In 2004, the stakes for non-compliance rose. Failure to file meant potential fines and criminal charges. Americans abroad can be punished for non-compliance even if they owed no income tax â€” and IRS data show that indeed most of them donâ€™t owe money to the U.S. government.
Income up to $95,100 isnâ€™t taxed under a rule called the Foreign Earned Income Exclusion. In 2009, the income cap was $91,400, and 88 per cent 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 â€” 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.
â€œAmericans abroad are terrified. Weâ€™ve had people pay tens of thousands of dollars in fines. Weâ€™ve had people pay huge amounts of back taxes,â€? she says. â€œUp to this point, we never heard of anyone renouncing, or if they did, they didnâ€™t talk about it,â€? says Serrato, who says her group does not advocate renunciation.
â€œNow,â€? she says, â€œweâ€™re seeing a lot of people speak openly about it and come to us for information.â€?
Congress is taking note.
â€œWhile 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,â€? says Democratic Representative Carolyn Maloney of New York, who chairs the Congressional Americans Abroad Caucus. Maloney says she has taken the matter to the Department of the Treasury, which oversees the IRS.
Lawyers report that banking is a big reason why people renounce.
â€œI hear about banking problems again and again and again,â€? says Phil Hodgen, a lawyer who has been helping Americans expatriate since 2008. The new reporting rules, he says, pose â€œa huge administrative burden. Itâ€™s made Americans too expensive to keep.â€?
Francisca N. Mordi, vice-president and senior tax counsel at the American Bankers Association, says she has received a number of calls from Americans in Europe complaining about banks closing their accounts. â€œTheyâ€™re going to drop Americans like hot potatoes,â€? Mordi says. â€œThe foreign banks are upset enough about the regulations that theyâ€™re saying they just wonâ€™t keep American customers, and itâ€™s giving [Americans living abroad] a lot of sleepless nights.â€?
Taxpayer complaints sometimes make their way to Nina Olson, the U.S. taxpayer advocate for the IRS, who addressed some of the international tax issues in a December report.
â€œThe complexity of international tax law, combined with the administrative burden placed on these taxpayers, creates an environment where taxpayers who are trying their best to comply simply cannot,â€? the report reads. â€œFor some, this means paying more U.S. tax than is legally required, while others may be subject to steep civil and criminal penalties. For some U.S taxpayers abroad, the tax requirements are so confusing and the compliance burden so great that they give up their U.S. citizenship.â€?