Today the Treasury Department published the names of individuals who renounced their U.S. citizenship or terminated their long-term U.S. residency (“expatriated”) during the fourth quarter of 2011.
In 2011, the total number of expatriates was 1,781, a 16% increase from 2010. Last year had the highest number of expatriates since at least 2004 (when I started keeping these records), and perhaps the most in any year in U.S. history.
According to the I.R.S., an estimated five to seven million U.S. citizens reside abroad. Many of these individuals have never lived in the U.S. and never expect to live in the U.S. However, these U.S. citizens must annually file U.S. tax returns.
For example, I spoke with a Canadian the other day who was born to two U.S. citizen parents in Canada. This individual therefore is a U.S. citizen. However, he has never lived in the U.S. and never expects to live in the U.S. Despite that he has never lived in the U.S., he will have to file U.S. tax returns for his entire working life. In addition, his U.S. tax returns are quite complicated because he pays income taxes in Canada and because he has financial assets located in Canada.
Failing to disclose offshore assets to the I.R.S. can create huge potential penalties. The potential penalties can be so large that they can bankrupt even the wealthiest of taxpayers. Further, the cost of preparing a U.S. tax return for a U.S. citizen living abroad can be significant.
The I.R.S. has recently been doing a lot of “saber rattling” with respect to the potential penalties for failing to disclose offshore assets. The National Taxpayer Advocate, in her recent annual report to Congress, criticized the I.R.S. with respect to how it has handled recent offshore voluntary disclosure programs.
Lastly, with the recent enactment of the FATCA provisions, many U.S. citizens living outside the U.S. are unable to even open regular bank accounts. Foreign banks simply don’t want to deal with what they perceive as U.S. complicated and overreaching tax rules.
U.S. citizens permanently living abroad often hold citizenship of another country as well as U.S. citizenship. If they renounce their U.S. citizenship, they can avoid not only the hassle and cost of annually filing U.S. tax returns, but also the difficulties associated with basic financial transactions. I therefore expect the number of expatriations to continue to increase.
Update (February 2, 2012): Josh Gerstein of Politico notes that Anna Getty, an heir to the Getty oil fortune, appears to be on the latest list of expatriates.