel, who tracks expatriations.
No less than the IRS’ ombudsman, Nina Olson, who recently released her annual report to Congress on the most serious problems faced by U.S. taxpayers, identified the Foreign Account Tax Compliance Act, or FATCA as it is known, as needing urgent attention—and openly questioning whether the law’s enforcement benefits justify the compliance burdens.
The real-world implications for Americans living, or wanting to live, overseas should not be minimized, says David Henderson, an international tax attorney and CPA with the Chicago law firm of Duggan Bertsch.
“But is this person really going to be able to conduct his financial affairs,” he says, adding “are you going to have the level of advisors needed to keep up with due diligence” or risk having to “pay a 27.5% penalty in retirement when you can no longer make up for it?”
That obscure sounding 27.5% figure is probably well known to those Americans renouncing their citizenship. It’s after a citizen comes clean and pays his taxes through the government’s voluntary disclosure program, and is assessed on the highest account value over an 8-year period.
“So if you have an account that had a high value in 2007 and then the market tanked — that’s in essence phantom gains you never realized. That penalty is very high can be very damaging financially,” Henderson says.
And it is not uncommon for Americans living abroad to be unaware of the many and increasing disclosure requirements.
“From what I see, the vast majority of people with these undisclosed or unreported account issues are not trying to evade tax or are willfully neglecting their duties to report these accounts.”
Not everyone is Ty Warner, the Beanie Baby creator with massive accounts overseas. For the vast majority of clients, that’s not the case. They have money overseas form an inheritance, from currently working abroad; they have a past account, moved back to the U.S. and forgot about it” or the like, he said.
So, for ordinary Americans who just want to stretch their dollars and get the benefits of a Caribbean beach, Henderson says they should also be aware of that U.S. law requires a deep relationship with the IRS while living abroad, which can complicate relationships in their new home.
“The biggest issue is conducting financial transactions,” says Henderson, who estimates that between 5% and 10% of his firm’s clients are Americans living overseas — in virtually every part of the world and for a wide variety of reasons.