More Rich Americans Renounce U.S. Citizenship for Lower Taxes

More Americans are renouncing U.S. citizenship for tax reasons.
More Americans are renouncing U.S. citizenship for tax reasons.

A U.S.-born resident of Ireland recently came into some money after he and his wife sold a farm they inherited from her parents. Instead of enjoying his windfall, the man is furious at the Internal Revenue Service for penalizing him for running afoul of the agency's confusing regulations regarding the reporting of income from foreign bank accounts. He is so mad, according to his attorney, Jane Bruno, that he's considering renouncing his U.S. citizenship.

While such a move is drastic, it's also becoming increasingly common. In fact, so many people are eager to renounce their U.S. citizenship for tax reasons, that in some U.S. embassies there's a waiting list to escape from the clutches of Uncle Sam.

Part of the reason for the rising interest in renunciation is burdensome rules like the one about foreign accounts designed to catch people who use quitting their citizenship as a way to illegally duck their tax obligations, says Bruno, who is based in Palm Beach Gardens, Fla. The Irish resident, whom she declined to name, was slapped with a penalty of several thousand dollars.

"These penalties that they came up with are oversized when compared to the misdeeds that were committed," Bruno says.

Triple the Number in a Year

As many as 743 people with American citizenship or legal resident status renounced their U.S. citizenship in 2009 -- three times as many as in 2008 -- which resulted in a waiting list for people to say farewell to the red, white and blue at the U.S. Embassy in London, according to the Financial Times. That represents a tiny fraction of the 7 million or so Americans living abroad, but does underscore the growing unease about the Obama administration's taxation policies among the wealthy, according to experts.

Many of those leaving the U.S. behind have dual nationality and may not have lived in the country for years. Others have lived overseas for so long that America no longer feels like home. As Bruno points out, rescinding American citizenship is something not to be taken lightly. Not only do you lose the protection of the U.S. government, but the financial benefits don't kick in for several years. In fact, a former U.S. citizen is required to file tax returns to the IRS for several years after giving up citizenship.

"Also, persons who wish to renounce U.S. citizenship should also be aware that the fact that a person has renounced U.S. citizenship may have no effect whatsoever on his or her U.S. tax or military service obligations," according to the U.S. State Department's website. "In addition, the act of renouncing U.S. citizenship will not allow persons to avoid possible prosecution for crimes which they may have committed in the United States, or escape the repayment of financial obligations previously incurred in the United States or incurred as United States citizens abroad."

The Wealthy Have Been Quitting for Years

Wealthy people have been quitting their American citizenship for tax reasons for years. Tennessee-born mutual fund investor John Templeton did it in 1968. He died in 2008 in the Bahamas at the age of 95. John Dorrance III, grandson of the founder of Campbell Soup (CPB), quit being an American, as did members of the Getty Family. Companies including Tyco (TYC) and Transocean (RIG) have done the same thing. Some worry whether the newest crackdown will encourage more taxpayers to quit the U.S.

"U.S. citizens are in a uniquely horrible position as expatriates, wherever they reside, since the U.S. is just about the only major nation which taxes its citizens regardless of their residential status," according to Tax-News.com.

The crackdown on wealthy taxpayers is continuing. In April, IRS Enforcement Chief Steve Miller told members of Congress that tax revenue continues to be lost to offshore loopholes despite efforts to shut them down. Senate Finance Committee Chairman Max Baucus urged the IRS to be more vigilant. That may wind up driving more wealthy Americans overseas.

David Lesperance, a Canadian attorney, says he has seen a seven- or eightfold increase in cases of people looking to renounced their U.S. citizenship. The advantages of doing so are too great to pass up for financial and personal reasons such as divorce.

"They are not bound to a particular location to maintain their wealth," Lesperance says, adding that many people have found they can recreate their lifestyle abroad, and in some cases -- heaven forbid -- improve it. Wealthy expatriates know that "government at all levels are going to need money" and that "things are not going to get better for us."

Your resource on tax filing
Tax season is here! Check out the Tax Center on AOL Finance for all the tips and tools you need to maximize your return.
What is a Schedule K-1 Tax Form?
The Schedule K-1 is slightly different depending on whether it comes from a trust, partnership or S corporation. Find out how to use this tax form to accurately report your information on your tax return.
Read MoreBrought to you byTurboTax.com
Business Use of Vehicles
If you use vehicles in your small business, how and when you deduct for the business use of those vehicles can have significant tax implications. It pays to learn the nuances of mileage deductions, buying versus leasing and depreciation of vehicles. Special rules for business vehicles can deliver healthy tax savings.
Read MoreBrought to you byTurboTax.com
How to Change Your Tax Filing Status
Choosing your filing status is an important first step for preparing your federal tax return. Your filing status determines your standard deduction, tax rates and brackets.
Read MoreBrought to you byTurboTax.com
A Guide to Self-Employment Taxes for Contractors, Freelancers, and Beyond [Infographic]
If you work for yourself and don't call anyone your boss, you're likely self-employed. This carries advantages, like not having a manager and deciding your own hours. But it also comes with trade-offs, like paying the self-employment tax and paying for your own employee benefits.
Read MoreBrought to you byTurboTax.com