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Citizenship renunciation and offshore account compliance

Actions often have unintended consequences. It happens so often that it's almost like one of the laws of physics. And we may be seeing an example of it now in the U.S. crackdown on offshore account tax compliance.

In recent years, the IRS has offered numerous incentives to taxpayers with previously unreported foreign accounts to disclose them in exchange for partial amnesty. Federal authorities have also upped the ante on consequences for failing to comply with offshore reporting requirements. Those requirements are growing more extensive as the Foreign Account Tax Compliance Act (FATCA) moves toward full implementation.

U.S. authorities probably did not intend, however, for their aggressive attempts to clamp down on offshore tax evasion to lead to an increase in the renunciation of citizenship by U.S. taxpayers. But that is what is happening.

In the second quarter of this year, the number of renunciations spiked up to 1, 130 in a database maintained by one tax lawyer who monitors the federal data. This is more renunciations than were reported to have occurred during all of last year. It is also far above the previous high of 679.

Not surprisingly, that previous high was set in the first quarter of this year. So the upward trend on renunciations of citizenship is clear.

Renouncing citizenship does not mean that someone is able to avoid all U.S. taxes. After all, there is an exit tax.

Clearly, however, some U.S. taxpayers who also have citizenship elsewhere would prefer to pay that tax than have to keep dealing with the increasingly complicated regulatory requirements involved in offshore accounts.

Indeed, some taxpayers say that even when the amounts are small, the offshore compliance structure has become overly burdensome. And an increase in the renunciation of U.S. citizenship has become an unintended consequence of those burdens.

Source: The Wall Street Journal, "Number of Americans Renouncing Citizenship Surges," Liam Pleven and Laura Saunders, August 9, 2013