There are nearly 7.6 million Americans living abroad and while last year, record numbers renounced their US citizenship (3,415), the vast majority of US expats remain proud Americans. However, there is a newly discovered group of people who consider themselves “foreigners” but in fact they are not. Dubbed “Accidental Americans”, these individuals live in a foreign country but hold dual citizenship, whether or not they know it. Even if they have never set foot on US soil, they are still considered US citizens and therefore have US federal tax obligations and perhaps even foreign bank account reporting requirements (such as FATCA, Foreign Account Tax Compliance Act).
Because the US is one of the only countries that employs ‘citizenship-based taxation’—meaning, your worldwide income is taxable regardless of where you live – these “Accidental Americans” are finding out that they may owe the IRS for many years of unpaid taxes and unreported bank accounts—and the amounts and penalties can be crippling.
How do you become an Accidental American?
There are several ways people could fall into this category. One common scenario is when a person was born while their American parent(s) was living abroad. They are an American, albeit Accidental. Another could be if an individual was born on US soil while his foreign parents were here but they quickly returned to their country of origin to raise their child. That would still make the child an American. Another situation could be created from a basic lack of knowledge. For people who choose to become naturalized citizen elsewhere, may believe that this action automatically ends their American citizenship. It doesn’t. Unless they file and obtain a Certificate of Loss of Nationality from the US Department of State, they will possess dual citizenship and remain a US citizen with tax obligations.
So now what?
Up until recently, the IRS wasn’t actively pursuing the delinquent taxes of those Americans living abroad, so Accidental Americans were never alerted to their surprising citizenship status. But all that changed in 2010 when the US launched a major initiative to uncover tax cheats hiding money and assets abroad. The most well-known part of this initiative is FATCA, the Foreign Account Tax Compliance Act. FATCA requires taxpayers to report specified foreign assets if they exceed certain thresholds (which vary based on filing status and residency). In addition, foreign financial institutions are now required to report on the assets of their American clients.
With FATCA making global headlines, it has become clear to Americans abroad that the long arm of the law will eventually reach them. Many Accidental Americans are realizing that they should have been reporting foreign bank accounts and filing US taxes. With so much information being disseminated about US taxpayers’ filing obligations – and the ability to access anything from anywhere on the world-wide-web—ignorance is no longer a valid excuse with the IRS. While this group aren’t the intended ‘targets’ of US initiatives, the search for crooks has opened up the door to unfulfilled tax obligations of Accidental Americans by the millions. They are caught in the crossfire of this massive legislative act—and the financial implications for the ‘innocent but overseas’ can be extreme!
Understanding the Citizenship Act Changes
On October 24, 1994, President Clinton signed into law Immigration and Nationality Technical Corrections Act of 1994 (INTCA)—one of the most far reaching citizenship-related laws to have passed in decades. One section of INTCA retroactively granted citizenship by birth to any natural born citizens who lost citizenship for failing to meet “physical presence retention requirements” that were in place before 1978. (The former physical presence retention requirements stated that children born to one or more US parents between 1934 and 1978 had to retain a permanent residence in the US for a period of time prior to their 18th birthday in order to retain their citizenship.) INTCA did away with the requirement to have resided in the US. Despite rumors, INTCA didn’t automatically reinstate citizenship for those who had lost it. It simply provided the opportunity to reclaim citizenship if desired by taking an oath of allegiance to the US.
The citizenship laws are complicated, but generally speaking, if you were born in the USA then you are a US citizen. This can remain true even if you have been absent from the country for a long time or a foreign country has “stripped” you of your US citizenship as a result of voting or military activities for a foreign country. In addition, if your parents or grandparents were/are US citizens, you may also be a US citizen even if you were born elsewhere and your parents or grandparents have not lived in the US for a long time.
The US has a very complex tax system which is based on citizenship, not location. With a citizenship criterion that is different than many other countries, this can create a difficult situation for US citizens living abroad—especially individuals who may not have realized they were US citizens and had any filing/reporting requirements to the US Government. Everyone living abroad hopes that the US will move to a residency-based tax system, but until that happens the only real options are to either stay compliant on one’s taxes or renounce one’s US citizenship.
Have more questions?
Our expert accountants are here to help! Simply contact us today and we will be in touch within one business day.