Record number of Americans renounced their US citizenship in 2011 to avoid paying taxes

In 2011, almost 1,800 people renounced their U.S. citizenship or handed in their Green Cards and many of them said it was because of tax reasons.

That’s a record number since the Internal Revenue Service began publishing a list of those who renounced in 1998. It’s also almost eight times more than the number of citizens who renounced in 2008, and more than the total for 2007, 2008 and 2009 combined.

The United States is one of the only countries to tax its citizens on income earned while they’re living abroad. And just as Americans stateside must file tax returns each April – this year, the deadline was yesterday, April 17 – an estimated 6.3 million U.S. citizens living abroad brace for what they describe as an even tougher process of reporting their income and foreign accounts to the IRS. For them, the deadline is June.

The National Taxpayer Advocate’s Office, part of the IRS, released a report in December that details the difficulties of filing taxes from overseas. It cites heavy paperwork, a lack of online filing options and a dearth of local and foreign-language resources.

For those wishing to legally escape the filing requirements, the only way is to formally renounce their U.S. citizenship.

In 2011, IRS records show that at least 1,788 people did, and that’s likely an underestimate. The IRS publishes in the Federal Register the names of those who give up their citizenship, and some who renounced say they haven’t seen their name on the list yet.

In fact, Superman declared plans to renounce his U.S. citizenship a year ago, in Action Comics.

“Truth, justice, and the American way – it’s not enough anymore,” the comic book superhero said, after both the Iranian and American governments criticized him for joining a peaceful anti-government protest in Tehran.

The State Department said records it keeps differ from those published by the IRS. They indicate that renunciations have remained steady, at about 1,100 each year, said an official.

The decision by the IRS to publish the names is referred to by lawyers as “name and shame”. That’s because those who renounce are seen as willing to give up their citizenship primarily for financial reasons.

There’s also an “exit tax” for the very rich who choose to leave. During the last 25 years, a number of millionaires and billionaires have renounced their citizenship. Among them: Ted Arison, the late founder of Carnival Cruises, and Michael Dingman, a former Ford Motor Co. director.

But those of more modest means renounce, too. They say leaving America is about more than money, it’s about privacy and red tape.

Two filing requirements affect Americans abroad: the Report of Foreign Bank and Financial Accounts – which has been around since 1970 but now carries penalties for noncompliance – and the Foreign Account Tax Compliance Act, passed in 2010 with the aim of reducing offshore tax evasion.

The first regulation requires all Americans, including those living abroad, with at least $10,000 in overseas bank accounts, to file a supplementary form disclosing all of their foreign accounts.

That includes any accounts in which the U.S. citizen has a financial interest. That could include a joint account with a spouse or child, accounts for corporations in which the American owns more than 50% of the value of shares of stock, or any trust or estate that benefits the U.S. citizen.

The tax compliance act – the newer law – asks foreign financial institutions such as banks, hedge funds, and private equity funds to provide the IRS with information on U.S. clients.

The United States and five European Union countries recently announced their intent to allow institutions to report the information through their own governments, rather than directly to the IRS.

Institutions that do not comply will be subject to a 30% withholding tax on certain U.S. – sourced payments and proceeds of property sales beginning in the 2013 tax year – for instance, dividends on investments in U.S. companies.

Some expatriates say they were unaware of the first regulation for years and even decades. In 2008, the IRS received only 218,840 such filings. American nationality law grants citizenship to almost everyone born in the United States or born abroad to American parents, regardless of how much time they’ve spent in the United States. Many may not even know the extent of their U.S. ties.

In 2004, the stakes for noncompliance rose. Failure to file meant potential fines and criminal charges. Americans abroad can be punished for noncompliance even if they owed no income tax – and IRS data show that most of them don’t owe money.

Income up to $95,100 isn’t taxed under a rule called the Foreign Earned Income Exclusion. In 2009, the income cap was $91,400, and 88% of all taxpayers claiming the foreign earned income exclusion owed nothing.

Since 2008, the IRS has offered several voluntary-disclosure grace periods during which expatriates can file back taxes without facing criminal charges – but with the possibility of incurring penalties.

Marylouise Serrato, head of American Citizens Abroad, a non-profit organization based in Geneva, says that many members feel scared about reporting requirements they did not know existed. Their disenchantment, she says, is pushing some to renounce.

“Americans abroad are terrified. We’ve had people pay tens of thousands of dollars in fines. We’ve had people … pay huge amounts of back taxes,” Marylouise Serrato says.

“Up to this point, we never heard of anyone renouncing, or if they did, they didn’t talk about it,” says Marylouise Serrato, who says her group does not advocate renunciation.

“Now, we’re seeing a lot of people speak openly about it and come to us for information.”

Congress is taking note. “While I fully support measures that reduce fraud and address offshore havens, the U.S. should not have policies that place undue burdens on legitimate Americans abroad,” says Representative Carolyn Maloney, D-NY, and the chair of the Congressional Americans Abroad Caucus.

Carolyn Maloney says she has taken the matter to the Department of the Treasury, which oversees the IRS.

The IRS did not respond to requests for comment.

Lawyers report that banking is a big reason why people renounce.

“I hear about banking problems again and again and again,” says Phil Hodgen, an attorney who has been helping Americans expatriate since 2008.

The new reporting rules, he says, pose “a huge administrative burden. It’s made Americans too expensive to keep”.