Want to Renounce? Your 4 Choices

For many U.S. citizens who want to renounce their citizenship, $2,350 is a big number. If you fit into this category, you have four choices :

Renounce and pay $2,350

Your first choice is to proceed with renunciation and pay the new and improved $2,350 user fee. The expense might hurt, but you pay the money anyway. Why would you do this? Because the alternative (keeping your U.S. citizenship) is worse. It might be necessary to give up U.S. citizenship because of FATCA-driven banking issues. There might be political reasons-many countries do not allow dual citizenship and you have inadvertently backed into violation of your home country's laws. There might be other reasons.By far the easiest reason for paying the $2,350 user fee is to simply look at the cost of preparing and filing U.S. income tax returns and the FBAR form every year. In a couple of years you will be dollars ahead. You will not be spending money on accounting fees anymore.

I think this is going to be the most common reaction. Over a few years, the savings achieved by removing U.S. tax reporting from your life will more than pay for the painful $2,350 user fee.
Claim You Relinquished Citizenship

If the facts work in your favor, you can claim that you relinquished your U.S. citizenship. The primary one I have seen is that you acquired another citizenship with the intention of terminating your U.S. citizenship. This is harder to do, but certainly not impossible. This is a cunning strategy because the user fee does not apply, and the government must eat the entire cost of dealing with your application.

Don't Expatriate, Comply with U.S. Tax Law

The third choice is to keep U.S. citizenship. Coupled with this will be the continued legal obligation to file U.S. tax returns and (if your income is high enough) pay U.S. income tax. There are a host of other U.S. laws that apply to you as well. The various sanctions rules will limit your ability to travel to or do business in various countries, depending on the political whim-du-jour in Washington DC.

Don't Expatriate, Don't Comply with U.S. Tax Law

The path of least resistance is to keep your U.S. citizenship, but never re-enter the United States. Let your U.S. passport expire and do not renew it. Pull all of your money out of the United States. Stop filing U.S. income tax returns, and drop off Uncle Sam's radar. In short, pull a DIY renunciation. I think this will happen rather more often than Uncle Sam expects. The increased user fee, along with other impediments to expatriation, will create a subtle culture of noncompliance. Among U.S. persons abroad, deliberate violation of U.S. law will become an acceptable level of ethics. The IRS, of course, will be outraged. So will Congress. Higher penalties will be created to discourage this behavior. FATCA agreements will be rolled out in an effort to fish for these people with dynamite. Except that it isn't that easy. We are talking mostly about ordinary people. People with relatively small amounts of income and wealth. It is simply not cost-effective for the IRS to pursue small taxpayers for failure to file income tax returns and FBARs. The reality is that these people will get away with it. FATCA is designed to prevent DIY renunciation. Foreign banks must query their customers and determine if the customer is a U.S. person. The response, I think, will be simple. People will lie. More subtly, there will be a host of reasons why foreign banks and governments feel that it is not in their best interests to roll over and play dead for the benefit of the United States Treasury. In a multitude of overt, covert, and passive-aggressive ways, FATCA compliance will bog down. "The beatings will continue until morale improves" is not a long-term solution for Uncle Sam.

I think this is the most likely solution that regular people will choose. Noncompliance (deliberate or unwitting) with U.S. tax law is how most Americans abroad deal with their tax obligations.

People in this position are likely to be relatively unsophisticated. They will not necessarily be aware of the implications of their decision to choose a DIY renunciation. This is the cheapest and easiest way to go. They will ignore the risk. They are likely to be customers of very small financial institutions, rather than the Citibanks and the HSBCs of the world. They will be more likely to be able to avoid the "drain the ocean to catch the fish" approach to life that is FATCA. This creates a culture of deliberate noncompliance with U.S. law that is unhealthy for all of us. The IRS rails against "the rich" for a variety of real and imagined tax dodges. Yes, that's bad. But so is deliberate noncompliance at any income range. Ethics are ethics, rules are rules. Anything that creates an incentive for some people to cheat will hurt all of us.

Prediction: More Renunciations

The increase in the user fee is a wake-up call. The government is slowly and steadily making it more painful to terminate their U.S. citizenship. For those people who are conscious and aware, the new user fee is another indicator that getting out now is better than waiting. I expect people to see this and favor renunciation now rather than later. Perversely, by making it more expensive to expatriate, the government has increased the incentive to renounce citizenship.

• The user fee will increase again. The fee went from nothing to $450 in 2010. It is going up to $2,350 now. "Unanticipated" is an adjective you will find in the lazy (or politically biased) journalist's lexicon when describing economic statistics unfavorable to the reputation of the President supported by that journalist. You can fully anticipate higher fees in the future.


• Higher taxes for expatriation. Congress will write new, harsher tax laws punishing people who renounce citizenship. All you need to do is remember Senator Carl Schumer's rants following Edward Saverin's expatriation ("Tax them more!"). It is politically expedient to pound on people who give up U.S. citizenship.


• Travel restrictions. There is a recurring effort in Congress to allow the IRS to control your passport. The most recent effort was in Senate Bill 1813, from 2012. If you had a " seriously delinquent" tax debt of $50,000 or more, your passport could be revoked. The definition of "seriously delinquent" would morph over the years, of course, and the $50,000 threshold might change. The usual thing to expect in tax would be that the scope of "seriously delinquent" might change from an actual hard tax debt that you unquestionably owe and the IRS has issued a lien (that is very concrete) to something more akin to a thought crime-the IRS thinks you might have a tax problem so let's take a pre-emptive strike to ensure that the Treasury collects its money and you don't run overseas.


• We know what you own, and we can ruin you. Transparency is such a nice word. It is eco-friendly and cuddly like a puppy. In the interests of transparency, the government wants to know everything that an American owns abroad.

These are things I can see coming over the horizon. For the risk-averse individual who is thinking of expatriation, getting out now is the best choice. Over time, legal and tax conditions will deteriorate. I think people who are on the fence will be encouraged to accelerate their plans to renounce citizenship.
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