Taxed into renouncing their US citizenship?
Drowning in a sea of new financial regulations, and with IRS audits on the rise, some American citizens in Israel say they are weighing expatriation. That won’t work
Tax attorney JoAnne Adlerstein has received some unusual phone calls of late. They’re from American clients living in Israel who are thinking about giving up their citizenship, because they’re fed up with increasingly draconian tax laws for US citizens abroad.
“People say, ‘I don’t like Obama, I don’t like what he did with health care, I don’t need Medicare,’ or ‘I came here so long ago that I don’t need what Social Security I’ll get,’” said Adlerstein. “They’re angry, but what they’re really angry about is that they haven’t paid taxes all these years. And they may have to pay back taxes, as well as an accountant.”
American citizens in Israel are feeling frustrated. And most of it has to do with money.
They’re being told by their local banks that they must sign W9 forms from the Internal Revenue Service by July 1, or they won’t be able to access their Israeli accounts. The same rules apply to their retirement accounts and mutual funds, all those nest eggs carefully nurtured throughout their adult lives.
That’s the result of FATCA — the Foreign Account Tax Compliance Act — which will impose penalties on non-US banks that don’t comply with American reporting requirements, including closing bank accounts of customers who refuse to comply.
There’s also FBAR — the Foreign Bank and Financial Account Report — created back in 1975, but making waves now, with the increased incidence of IRS investigations into the income taxes of US citizens living abroad, with bank accounts exceeding amounts of $10,000 at any time.
Israel’s tax authority has always complied with the IRS with regard to US citizens living in Israel (photo credit: Flash90)
There’s nothing new about FBAR, which was passed in the 1970s, said Adlerstein. What changed was when FBAR compliance was moved to the IRS, and that’s when it started to get a little more publicity.
And then there’s the recent upsurge in IRS audits, which experts believe has to do with the increased number of American Israelis claiming those popular IRS child tax credits — without having properly filed income taxes.
“People claimed for kids who weren’t yet American citizens,” said Adlerstein. “It might have been ignorance, but it’s called fraud.”
And a result, the IRS cracked down with audits, “unfair, abusive audits,” she said.
“Most Americans abroad are tax compliant, but the administration has tried to paint us as scofflaws and deadbeats,” said Marc Zell, an Israel-based American lawyer and chairman of the Israeli chapter of Republicans Abroad, which is urging US citizens to sign a petition to abolish FATCA, claiming it violates US citizens’ right to privacy, among other things.
“The fact that we are now subject to this kind of scrutiny by foreign banks in which US citizens have accounts really does stigmatize our population and it’s not right,” said Zell.
He also believes the tax credit issue was “overstated,” by the IRS.
“It was happening among a portion of the population, but I think the IRS is a bit overzealous,” he said. “It swept a lot of people who were filing properly. But we don’t need a zealous tax regime like FATCA in order to prevent that kind of abuse.”
Israel’s Central Bank is also working with the US government and US Treasury, with regard to FATCA compliance (photo credit: Avishai Teicher/CC-BY-2.5 via Wikimedia Commons)
But will those American citizens decide to give up their US citizenship in order to avoid filing tax returns?
It’s not likely, said Adlerstein. Expatriation isn’t a quick fix.
“The part that’s hilarious about renunciation is that when you read the regulations and the law, you can’t renunciate to avoid taxation,” said Adlerstein. “You have to have filed taxes for the past five years.”
The people now making noise are mostly those who need to now pay their taxes in order to be compliant with the IRS, and there’s a range of penalties for those in that situation, said Adlerstein.
“The only ones complaining are those who haven’t been compliant,” said Adlerstein. “They may not have filed tax returns for as long as 30 or 40 years. If they came in the 1960s, post-college, and went to kibbutz and got involved in their lives here, they didn’t say ‘I’m turning my back on taxes,’ they just didn’t know.”
It is true, however, that American citizens in Israel can “get creamed” by tax compliance, she said, particularly if they have invested in real estate in Israel, are self-employed or recently cashed in on a long-term savings account.
“God help people who hit three of those in a year,” she said. “But I wouldn’t give up your passport for that.”
According to the US State Department, there has been an increase of US citizens renouncing their citizenship in recent years. But they can’t say if any are from Israel.
“There’s all kinds of reasons, and it tends to be anecdotal,” said a press officer for consular affairs. “Some are dual nationals and have never lived in the US, and have no intention of living here. Some say that it’s because of the cost of tax filing, or that citizenship was becoming an impediment where they live.”
‘At the end of the day, they love America. You don’t facilely relinquish that tie’
While the State Department doesn’t know how many US citizens live abroad, the Treasury Department publishes a long list of names several times a year, announcing all the Americans who have recently abandoned their US citizenship. And while this may surprise the nearly 300,000 Americans living in Israel, the vast number of citizen renunciations come from Canada, England and Switzerland.
According to several legal websites that discuss the matter of citizenship renunciation, the number of citizens who chose to renunciate their citizenship was around 500 a decade ago. Last year, it hit a record high of nearly 3,000.
It’s not easy to renounce one’s citizenship. Those considering the move are given time to reflect before executing their oath, said the press officer.
“There are a lot of people thinking about this, because the administration has gone too far in trying to enhance US tax compliance, but I don’t think most people will take this step,” said Zell. “At the end of the day, they love America. You don’t facilely relinquish that tie.”
The Republican Committee has formally recommended a repeal of FATCA, and are hoping for support from the Democrats in the matter. It’s unlikely that it will be repealed by the July 1 date, said Zell, but the committee hopes that if more Republicans are elected to the House of Representatives by the November mid-term elections, they will succeed then.
Zell said he would be meeting with members of the Prime Minister’s Office in order to ask the prime minister and the government to postpone a forthcoming vote in the Knesset Finance Committee regarding the tax agreement with the US and Israel.
“It’s not a pipe dream,” said Zell.
Maybe not, but a repeal won’t happen all that easily, said Adlerstein. FATCA is a statutory law, not something that can easily erased.
Zell isn’t so sure.
“We’re getting a huge response worldwide, especially from Israel, because American Israelis aren’t afraid to speak their mind,” said Zell. “What you’re seeing is the beginning of a kind of pushback.”
Credit: Times of Israel
