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Accidental Americans and Their Plight With US Taxes

Accidental Americans and Their Plight With US Taxes
Ines Zemelman, EA

About 7.6M American Citizens are living overseas. Out of that 7.6M, 3,415 of them renounced their citizenship last year. These figures include those who are fully aware of their American Citizenship. There are other types of Americans, however. These people are referred to as ‘accidental Americans’. These individuals have dual citizenship between the IRS and their home country and they have no idea. US Persons under these circumstances may never have even set foot in the United States, but they are bound by the same tax laws as every other American Citizen. This not only includes obligations on federal taxes, but also applies to FATCA (Foreign Accounts Tax Compliance Act) reporting requirements.

Since the IRS requires its citizens to report income and pay taxes no matter where in the world they live, these accidental Americans may have multiple years’ worth of tax debt about which they have no idea. The interest and penalties that add up from years of unpaid taxes can be devastating.

What Causes an Individual to Become and Accidental American?

There is a variety of ways in which a person can become an accidental American. One of the most common ways is to have been to American parents while they were living in a foreign country. Since this individual was born in a foreign country, he/she is automatically a citizen of that country; and since the individual was born to American Parents, he/she is also an American Citizen. Another scenario is that an individual was born in the United States to foreign parents who were only visiting America and since returned to their home country. There is also the case of becoming a naturalized citizen in another country. Many people who have become naturalized citizens of a foreign country just assume that they are no longer American Citizens. This is only true if they had taken steps to renounce their citizenship and obtained a Certificate of Loss of Nationality from the Department of State in the US. Otherwise, they will still maintain dual citizenship and will therefore be required to report their worldwide income and will be subject to FATCA reporting requirements.

What Does All This Mean for Accidental Americans?

In previous years, the IRS made a decision not to pursue the unpaid taxes of accidental Americans living abroad. With this being the case, these dual citizens were unaware of their tax delinquency, because the IRS never sent them any notification. When the FATCA initiative was enacted in 2010, this changed dramatically. The purpose of FATCA was to identify American Citizens who are living overseas and have failed to file their US expat tax returns or report their foreign financial accounts valued at $10K or more. Now that foreign financial institutions are required to report all foreign bank account information on US Citizens, it’s becoming easier to track delinquent taxpayers; and accidental Americans are getting caught in the crossfire.

News of FATCA initiatives are now a matter of global importance. Information can be found on the Internet, and this fact means that ignorance is no longer a viable excuse for failing to have met all US tax and reporting obligations. Accidental Americans were never the target of these initiatives, but all US Citizens – accidental or not – are being identified as being behind on their taxes.

Changes Brought About by the Citizenship Act

President Clinton signed a new law on October 24, 1994. This was known as the Immigration and Nationality Technical Corrections Act – otherwise referred to as INTCA. The INTCA granted retroactive citizenship to all natural born citizens who had lost their citizenship by having not met the physical presence retention requirements which were active before the year of 1978. These physical presence retention requirements mandated that children born to one or more US Citizens between the year 1934 and the year 1978 were required to have been a permanent resident of the United States for a minimum period of time before their 18th birthday if they were to retain their US Citizenship. The INTCA abolished the requirement to have retained US residency in the United States in order to be deemed a US Citizen. Contrary to popular belief, the INTCA did not automatically grant citizenship to those who had lost it by being born between 1934 and 1978 and never meeting the permanent residence guidelines. The INTCA merely made the option of reclaiming citizenship by taking an oath of allegiance to the United States if it were desired.

The current laws of American Citizenship are complicated, but it’s a good rule of thumb that if you were born in the United States or born to American Citizens in another country you are a US Citizen. This is true even if you have lived in a foreign country your whole life or only spent minimal time in the United States. This is also true even if you have been stripped of your American Citizenship by a foreign country resulting from your having voted for a public official or served in a foreign military.

The complex tax laws of the United States are based on citizenship – not the location of residence. The current tax system of the United States differs from that of many other countries, and it can create confusing situations for American Citizens living overseas – particularly individuals who are unaware of their US Citizenship.  

If you are an accidental American and you wish to renounce your US Citizenship that is a viable option. If you believe that you are delinquent in your tax and reporting obligations due to your dual citizenship, get in touch with an American Tax Consultant to figure out how you can become current and minimize accrued penalties and interest.

Ines Zemelman, EA
Ines Zemelman, EA
founder of Taxes for Expats