Being an Accidental American: A Tax Perspective

May 13, 2024

While American citizenship offers many privileges, it also comes with numerous tax obligations. This can be particularly challenging for accidental Americans—individuals who are unaware of their U.S. citizenship. The issue of accidental Americans has gained significant attention due to the serious financial consequences they face, including the potential imposition of an exit tax for those considering renunciation of their U.S. citizenship.

In this article, we will delve into the challenges faced by accidental Americans and discuss strategies for managing and mitigating 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 owe years of unpaid taxes to the United States while the bank is threatening to close their account.

The scenario sounds 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?

The status of an accidental citizen may arise due to many reasons, with the most common ones being the following:

  • An 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.

Do you pay taxes if you were born in the U.S. but never lived there?

Yes. If you were born in the U.S. but have never lived there, you are still required to file an annual tax return as a U.S. citizen. Known as accidental Americans, individuals in this situation must comply with IRS tax reporting requirements and file reports on foreign accounts with the Treasury Department. This can lead to the challenge of double taxation, where taxes may be due in both the United States and your country of residence.

To mitigate this, accidental Americans can utilize the foreign tax credit to offset taxes paid in their country of residence against U.S. taxation. However, while tax treaties exist to prevent double taxation, they often have limited effectiveness for U.S. citizens living abroad, as all U.S. tax treaties allow the U.S. to tax its citizens as if these treaties did not exist.

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 Relief Options for Accidental Americans

Tax relief programs for accidental Americans include options like the Relief Procedures for Certain Former Citizens, and Streamlined Filing Compliance Procedures to help them address their U.S. tax obligations and avoid double taxation. Additionally, accidental Americans can include utilizing foreign tax credits to alleviate the burden of double taxation, as provided by the IRS. This can offset U.S. tax obligations for many Accidental Americans living and working abroad. If you want to become tax compliant and avoid all the penalties and other federal tax issues, these are your options:

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 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 to become compliant! 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.
  • To take advantage of this amnesty program, you must first obtain a Social Security Number (SSN) if you do not already have one. Once compliant, it is important to understand that you will need to continue filing U.S. tax returns annually.

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.

Annual U.S. Expats Filing Obligations

As a U.S. citizen living abroad, it is crucial to understand your tax filing obligations to remain compliant with the Internal Revenue Service (IRS). Despite living in a foreign country, U.S. expats must report their worldwide income, including income earned in their home country and any other countries where they earn income.

This means filing annual tax returns and complying with various reporting requirements, such as the Foreign Bank Account Report (FBAR) for foreign bank accounts exceeding $10,000. Additionally, expats may need to report financial assets through the Foreign Account Tax Compliance Act (FATCA). Staying informed about these obligations helps avoid penalties and ensures tax compliance.

How to Utilize Foreign Tax Credits to Avoid Double Taxation?

One of the primary concerns for accidental Americans and U.S. expats is the risk of double taxation—being taxed by both the United States and the foreign country where they reside. Fortunately, the Internal Revenue Code provides mechanisms like the Foreign Tax Credit (FTC) to mitigate this issue. By claiming the FTC on your U.S. tax return, you can offset taxes paid to foreign tax authorities against your U.S. tax liability. This credit helps reduce the overall tax burden and prevents you from paying taxes twice on the same income. It’s essential to maintain accurate records and provide documentation of taxes paid to the foreign country to take full advantage of this benefit.

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.

At 1040 Abroad, we specialize in providing expert tax advice tailored specifically for accidental Americans and U.S. expats. Whether you need assistance with tax compliance, understanding filing obligations, or maximizing your tax credits, our team is here to help. We offer free tax advice via email, ensuring you can make informed decisions without any upfront cost.

If you have any questions or need personalized guidance, don’t hesitate to reach out to us at 1040 Abroad. Let us assist you in making the most out of your tax filings and ensuring you remain compliant with all necessary tax laws as a U.S. expat.

Contact us today to ensure your tax strategy is as efficient and stress-free as possible.

Accidental Americans and Foreign Financial Accounts FAQ

What is an Accidental U.S. citizen? Simply put – it’s a person unaware of their U.S. citizenship. Being a U.S. citizen, even accidentally, comes with certain responsibilities, such as the need to file U.S. tax returns, regardless of where one lives. This includes complying with the Foreign Account Tax Compliance Act (FATCA), obtaining a Social Security Number, and the potential consequences of being an ‘Accidental American’ under enhanced IRS scrutiny.

How Do I Know if I’m an Accidental American? If you are not sure whether you are an accidental American, you can check your citizenship status by contacting the U.S. embassy or a U.S. consulate in your country of residence or by contacting the U.S. Citizenship and Immigration Services (USCIS). You can also check your tax status by contacting the Internal Revenue Service (IRS) or by speaking with a qualified tax professional.

Am I American if I was born in America? Yes. According to Amendment XIV, Section 1, Clause 1 of the U.S. Constitution, anyone born in the United States is granted automatic citizenship, regardless of the tax or immigration status of their parents. Contact the U.S. Citizenship and Immigration Services (USCIS) if you’re unsure about your status.

Does the U.S. allow dual citizenship? Yes, the United States allows dual citizenship. An individual can be a citizen of the United States and a citizen of another country at the same time. However, it’s important to note that some other countries do not allow dual citizenship, or may have certain restrictions for dual citizens.

 

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