Imagine living abroad for all of your life, never having visited or spent time in the US. One day, you are informed that you may be subject to thousands of dollars in penalties for failure to file and pay US taxes. Thus begins the journey of understanding the intricacies of US tax law for Accidental Americans.
What Is an Accidental American?
The above is often the story of the Accidental American, US citizens who live abroad and are unaware of their American taxpayer status. Their situation may arise in various ways:
- They may be born in the US but leave the country soon after.
- They may be born abroad, but one or both of their parents are US citizens.
- In some circumstances, Green Card holders who let their Green Card expire without officially renouncing their immigration status are labeled Accidental Americans, as well as spouses of US citizens.
Such is the case with French resident Fabien Lehagre, who was born in the US but left at the age of two. Twenty-eight years later, he discovered he had US tax-filing obligations after receiving a letter from his bank asking for his US tax identification number. Soon after, he established the Association of Accidental Americans.
What Tax Obligations Do Accidental Americans Have?
Accidental Americans have the same US tax obligations as any other US taxpayer earning in the US. The US is one of two countries that engage in citizenship-based taxation rather than using a territorial-based system. Individuals are taxed based on their citizenship irrespective of their place of residence, so their worldwide income is taxed.
As there is no statute of limitations for unfiled returns, the IRS can collect taxes, penalties, and interest for every year. Significant penalties can also be assessed for failing to file FBARs, which report foreign financial accounts over $10,000. As Americans living abroad, there may be further reporting needed, and consequently, additional penalties for foreign businesses, investments, pensions, and trusts.
How Can Accidental Americans Become Tax Compliant—Minus the Penalties?
Fortunately, a pathway toward compliance is available to help you avoid late filing, payment, and information return penalties. The IRS announced the availability of the Streamlined Filing Compliance Procedures in 2012 for those living abroad. Over the years, it has made changes, including making available these procedures to those living in the US.
Those that can avail of the procedures include individuals and estates of individuals.
To satisfy the Streamlined Filing Compliance Procedures:
- Taxpayers must certify that their failure to report all income, pay all taxes, and submit all information was due to non-willful conduct. Non-willful conduct includes negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.
- The IRS must not have initiated a civil examination of the taxpayer’s returns for any taxable year.
- Any prior penalties relating to previously filed tax returns must be paid.
- The taxpayer must have a valid Social Security number or taxpayer identification number.
To use the Streamlined Filing Procedures:
- Submit complete FBAR returns for the most recent six years.
- If living outside the US: submit complete original individual income tax returns (or amended, if original returns have been filed), including all information returns, for the most recent three years for which the due date has passed. Ensure that you have lived outside the US for at least one year; a 330-day physical presence test outside the US must be met during this year.
- If living in the US: submit amended returns for the most recent three years for which the due date has passed, together with all of the information returns.
Which Penalties Are Avoidable With the Streamlined Filing Procedures?
Taxpayers residing in the US do face a 5% miscellaneous offshore penalty for unreported foreign financial assets during the covered FBAR period, but successfully filing returns under the Streamlined Filing Procedures mean the following penalties will be abated: failure to file, failure to pay, accuracy related penalties, information return penalties, and FBAR penalties.
What If I Don’t Qualify for the Streamlined Filing Procedures?
There are certain situations where the Streamlined Filing Procedures are not available to taxpayers; for example, when lack of filing was willful. Taxpayers may have other options they can use if this is the case. These options include:
- IRS Criminal Investigation Voluntary Disclosure Program—this limits exposure to criminal prosecution
- Delinquent FBAR Submission Procedures—these procedures are in place for taxpayers who have no requirement to file delinquent or amended income tax returns, but have not filed FBAR.
- Delinquent International Information Return Submission Procedures—these procedures are in place for taxpayers who have no requirement to file delinquent or amended income tax returns, but have not filed one or more required international information returns.
We Have Helped Many Accidental Americans Get Caught Up. We Can Help You, Too!
Several avenues are available to get caught up with US filing obligations that do not necessarily involve paying hefty penalties to the IRS. Greenback can help guide you through the process of what works best for you to become compliant with your US taxes; get started with us today!