UPDATE: we have published a new article answering some of our readers feedback, please read this one below and then CLICK HERE for an updated version with new insights.

Author’s Note: The use of the noun and adjective “American” in this article conforms to the definition in Princeton’s WordNet: (A native or inhabitant of the United States), and the recommendation by the Associated Press Stylebook: (An acceptable description for a citizen of the United States). Natives and inhabitants of North, Central and South America are also Americans.

If you are a citizen of the United States living in Costa Rica, there is a chance that you will report to the American Embassy and surrender your citizenship by the end of the year.

The rate of self-expatriating U.S. citizens has reached a historical momentum. According to various reports recently published in financial news outlets, more than 1,000 Americans renounced their citizenship between May and June of 2013, which is a figure higher than the total of people who did so last year. At the current rate, we may see close to 5,000 Americans around the world surrendering their citizenship between now and the holidays.

What is driving so many U.S. citizens to commit such an ultimate act of self-expatriation? What could entice an American expat living in Costa Rica to say goodbye to his or her rights and duties as a citizen of the U.S.?

According to a Business Insider article published by online news magazine Slate, the record number of Americans giving up their citizenship in recent months is not the result of a sudden ideological shift or a wave of unpatriotic sentiment. It is rather a reaction to a 2010 law entitled the Foreign Account Tax Compliance Act (FATCA), which is expected to be globally implemented by 2014.

The essence of FATCA is rather bold: It puts the U.S. in a rather autocratic and peremptory position of forcing financial institutions around the world to cough up the account information of clients who happen to hold U.S. citizenship. This information is then turned over to the U.S. Internal Revenue Service (IRS). The foreign financial institution may then be directed to withhold and remit taxes from any income realized by the client.

The Long Arm of the IRS

Let’s say, for the sake of example, that a 28-year old woman born in Wyoming has been living and working in Costa Rica for the last 14 years -half of her life. Let’s say she is unmarried and has a regular savings account with a debit card at Banco Nacional de Costa Rica (BNCR), the bank with the very long lines. Under FATCA, this woman’s BNCR account would be monitored and reported to the IRS. Let’s say this woman works at a call center and makes about $10,000 a year; if her salary is electronically deposited to her account, the IRS may direct BNCR to withhold and remit $892.50 plus 15 percent of what she makes in excess of $892.50, which comes up to about $1,055 -more than what she makes in a month!

What is interesting about our Wyoming-born call center worker is that she does not make enough to fall into a personal income tax bracket in Costa Rica, but -under FATCA- her native country will happily take more than what she makes in a month here. She can, however, ameliorate the situation by filing IRS tax returns and claiming deductions; but, let’s be realistic: Not many U.S. citizens move to Costa Rica with the intention of filing 1040A forms and other complex U.S. tax documents.

FATCA gives the IRS a pretty long international arm. Aside from personal income, FATCA directs institutions such as BNCR to monitor accounts that receive income from investments, real estate, business activity, gambling, etc. Income earned by an American anywhere in the world is income that can be taxed, and this is something that the U.S. could definitely use: Tax revenue to shore up its growing deficit.

Could a bank in Costa Rica refuse to participate in FATCA? Sure, but at a high price: 30 percent of money originated from the U.S. to the foreign financial institution withheld. A well-capitalized bank such as BNCR is likely to have a lot of money invested in the U.S., from overnight sweep dollar accounts to U.S. bonds. Losing 30 percent of that income is a stiff price to pay for non-participation. In fact, banks in some countries are actually dumping American clients because of FATCA.

Costa Rica was the first nation in Central America -and one of the first in Latin America- to accept implementation of FATCA. As expected, a few banks have taken their time and the IRS has extended registration a few times. By March 2015, it is expected that income earned outside of Costa Rica by American citizens will be reported to the IRS by local banks. This is a major development since Costa Rica’s tax code does not touch income produced abroad.

Taking the Plunge

When FATCA was passed by the U.S. Congress, there was a fair amount of debate with regard to wealthy tax dodgers. Last year, the Costa Rica Star profiled Eduardo Saverin, the Brazilian-born co-founder of Facebook, who conveniently renounced his U.S. citizenship right before the highly anticipated initial public offering (IPO) of the world’s most ubiquitous online social network. That article argued the merits of renouncing U.S. and Canadian citizenship and the implications thereof.

In Costa Rica, it’s not just ultra-wealthy Americans who could benefit from renouncing their U.S. citizenship to avoid FATCA. Our example of the Wyoming woman working in a call center in Costa Rica illustrates that FATCA can take away a significant chunk of income; life in Costa Rica is not cheap, and giving up more than a month’s salary to Uncle Sam might inconvenience may American ex-pats living here.

The process of renouncing American citizenship usually takes place at an embassy overseas, and such requests can be denied under some circumstances. There is usually no turning back once U.S. citizenship is renounced, so Americans living in Costa Rica should think twice before taking the plunge. Prior tax and military obligations are not erased by renouncement.

Could surrendering U.S. citizenship be considered a cop-out, or even an un-American act? When major corporations such as Google and Starbucks play masterful games of tax avoidance with complex offshore structures, many Americans feel that they should be entitled to employ any legal resources available to them. Recently, Marie Sapirie of taxanalysts.com described an instance of an American citizen whose tax situation was so complicated that the IRS actually recommended renouncement:

“I lived in the U.S. for 30 years; I never was treated unfairly for 30 years. I was proud of it. And here the IRS is telling me to renounce my citizenship because it may be the best solution considering my situation,” the taxpayer said.

If anything, FATCA is a reminder that the U.S. is due for major tax reform.