Are you an “accidental American” living abroad who may be liable for US taxes and not even know it? Imagine living your life in a country where you grew up, were educated, and worked for years. You’ve dutifully paid taxes in your country your whole life. But then, the IRS contacts you and tells you that you owe the US hundreds of thousands of dollars in back taxes. Unfortunately, for thousands of people across the globe, that seemingly impossible scenario is very much real. They are accidental Americans.
Why Would I Owe the US Taxes If I’ve Never Even Worked There?
Unlike most countries that have a residency-based taxation system, the US has a citizenship-based taxation system whereby all citizens, regardless of where they live, are subject to US taxes on their global income. Shocking but true: the only other country to have such a tax regime is the small country of Eritrea.
Why Are Accidental Americans Becoming a More Common Phenomenon?
The IRS is in a position to locate and tax so-called accidental Americans thanks to the Foreign Account Tax Compliance Act, also known as FATCA. In 2010, Congress enacted FATCA to cut down on tax evasion by Americans with financial assets abroad. This Act came in response to several bank scandals which highlighted US taxpayers hiding millions of dollars overseas. In short, the law requires foreign banks to report about financial accounts held by US citizens to the IRS.
Since FATCA has placed punitive monetary restrictions on foreign banks that don’t comply, most have begun sharing information on US (or even dual) citizens with accounts. This allows the IRS to locate potential citizens who haven’t filed their taxes in years or, worse, ever.
In the years post-FATCA, other countries have passed similar laws (collectively referred to as a Common Reporting Standard – CRS for short), which ensure that nations share financial information about each other’s citizens. So, the trend of increased tax reporting is very likely to continue.
What Can the US Assess Taxes On?
Unfortunately, the US can tax wages, interest, dividends, capital gains, business profits, royalties, rental property, gambling winnings, and more – the list is long. Even if taxes aren’t assessed, tax return filing obligations are likely still in effect on everything from items of income to the receipt of gifts to foreign retirement or pension plans. Failing to file these tax returns can result in significant penalties even if no tax is due.
One of the most overlooked forms, even by US taxpayers who knowingly file tax returns, is FinCen Form 114, otherwise known as the FBAR. This form is an annual filing requirement for those whose balances in foreign (non-US) banks or securities accounts surpass an aggregate value of $10,000.
What Can I Do If I’m One of the Accidental Americans?
If you are an accidental American, the best thing to do is to be proactive. The US allows numerous strategies to reduce or even eliminate taxes on foreign income. Foreign tax credits, foreign earned income and housing exclusions, social security totalization agreements, and tax treaties are just some of the ways that the burden can be alleviated.
Additionally, the IRS has special programs (at least for now – some of these programs have been shuttered in the past few years) such as the Streamlined Filing Procedures, that allow citizens like accidental Americans who need to file – but haven’t – to get back into compliance in a much easier way. The key is to file before the IRS finds you and contacts you.