In the second quarter of 2013, a total of 1130 taxpayers renounced US citizenship in a bid to avoid new laws aimed at bringing taxpayers with foreign assets into compliance. This exceeded the total number of taxpayers who renounced citizenship in all of 2012. The huge increase is largely due to the Foreign Account Tax Compliance Act, better known as FATCA. The new law adds to an already confusing set of laws related to the disclosure of foreign bank accounts for US residents.
A popular example of this new phenomenon is the case of Facebook co-founder Eduardo Saverin, who renounced US citizenship shortly before Facebook's much-touted IPO in 2012, resulting in an estimated tax savings of $67 million to $100 million. As a result, Senators have pursued legislation aimed at punishing high net-worth individuals who renounce citizenship to avoid taxes, including barring such individuals from receiving a visa to enter the US in the future.
Many individuals who renounce citizenship do it not to avoid taxes, but to avoid the risk of being prosecuted civilly or criminally under the onerous US tax laws related to the disclosure of foreign accounts. Most taxpayers are unaware of these disclosure requirements, which can lead to massive civil and criminal penalties. The legal and accounting fees related to complying with the laws can also be hefty. Some taxpayers have complained that even their CPAs are unable to navigate the complex and highly technical maze of laws. Generally, taxpayers who have an aggregate balance of at least $10,000 in offshore accounts at any time during the year must file a Report of Foreign Bank and Financial Accounts, commonly referred to as an FBAR. Failure to do so can result in a penalty of up to 50% of the highest account balance during the year. US authorities have ramped up prosecutions of individuals with foreign accounts, as well as foreign financial institutions that assist these individuals in hiding assets offshore.
Many individuals with undisclosed foreign accounts have entered the IRS's popular Offshore Voluntary Disclosure Program (OVDP). Under the terms of the program, taxpayers can voluntarily disclose the existence of foreign bank accounts without running the risk of criminal prosecution. In exchange, the taxpayers must pay all owed taxes with interest, in addition to a civil penalty. While the program itself has no end date, taxpayers are urged to enter it as soon as possible. Once US authorities are in possession of information that can lead to the discovery of a taxpayer's undisclosed offshore accounts, the taxpayer is ineligible for the voluntary disclosure program and faces exposure to criminal prosecution. Due to FATCA and various tax treaties, the noose is quickly tightening around taxpayers with undisclosed accounts.
Our firm has guided many taxpayers through the Offshore Voluntary Disclosure Program. To learn more about our firm's international tax practice, including our OVDP practice, visit our website.