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Chasing Away Tax Dollars?

The IRS's concerted efforts to bring tax dollars on foreign-earned income back into the system may have some unforeseen outcomes. Between the increasingly strict penalties imposed by the various Offshore Voluntary Disclosure Programs and U.S. efforts to establish Foreign Account Tax Compliance Act (FATCA) agreements with other countries - taxpayers are starting to resent the U.S.'s ability to tax them on their worldwide income and the resulting consequences. In response, some U.S. taxpayers are choosing to give up their U.S. passports, green cards, and citizenship.

The media has focused attention on renunciations of citizenship by more famous Americans, such as Facebook co-founder Eduardo Saverin and wealthy socialite Denise Rich, but it is not only the rich and famous that are choosing this route. The Sunday, October 20, Business & Finance Section of The Wall Street Journal tells the story of the Roudabush family - Americans living in Switzerland who renounced their U.S. citizenship when they were denied a home mortgage loan from a Swiss bank because of the compliance cost of doing business with Americans. The Journal article also discusses Mr. Scott Schmith, an American photographer living in Switzerland who turned in his U.S. passport for similar reasons.

For foreign financial institutions, doing business with Americans may now involve not just the cost of reporting and the various fees associated with keeping the records needed to file accurate returns with the IRS, but also the cost of penalties associated with a failure to accurately comply. Though foreign governments may choose to enter into agreements with the U.S. to impose compliance requirements on their financial institutions, those financial institutions also have the option of responding by bowing out of the business transactions that are covered by the agreement - such as allowing U.S. citizens to have brokerage or interest-earning accounts at their institutions.

Despite the large receipts resulting from the IRS's Offshore Voluntary Disclosure programs over the past few years, the U.S. government's pursuit of offshore tax dollars may have finally hit a point of diminishing returns.

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