The Outgoing US Exodus
by Addison Wiggin
2014 is shaping up to be another record-setting year for Americans surrendering their citizenship.
The Treasury Department lists 1,001 names of Americans who expatriated during the first quarter of 2014. That's the second-highest quarterly total ever, exceeded only by the 1,130 during the second quarter of 2013.
The numbers vary wildly from quarter to quarter. But at the current pace, another annual record will be set by the end of the third quarter.
"The government's pursuit of tax evaders among Americans living abroad," The Associated Press reported in late April, "is indeed driving the jump in abandoned citizenship, experts say. But renouncers -- whose ranks have swelled more than fivefold from a decade ago -- often contradict the stereotype of the financial scoundrel. Many are from very ordinary economic circumstances."
For many Americans overseas, complying with the law is more trouble than it's worth -- hiring accountants and lawyers, reporting the income of non-American spouses, having their bank accounts closed because the banks prefer to shut out U.S. customers rather than comply with IRS rules... It's an old story, one we first outlined for our Apogee Advisory readers in 2011, in our report How to Move Your Money Safely out of Harm's Way.
The AP related the story of Carol Tapanila -- born in upstate New York but a resident of Canada since 1969, when her husband lost his job at Boeing and work was available north of the border. She had no idea until 2007 that she was required to file U.S. tax returns.
Since then, she's paid about $2,000 in back taxes… and $42,000 in fees for lawyers and accountants. In the end, expatriation was about preserving funds for her retirement and the care of her developmentally disabled son, who's now 40.
"I thought we had some rights to go wherever we wanted to go and some choices we could make in our lives," she says. "I thought that was democracy. Apparently, I've got it all wrong."
|The IRS is using this law to obtain a court order that prevents people who owe taxes from leaving the U.S. once they have entered.|
The Barretts retained their U.S. citizenship after moving to Ecuador. They returned to the United States last summer for their daughter's wedding. And they've been stuck here ever since.
Those are the facts. Beyond that, it gets murky. The Barretts got a large income tax refund the IRS says they weren't entitled to in 2007. The IRS says with penalties they owe $351,197. Depending on whom you believe, they got tied up with a tax preparer who engaged in -- umm -- "questionable schemes." Or not. They've been trying to work it out with the IRS ever since. Or not.
In a way, the details don't matter: While the Barretts were in Ecuador, the IRS got a writ of ne exeat republica from a federal judge.
"The IRS' powerful new weapon is actually an old one that hearkens back to 18th-century English royal court, and was introduced in America as a tax collection tool by the Revenue Act of 1918," explains the Independent Institute's Wendy McElroy. "The writ is issued to prevent a person from leaving a jurisdiction until he satisfies a claim brought against him in court. In practical terms, the IRS is using this law to obtain a court order that prevents people who owe taxes from leaving the U.S. once they have entered."
The Barretts claim they were unaware of the writ's existence. But they learned about it good and hard when they returned to the U.S. for their daughter's wedding in August 2013. While they're not in custody, they also can't leave the country. Charles Barrett says he's lost his job as the Latin American operations director for a U.S.-based animal feed company. To pay their lawyers, they're begging for donations on the crowdfunding site GoFundMe.
So if you travel overseas frequently, are you at risk? "IRS policy can change quickly," writes Ms. McElroy. "The people most currently vulnerable, however, would probably be those who meet the following criteria:
- They have been identified as noncompliant by the IRS
- They have a sizeable 'debt'
- They reside abroad or intend to leave the U.S.
- A tax case can be sustained in court
- They are without assets in the U.S. but hold considerable ones abroad
- The tax treaties with the foreign nation do not facilitate collection (Canada is IRS-friendly).
Even if you're not prudent, that seems a safe assumption. We'll keep tabs on any developments for you in future reckonings.
[Ed. note: Surprisingly, only 35% of Americans hold passports. It seems traveling abroad, let alone living abroad, is a foreign (excuse the pun) concept to the average Joe. Thirty-five percent is about 111 million people. Of those, about 76 million Americans live overseas. That's equivalent to the 13th-largest U.S. state by population size, behind Virginia, according to Newsweek. Where will the public pressure for political change come from? Most likely, nowhere.] © 2014 Agora Financial, LLC