It’s not uncommon for US citizens living abroad to be unaware of their tax for expat requirements, especially if the process is new for them. The most important thing Americans abroad should know is that all US citizens must file a US Tax Return, regardless of where they’re living at the time. However, there is another group faced with the same concern – being unaware of filing obligations – except these individuals didn’t even know they were considered US citizens.
I Didn’t Know I Was an American
It may seem impossible – how could one not know his or her citizenship? In reality, it’s more common than you think. Known as ‘Accidental Americans,’ these individuals consider themselves foreigners, as they don’t realize they hold dual citizenship. They may have never set foot in the US, but as a citizen, they have tax for expat filing obligations since the US employs citizenship-based taxation. The US is one of very few countries that taxes your worldwide income no matter where you live, so it’s very important to understand your tax situation in order to avoid racking up significant penalties and interest due to failing to file US expat taxes.
How Individuals Become Accidental Americans
There are a number of ways you can become an ‘Accidental American,’ all of which lead to having a tax for expat filing obligation. These include:
- You were born while your American parent(s) were living abroad
- You were born on US soil while your foreign parents were in the US, but they returned promptly to their home country to raise you
- You become a naturalized citizen of another country, thinking your US citizenship has ended
All of these scenarios lead to having US citizenship, even if you were unaware of it. As a reminder, if you do become a naturalized citizen elsewhere, you do not automatically drop your US citizenship. You must file and obtain a Certificate of Loss of Nationality from the US State Department in order to end your US citizenship status and no longer have a US tax for expat filing requirement. Note there is an expatriation tax involved, which you can learn about on the IRS website.
Discovering You Have a US Filing Obligation
In the past, the IRS hadn’t been actively seeking out delinquent taxes of Americans living overseas, so many ‘Accidental Americans’ were unaware of their expat tax obligations. However, with the introduction of the Foreign Account Tax Compliance Act (FATCA) in 2010, that has all changed. FATCA is a law enacted to require taxpayers to report specified foreign assets that exceed certain thresholds, and foreign financial institutions are also required to report on behalf of the assets of their American clients. You can learn more about FATCA here.
FATCA has opened up intense scrutiny on offshore financial accounts, which has led to many unknowing US citizens realizing they have a US tax for expat filing and financial account reporting obligation that they failed to complete in the past.
Getting Caught Up
Fortunately, if you’ve found yourself in a situation where you didn’t realize you had an expatriate tax filing obligation and need to become compliant with the IRS, there are several ways in which to do so. The IRS created two amnesty programs specifically to help US taxpayers get caught up on their delinquent taxes:
- Streamlined Filing Procedures: This allows taxpayers who didn’t know they had a filing obligation to get caught up on delinquent taxes and foreign financial account reporting without incurring penalties for late filing.
- Offshore Voluntary Disclosure Program: This allows taxpayers who willfully failed to file the opportunity to get caught up without facing criminal charges, though significant penalties and interest will still apply.
For Accidental Americans who didn’t realize they held US citizenship, the Streamlined Filing Procedures will likely be the best approach to take in order to get caught up. Read the case story of an Accidental American in Germany to learn how she became compliant with the IRS here. To learn more about filing late taxes, download our guide featuring seven steps to getting caught up on US taxes.
Need to Get Caught Up on your US Expat Taxes?
Our team of dedicated CPAs and IRS Enrolled Agents have particular expertise in helping US expats become compliant with the IRS. Get started with us today and gain unbeatable peace of mind by getting caught up on your expat tax obligations!