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American by Accident and What the IRS May Have to Say About It

American by Accident and  What the IRS May Have to Say About It

Default Citizenship by Birth

Thanks to the US Constitution’s Fourteenth Amendment, any person born in the United States is automatically a US Citizen – despite the nationality of his/her parents or the length of time spent in the US. Conversely, children born outside of the United States can also receive automatic US Citizenship, provided at least one of the biological parents is a United States Citizen and had spent at least 5 years in the US or a US Territory prior to the birth of the child. The only exception to the laws of citizenship at birth is that of a child born to a foreign diplomat while serving official duty in the United States.

Taxation of Worldwide Income

Having default American Citizenship may seem like a great gift to offer a child with immigrants for parents; but if the child winds up living and working in another country as an adult and never enters the United States, an unfair tax burden will be placed on the individual: A requirement to file an annual US expat tax return and reporting his worldwide income. This requirement is imposed on every United States Citizen no matter where in the world he/she is living. Not only will the individual be responsible for personal income taxes in the United States, he/she will also be liable for any estate taxes which are owed by parents or other descendents if they passed with any tax liability.

How to Legally Avoid Filing a United States Tax Return

If an individual was born with a default US Citizen status and does not wish to live or work in the United States or be responsible for US taxes, the individual has an option to give up his/her United States Citizenship. This can be done in one of 2 ways: Relinquishment or Renunciation of citizenship.

Relinquishment of United States Citizenship

Relinquishment of United States Citizenship isn’t necessarily easy, but it’s an option for an individual who’s lived his/her life in another country and has taken patriotic steps as a citizen of that country such as having enrolled in foreign military, taken an oath of allegiance, or has otherwise accepted foreign citizenship. Upon turning 18 years of age, a default US Citizen who has lived his/her entire life in another country may voluntarily relinquish all the rights and liberties of United States Citizenship and, therefore, be free of all US Citizen responsibilities of filing US taxes.

In order for the relinquishment of citizenship to be formally recognized, an individual must have completed one or more foreign patriot acts (including those which were previously mentioned) defined in the Immigration and Nationality Act, Section 349. If the individual had lived and worked in the United States for any portion of time, simply relinquishing his/her status will not be sufficient. If any money was earned by the individual living and working in the US as a Citizen, an exit tax will be assessed, and steps to renounce citizenship must be taken.

Renunciation of United States Citizenship

While a relinquishment of US Citizenship is limited to those who have spent their entire lives (or a considerable amount of time) living as a citizen of a foreign country, voluntary renunciation of US Citizenship can be performed by any United States Citizen as long as all tax liabilities are met. In order to satisfy United States tax liability, one must have met all of his/her obligations as a taxpayer for the previous 5 years. Additionally, a person renouncing his/her citizenship will be required to pay estate taxes on property or other valuables as if the items had been sold. This imposition is part of what’s known as an exit tax: The final taxes the IRS imposes onto its expatriating Citizens officially and permanently renouncing their citizenship.

If an individual had earned over a specific threshold in the 5 year period preceding expatriation, he/she may be subject to additional taxes as part of the exit tax. Additional penalties may be assessed on individuals who have not sufficiently proven and stated to the IRS that all tax obligations for the preceding 5-year period had been met. In order to ‘prove’ that an individual has met all tax obligations for the previous 5 years, he/she must complete a very detailed form and send it to the IRS with a final tax return. The information required on the form includes a certification under penalty of perjury that all taxes (income, gift, estate, etc) have been paid and there is no outstanding tax liability.

There are circumstances in which an expatriating US Citizen can avoid being charged an exit tax. If the individual had spent a period of 10 years or longer out of the 15 year period preceding expatriation living as a citizen in a foreign country and had not accrued any US tax liability for a period of 5 years or more, he/she may be able to expatriate without having to pay an exit tax, unless property or other valuable assets are held within the United States. Find out more about voluntarily renouncing US Citizenship.

If you are an individual with dual citizenship and you have never taken steps to relinquish or renounce your US Citizenship, you may be interested in taking the time to make sure that you are current on your US expat tax obligations and take the steps to free yourself of future tax liability. If you are in debt to the IRS for not having filed previous years’ returns, Taxes for Expats can help get you on track and may be able to help you avoid paying excessive fees and back taxes.

Ines Zemelman, EA
Founder of TFX