Don't Mess With Taxes

Between Jan. 1 and March 31, the most Americans ever in one calendar quarter renounced their citizenship. 

The first quarter of 2015 report released by Treasury last week contained the names of 1,335 U.S. expatriates. That's a new quarterly record, handily surpassing the 1,130 who gave up their citizenship in the second quarter of 2013.

Are territorial taxes to blame? Federal law -- section 6039G of the Internal Revenue Code, actually -- demands the Treasury Department list each quarter the names of Americans who renounce their citizenship. Treasury is not required by the law, however, to find out or note why people are expatriating.

There's no mention of taxes in the 1951 classic film "An American in Paris," starring Gene Kelly and Leslie Caron. However, current U.S. citizens living in France and elsewhere abroad say Uncle Sam's tax laws are a major hassle. That might be why so many of them are renouncing their birthplace.

Many speculate that a main reason that a lot of folks relinquish their citizenship is because they are tired of hassling with the increasing demands of the tax code and the Internal Revenue Service on taxpayers who live and work abroad or who keep money in foreign accounts.

Because of that tax implication, the first quarter of 2015's expatriates is this week's By the Numbers figure.

Unlike most countries, the United States taxes its citizens on all their income, regardless of where they live or where the money is earned. Pressure has been increasing in recent years to switch from this global taxation system to a territorial one, under which taxes are collected only on the income earned within a country's borders.

As part of Uncle Sam's global tax reach, the IRS has stepped up efforts to collect money from Americans abroad or those still living here but who have money in certain foreign accounts.

Facing FATCA, here and there: A principal tool -- or bludgeon, according to many who must deal with the U.S. tax process -- is the Foreign Account Tax Compliance Act, or FATCA. This law requires that U.S. individuals report certain foreign assets and banks disclose all foreign accounts held by Americans. Failure to do so results in costly tax penalties.

Many Americans who fall under FATCA guidelines say the paperwork is so onerous that they must seek professional help, and pay dearly for it, often spending thousands of dollars to prepare a relatively simple tax return.

And the U.S. tax implications also have other negative effects on life abroad for many individuals who live abroad.

Jake, an American in Great Britain according to his comments on the CNN Money story about the latest expatriations, explains:

"Like so many, I've started the renunciation process, not to avoid paying taxes, but for financial survival. I was born, grew up and I live and work in the UK, son of an American, proud of this heritage and often defending America in anti-American Europe. I cannot afford the annual lawyers and accountants fees to submit complex tax forms that cost me thousands for the privilege of telling the IRS I owe no tax (as I pay higher taxes here in the UK than if I was in America).

The last straw was when I realised [remember, Jake is in Great Britain, hence the "s" instead of U.S. "z"] I may lose my home because my bank and mortgage company let me know they do not want to have Americans as clients (any other nationality on earth is fine) due to the onerous and ridiculously opaque new FATCA rules imposed on them by a foreign country. I would write to complain to my representative in the United States about the unfairness and hardship this new tax regime is causing ordinary Americans living and working overseas and just trying to get by.

But I have no representative, as overseas Americans have no representation. Who was it that said 'taxation without representation is tyranny?' America has betrayed me and will lose one more voice defending here abroad. Millions more are considering the same. Sad and angry in Bristol, U.K."

Some lawmaker support for change: Speaking of representation, former Ways and Means Committee Chairman Rep. Dave Camp, the Michigan Republican who retired after the last Congressional session, was a supporter of the United States joining the rest of the world in employing a territorial taxation system, particularly for companies.

Republicans generally have supported such a tax shift, again primarily with regard to corporate taxation. Since that party is now in control of both the House and Senate, it's possible the matter could be addressed as part of long-promised tax reform. Even President Obama has indicated he's willing to discuss corporate tax changes.

But will individual taxes be part of the package? Maybe. Maybe not.

Part of the reason for the equivocation is that tax reform is incredibly difficult even in the best of political situations. And it is definitely not the best of political situations.

Not only is there continuing Republican opposition to any kind of compromise with the Democratic president, the GOP itself continues to face infighting about which direction to take on taxes.

Then there's the 2016 presidential campaign.

Yes, as I noted last week at my other tax blog, that ordeal rite of American democracy has already begun. And all of the candidates, both Democrat and Republican, will make taxes a key part of their campaigns.

If the GOP sees that the issue can be useful in its efforts to regain the White House, the party's Congressional leaders might tailor any tax reform measures toward that longer goal. And that could help or hinder any changes, both domestically and internationally.

More citizens leaving? If Congress dallies, we might continue to see more expatriations in 2015.

And if things continue as they have the first three months of this year, the number of expatriations for 2015 could smash the previous record of 3,415 set in 2014.

Tax delinquent IRS employees: Americans abroad aren't the only ones who have issues when it comes to paying their taxes. Even some IRS employees find themselves in tax trouble.

As I also discussed last week at Bankrate Taxes Blog, a recent Treasury Inspector General for Tax Administration report found that the IRS is inconsistent in dealing with employees who willfully ignore their federal tax responsibilities.

Some workers are, as required by the IRS Restructuring and Reform Act of 1998, fired. Others, however, are assessed lesser penalties at the discretion of the commissioner, also an option under the 1998 law.

My Bankrate tax musings usually are posted on Tuesdays and Thursdays at that personal finance website. If you miss them there, check here at the ol' blog over the weekend where I usually post highlights and links.

You also might find these items of interest:

• Obama says corporate tax inversions are 'gaming the system'
• United States among top 10 tax havens for Australian taxpayers
• World governments mounting global effort against tax evasion