In this Q&A, immigration lawyer Andy Semotiuk talks about why some US citizens are renouncing their citizenship.

According to this story in the Wall Street Journal, a record number of people are renouncing their US citizenship. What’s going on?

Recently, the United States Internal Revenue Service has been cracking down on U.S. citizens living outside the United States who fail to file income tax returns. Many U.S. citizens have lived for decades abroad without filing. They assumed that since they were living in other countries and filing tax returns there, filing in the U.S. was unnecessary.

They were kind of right. For the most part, before 9/11, U.S. tax authorities paid little attention to such citizens. However, with the increasing financial stress put on the U.S. government by the wars in Iraq and in Afghanistan, as well as the meltdown in the American economy starting in 2007 as a result of the sub-prime mortgage crisis, what was once tolerated or overlooked has now become the target of enforcement. In turn, some people who are looking to avoid these taxes are renouncing their citizenship to escape them.

What is the process involved in renouncing US citizenship?

It’s pretty straightforward. You must appear in person before a U.S. consular or diplomatic officer at a U.S. embassy in a foreign country and sign an oath of renunciation. You can’t, however, just sign a renunciation and mail it in, nor can you renounce your citizenship while in the U.S.

Have you ever seen something like this before?

This is a new phenomenon brought on by economic circumstances. Another factor that has influenced the process indirectly is the abject instability of the world economy as a whole, particularly the European Union. This has simply added more fuel to the fire and made the collection of taxes that much more of a priority in the United States.

Do you think the U.S. government will react by changing any policies?

In regard to U.S. citizens in Canada, there is still reason to hope that U.S. policy will stabilize and there may be some retreat on this front. The two countries have a tax treaty that effectively eliminates duplication of taxation. Taxpayers who file in one country get a credit against taxes payable in the other, so that the net result is the same as if the taxpayer was paying only in the country with the higher tax regime.

In this case, Canada has the higher income tax rates. So the net effect of the tax treaty is that if Americans had been filing U.S. tax returns on their worldwide income, they would have received a credit against their U.S. taxes. So in the case of Canadians, at least, it appears that the net result of all this enforcement brouhaha is that the US will not receive much in the way of back taxes. Still, it has caused a lot of heartburn. It may be different with respect to residents of other countries. My advice is to contact a tax lawyer to make sure you’ll stay out of trouble.

Andy Semotiuk is a Canadian and US immigration lawyer with immigration law firm Pace Immigration. You can learn more about Andy at My Work Visa.