While being an American citizen comes with many privileges, it also comes with a host of tax obligations. This is where things get tricky for accidental Americans – people unaware of their U.S. citizenship. In recent years, the issue of accidental Americans has garnered attention due to the increasing global mobility and their potential to face significant financial consequences in the United States.
In this article, we will explore the challenges they are facing and discuss strategies for avoiding the tax implications of accidental citizenship.
Who Is an Accidental American?
An accidental American is a term used to describe someone who holds dual citizenship in the United States and another country, but is unaware of their U.S. citizenship status. They may have acquired U.S. citizenship even if they have never lived in the States or have only spent a limited amount of time in the country. For many accidental Americans, the discovery of their citizenship comes as an unpleasant surprise – often through a realization of the tax filing obligations to the United States.
A typical accidental American is living their regular life in another country, completely unaware of their U.S. citizenship and associated taxes. Then one day, they get an unexpected letter from their local bank requesting their SSN and a declaration of their tax residence in the US. After initial disbelief, they are struck with the sudden realization – they might be owing years and years of unpaid taxes to the United States while the bank is threatening to close their account.
The scenario sounds pretty grim and seemingly offers no way out. Luckily, there are ways to work around it, normalize the status with the IRS and avoid all unwanted consequences. Let’s find out what makes an accidental American and what they can do to break free from the U.S. tax system without paying any fines.
How Do I Know if I’m an Accidental American?
How is it possible to be a citizen of the United States without ever being aware of it? It happens more often than you’d think. The status of an accidental citizen may arise due to many reasons, with the most common ones being the following:
- American citizen who moved abroad in their youth mistakenly thinks that by becoming a citizen of another country, they automatically lost their American citizenship.
- Someone who was born in the U.S. but left as a baby or a small child and grew up abroad, not knowing that they received their U.S. citizenship at birth.
- A non-U.S. citizen can have a child born in the U.S. while they are there on temporary employment or student visas. This child, born in the United States, automatically became a U.S. citizen at birth and might not be aware of it later on.
- A child born outside of the U.S. to both U.S. citizen parents may be a U.S. citizen at birth if at least one parent had resided in the U.S. or one of its outlying possessions, even if s/he was never registered with the U.S. government Vital Records Office
- A child born to two U.S. citizens abroad may become a U.S. citizen at birth if one of the parents had previously lived in the US or one of its overseas possessions (American Samoa and Swains Island). Again, if the child was never registered with the U.S. government’s Vital Records Office, they are still considered a U.S. citizen.
- Even if you’re born in a foreign country and only one of your parents is a U.S. citizen, you might also be a U.S. citizen under certain circumstances. For example, if your U.S. citizen parent was living in the U.S. for at least 5 years, with at least 2 of those years after they were 14.
U.S. Taxes For Accidental Americans
Regardless of how their US citizenship was obtained, accidental Americans are still required to file an annual tax return, the same as any other American citizen. They are subject to tax reporting requirements from the IRS, as well as foreign account filings with the Treasury Department. Suddenly, they are facing the burden of double taxation and have to pay taxes in both the United States and their home country.
All this new-found information is a lot to take in, and many accidental Americans are unsure how to deal with their federal tax issues or where to begin. Fortunately, there are several options available to address these concerns and avoid late filing, payment, and information return penalties.
One option is to take advantage of tax amnesty programs offered by the IRS. They provide an opportunity to come forward, disclose your U.S. citizenship status, and become compliant with U.S. tax laws without incurring any additional penalties or facing legal action. Another option is the Renunciation of U.S. Citizenship. This can be a complex and time-consuming process, but a very effective one, as it provides a permanent solution for those who don’t want to be subject to U.S. taxation ever again.
Failing to properly address federal tax issues can result in serious consequences and you shouldn’t take any chances with your financial well-being. It’s important to carefully evaluate all your options and consult with professional advisors before making any decisions concerning your U.S. tax responsibilities
Tax Amnesty Programs For Accidental Americans
The Internal Revenue Service has established amnesty programs for accidental Americans that allow significant relief from certain taxes and reporting requirements. If you want to become tax compliant and avoid all the penalties and other federal tax issues, these are your options:
The Streamlined Compliance Procedures
- Whether you owe taxes for a few years or more than a decade, this program allows you to file just the last 3 tax years! It will reduce your financial burden immensely (the IRS waives all penalties and interest for failure to file before), and simplify the entire process of getting into compliance.
- If you are eligible to use Streamlined Procedures, you will not be subject to any penalties.
(failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, FBAR penalties, and other repercussions related to foreign bank and financial accounts)
- To be eligible for this program, you have to be considered a foreign resident. You also need to certify there was no willful conduct on your side. Simply put – you need to prove that you didn’t fail to pay taxes and report your foreign financial assets on purpose.
Relief Procedures for Certain Former Citizens
- Relief Procedures for Certain Former Citizens is a completely penalty-free option for expatriation. It’s made for accidental Americans who have renounced or plan to renounce their US citizenship, and want closure with the IRS.
- If you have never filed a U.S. tax return – this is one of the rare occasions when the IRS actually rewards you for not filing! One of the eligibility criteria for this program is that you don’t have a filing history as a U.S. citizen or U.S. resident.
- Due to their circumstances, many accidental Americans don’t have a Social Security Number, which is a common requirement when applying for amnesty programs. If you don’t own SSN, this program is a great option as it doesn’t require SSN or Taxpayer Identification Numbers (TIN).
The IRS amnesty programs are set up to encourage people to catch up with their tax filings while taking advantage of various financial benefits. As an accidental American, it’s in your best interest to take advantage of these procedures.
Renouncing U.S. Citizenship
By renouncing their U.S. citizenship, accidental Americans can permanently escape federal tax obligations and potentially save a significant amount of money. Once they renounce their U.S. citizenship, they can no longer be subject to costly penalties for failure to file or disclose foreign financial accounts. It’s a smart financial move that can provide peace of mind and free up resources that can be put to better use elsewhere.
Another perk of renouncing American citizenship is the ability to escape the long arm of American law. The United States has a wide-reaching legal system that can have jurisdiction over Americans even if they are living and working abroad. This can be particularly problematic for accidental Americans who may be caught in legal disputes that have nothing to do with their lives outside the United States. Renouncing citizenship allows them to escape the potential legal entanglements that may come as a result of their citizenship status.
In addition to the financial and legal implications, accidental Americans often don’t feel like their American citizenship truly represents who they are. In most cases, being an American citizen can feel like a complete mistake, rather than a true reflection of their identity. It may not be immediately apparent, but this is another significant reason to choose renunciation.
Have a question? Contact Olivier Wagner, 1040 Abroad.
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