LONDON -- If you don't want something, giving it back is often an option. That's precisely what some Americans, frustrated at what they see as onerous U.S. tax filing obligations for Americans living overseas, are doing with their citizenship.
"I felt like I had gotten a divorce," says Donna-Lane Nelson, a 71-year-old Geneva-based editor and writer who renounced her U.S. citizenship in 2011 in favor of a Swiss passport, in part because of what she felt were the increasingly arduous and punishing tax reporting requirements from U.S. authorities.
"I was doubled taxed on my U.S. and Swiss pensions, the cost of having a professional go through the complicated U.S. tax forms, living under the threat if this or that wasn't properly filed there would be huge fines — U.S. nationality just became a complete burden because of banks not wanting my business, and as an expat not being allowed to have a U.S. account," Nelson says.
There are around 6 million Americans living and working abroad, and the Internal Revenue Service estimates that international taxpayers owe $40 billion to $123 billion in unpaid taxes.
This summer, in an attempt to start redressing this sizable hole in the nation's coffers, the first stage of the Foreign Account Tax Compliance Act, or FATCA, will formally come into effect. The Report of Foreign Bank and Financial Accounts, or FBAR, is already operational. FBAR requires Americans — whether they live in Boise or Bangkok — with foreign accounts that have $10,000 or more held in them to notify the IRS annually of that year's highest balance.
Passed by Congress in 2010, FATCA is designed — using a controversial dragnet-like method — to catch those Americans thought to be evading taxes by hiding their wealth in foreign bank accounts. The way FATCA does this is by requiring that all non-U.S. financial institutions pass along detailed information about American account holders, or potentially face steep penalties.
But casting such a wide net is producing unintended consequences for some Americans who faithfully pay their taxes from afar.
"I have always filed my U.S. taxes just as I am supposed to," says Brian Dublin, 47, an American businessman now based in Zug, Switzerland, who has lived overseas for many years, including stints in Russia.
"However, as a result of FATCA, in the past year I have been kicked out of a Swiss bank that said, 'Hey, we love you, but we won't work with Americans.' I have also been kicked out of a Swiss pension fund. They told me they don't want any Americans in the fund. They don't want to work on behalf of the IRS," he says.
"And on top of that, I spend many hours and many dollars each year filing U.S. taxes when I sometimes turn out to have zero liability for that year because I have paid a lot of tax somewhere else," Dublin adds.
Dublin, a New York City native, says he will be eligible for Swiss nationality in the next few years and that if the situation has not dramatically changed he will give serious consideration to renouncing his U.S. citizenship.
"I am a pragmatic patriot. I love my country. I love to visit it. But at this point in time all my American passport gets me is a shorter line when I fly into John F. Kennedy International Airport. For me, it's also an issue of taxation without representation. I can vote in presidential elections, sure, but I effectively have no voice. As it is, I am paying taxes for no other reason than my patriotism."
Many Americans, now ex-, have already voted with their feet.
About 3,000 Americans decided to call it quits on their citizenship in 2013 — according to data posted online at the Federal Register, a government publication that posts notices and documents of federal activity — and analyzed by CNNMoney. While that is not a large number itself, it's a 221% rise from the 993 people who relinquished passports in 2012. In 2008, as the first financial crisis was in full swing but well before the issue of overseas taxpayer negligence was freshly established on the agenda of the IRS, just 231 people said thanks but no thanks to Uncle Sam.
A poll conducted by the de Vere Group, a financial consultancy, late last year revealed that 68% of American expatriates have considered giving up their U.S. citizenship as a result of FATCA.
JUST THE TWO OF US
There are only two countries that tax their citizens based on nationality rather than residence. The USA is one. Eritrea, a country in the volatile eastern horn of North Africa, is the other, according to Roland Sabates, a tax expert at H&R Block who runs the firm's expanding services for expatriates.
This means, for example, that if a French national works and pays taxes in Germany, then French officials don't require additional tax reporting; the same is not true for Americans, who are required to file a U.S. tax return no matter where they live or how much tax they may pay to the nation in which they reside. Reciprocal tax agreements between the USA and other nations in combination with IRS tax credits may effectively reduce an expatriate's U.S. liability to zero.
"It's fairly counter-intuitive," Sabates says. "You certainly don't move to Western Europe to avoid tax obligations," he says, referring to high rates of income tax across the Continent relative to the USA.
"Yet fundamentally the rules for Americans living abroad haven't changed, it's just that there's more visibility around the issue now that FATCA compliance is becoming a problem for some," Sabates says. He says that of the 6 million Americans living abroad, less than one million file regular U.S. tax returns.
Part of the absentee rate here may be down to that particularly pernicious call to inaction: puzzlement. Nearly one-third of U.S. expatriates are confused by how the IRS wants them to file taxes from abroad, a study by H&R Block has found.
Andrew Mitchel, an international tax expert, says that what is aggravating for many expatriate taxpayers is that the filing process for Americans located overseas is so inefficient. "In many cases, they are paying a tax professional (several thousand dollars) to file the forms even when there is no tax to pay," he says. "If you have to dish out thousands of dollars each year just to retain your U.S. citizenship you start to say, 'Look, do I really need it that much?'"
For those who do decide to ditch their U.S. citizenship, it's not all roses.
"I got a good education. I was raised in an upper-middle-class family in the Boston area. The U.S. provided me with a good platform to go and have a successful life," the now-Swiss Nelson says. "When I gave up my American passport I was so upset that I went out in the street and vomited," she says.
"I'm glad I didn't have to tell my father (who died 30 years ago) because he was a naturalized American citizen and believed in his adopted country very much," Nelson says.