Scott Schmith is a patriot and a US military veteran but he is no longer a US citizen. Sick of complex tax rules making his life in Switzerland miserable he recently handed back his passport.

• Zurich resident Tina Turner becomes Swiss (25 Jan 13)
• Economist calls for higher taxes on expats (21 Jan 13)
• Tax deal with US pressures Swiss banks (04 Dec 12)

"It was a pretty big decision and there was a bit of anxiety," said the 50-year-old photographer who served in the 1990-91 Gulf war and has been living in Switzerland since 1993.

But once he received his Swiss passport and handed back his US one last September, "it was like a load of weight off my shoulders."

Schmith is one of a growing number of American expats who are opting to give up their citizenship rather than deal with the increasing difficulties imposed on them by US tax authorities, observers say.

John, a 60-year-old business strategy specialist who asked that his last name not be used, told AFP he had decided to give up his US passport after losing sleep for years over the intricate tax filing requirements Washington places on all US citizens, regardless of where they live in the world and where they make their money.

When the United States recently began pushing through regulations aimed at fighting offshore tax evasion, the implications for him — a "squeaky-clean" law-abiding citizen — became too overwhelming, he said.
 
"I just got more and more anxious about my ability to protect myself and my family from the administrative overhead of the US government," said John, who has been based in Switzerland since 2002.

Six European countries, including Switzerland, have recently agreed to comply with the 2010 US Foreign Account Tax Compliance Act (FATCA), requiring banks to report all holdings by their US clients to the Internal Revenue Service.

"Offshore tax evasion costs the US jobs and billions of dollars each year, and it puts an unfair burden on the average American taxpayer to make up the difference," Senator Max Baucus, who chairs the Senate Finance Committee and sponsored the legislation, told the New York Times last year to explain why FATCA was needed.

Jackie Bugnion, a Geneva-based tax expert working for the American Citizens Abroad lobby group, however told AFP that while the aim in theory is to "go after the wealthy resident in the United States who is hiding money overseas," only a small minority of those affected fall into that category.

An estimated four to seven million Americans live outside the country, ranging from US military personnel, diplomats and others on temporary assignments, to so-called "accidental" Americans who happened to be born in the United States to foreign parents and dual citizens who may have lived most or all of their lives abroad.

According to observers, most of these people don't owe any taxes to the United States, but they still have to go through the process of filing complex IRS returns each year.

"Over the past 10 years, I have paid more to tax preparers than I have in tax," John said, insisting his decision to give up his US passport had nothing to do with the amount of tax he was being asked to pay, but rather the filing burden and fear of penalties if he messed up.

Banks are eliminating US clients

The United States is the only country in the world besides Eritrea that taxes based on citizenship rather than on residence or the source of revenue, Bugnion said.

This also means that anyone who happens to have a US passport falls under the new FATCA rules, regardless of their background or fortune.

Fearing the workload of ensuring compliance with FATCA and especially the consequences if they slip up, "banks have been actively eliminating American clients," Bugnion said, lamenting that Americans often "can no longer get mortgages, and are being told their bank don't want their business."

While this is happening all over the world, Americans are especially feeling the heat in Switzerland — the main target of a US campaign to track down institutions and individual bankers who help US clients open secret accounts overseas.

 "Switzerland is the canary in the coalmine on this issue," Bugnion said.
 
Switzerland's largest bank UBS, for instance sent out letters to all its American clients late last year telling them to prove compliance with US tax rules or to take their business elsewhere.

That letter came as a shock to many, Bugnion said, adding that she had been receiving desperate calls from people who had spent their entire careers abroad and had never realized before they were supposed to file US tax returns.

"Suddenly they realize their entire life's savings could be at risk," she said.

In addition to making it difficult for Americans to simply open bank accounts abroad, the US tax rules also trip up US citizens' attempts to do business in other countries, observers say.

John, for instance, said he had long wanted to go into business with a good Swiss friend, but "every time we got close to a deal, my citizenship became a huge stumbling block."

According to US law, any business anywhere in the world which is more than 10-percent owned or controlled by American citizens or interests must file its annual balance sheet to US tax authorities.

Bugnion said she had spoken with people who had been forced to shut down businesses, while John said he knew people who had lost their jobs because companies didn't want to put up with the hassle and cost of employing an American.

There are some signs that relief could be on the way.

A Senate Finance Committee aid told AFP that chairman Baucus was preparing proposals that might affect the taxation of US citizens abroad.

The senator, he said on condition of anonymity, "is committed to improving the US tax laws to ensure that US competitiveness is not hindered by unnecessarily burdensome tax rules."

In the meantime, however, "Normal people with normal incomes are (being) tremendously negatively affected by these regulations," John said, expressing bitterness that he had been forced to give up his nationality.

Schmith meanwhile insisted he didn't regret becoming Swiss, but said he would have preferred to also hold onto the passport of the country he once fought for.
   
"If it hadn't been for the US micromanaging, I would still be an American," he said.