Problems with complying with the Foreign Account Tax Compliance Act (FATCA) are leading to huge numbers of American expats ripping up their passports.
More than 770 Americans renounced US citizenship in the third quarter of this year, up 39% on the previous quarter, says the Federal Register.
The Federal Register is updated every three months by the US State Department and is the official data source detailing how many US citizens hand back their passports each quarter.
This year’s figures are on the way to surpassing last year’s record as 2,353 Americans have already renounced their citizenship in 2014, compared with 2,369 in the same period last year.
The surge in American expats resigning their nationality is linked with the introduction of FATCA, which requires all US taxpayers to disclose information about their offshore bank accounts and investments to the Internal Revenue Service (IRS).
FATCA took effect from July 1 and requires around 100,000 international financial institutions across more than 200 financial jurisdictions to report details about their American customers’ to the IRS.
Financial institutions have to make reports of US tax residents with accounts holding a balance of $50,000 or expat accounts with a balance of more than $200,000.
As a result of the cost of identifying and tracking US customers, many banks have simply closed their accounts so they can stay outside of FATCA.
The US government is threatening harsh penalties on banks that break the FATCA rules.
Sanctions can include fines, a 30% withholding tax imposed by US banks on a foreign financial institutions dollar transactions and ban on dealing in the US for persistent offenders.
Difficulties with day-to-day banking, credit cards and obtaining a mortgage for 6 million US expats is one of the main reasons leading them to give up their passports.
Once they cease being a US citizen, they and their financial services providers have no further need to observe the FATCA rules.
President Barak Obama personally backed the legislation after the IRS projected the law would reclaim $8.7 billion of undeclared tax on offshore money and assets over 10 years.
The US is one of few countries in the world that taxes expats as well as residents.
According to the Federal Register, more than 9,000 Americans have given up their citizenship during the past five years as the IRS has cracked down on tax evasion.