The Accidental American

“The Accidental American” may sound like a film title but the consequences of being one are far more real than a Hollywood script would entertain.

With several high-profile cases over the past few years, including our own ex-Prime Minister, the concept of inadvertently being a US citizen may seem unusual, as you would expect everyone to know their own citizenship, but with the laws of the US being complex and far reaching it is not as straightforward as it may seem.

This article discusses who may be an Accidental American, the requirements this places upon them from a tax perspective, and the solutions to becoming compliant.

WHO IS AN ACCIDENTAL AMERICAN?

An Accidental American is generally an individual who is unaware that they are a US citizen and as a result is likely to be ignorant of their requirement to comply with US tax laws. However, there are also individuals who are fully aware of their US citizenship (such as those who hold US passports) but are not aware of the exposure that this creates from a US tax perspective.

WHY IS THIS RELEVANT?

Individuals who are US citizens are subject to the income tax laws of the United States regardless of where they happen to live and/or work in the world. This includes the requirement to file an annual income tax return (assuming the minimum income requirements are met) and pay any taxes that might be due. US citizens must also comply with other requirements such as the gift and estate tax regulations, and the requirement to file a foreign bank account report (FinCEN 114).

WHO IS A US CITIZEN?

Generally speaking, an individual will be a US citizen if either:

1. They are born in the United States, or
2. They are born outside of the United States and one parent is a US citizen who has lived in the US for a specified period

Note, those born in US territories may also be considered US citizens, however the rules around this are complex.

One of the most common reasons that someone ends up being an Accidental American occurs when they are born in the US to non-US parents who are present in the country for a brief period, such as a temporary work assignment. The individual often leaves the US at an early age and the parents are unaware of the requirements that birth in the US places upon them.

DOES US CITIZENSHIP AUTOMATICALLY PASS TO CHILDREN?

Not necessarily.

For children born outside of the US, citizenship only passes from parent to child if the parent lived in the US for a specified period. This specified period depends on several factors including the date of birth of the child, and the marital status and nationality of the parents.

As an example, if a child is born to one US citizen parent, who was married to a non-US citizen, then the US citizen parent would need to have been physically present in the US for at least 5 years, including 2 years after reaching the age of 14, for citizenship to be passed to the child.

HOW MIGHT THIS SITUATION BE DISCOVERED?

Many Accidental Americans go for years before an outside factor makes them aware of their US tax obligations.

Banks and other financial institutions are required by law to check for US connections and report these to the IRS. As a result, opening a new bank account or making a new investment can often inadvertently raise a US tax compliance issue.

Another trigger is when a US citizen comes to renew their US passport. The US Department of State may have a record of individuals with unpaid tax bills or unfiled tax returns and can, in many cases, withhold the applicant’s passport until such matters are settled.

WHAT ARE THE OPTIONS FOR AN ACCIDENTAL AMERICAN?

For individuals who are not compliant with their taxes there is the possibility of catching up by filing under the IRS streamlined offshore procedure, which involves filing 3 years of tax returns and 6 years of foreign bank account reports.

Under this procedure penalties may be mitigated assuming that the failure to file was non wilful. Tax and interest may be due on any balance owed to the IRS, however for those living abroad there are likely to be mechanisms to avoid double taxation.

Once the individual has caught up, they would then be required to comply with annual filing requirements like any regular US citizen.

IS IT POSSIBLE TO GIVE UP US CITIZENSHIP?

Relinquishing US citizenship is procedurally possible, but is a complex decision and there are a broad range of factors to consider from both a tax and immigration perspective e.g. the right to travel to, and work in, the US.

From a tax perspective, when relinquishing US citizenship individuals need to be aware that should income or general wealth exceed certain limits, then there is potential to be considered a ‘covered expatriate’ and an exit tax may apply. There are some exceptions to this rule based upon personal circumstances, however the exit tax would certainly apply where an individual is not currently compliant with tax return filings.

Please note, that a US citizen child who renounces their citizenship will not be subject to the exit tax as long as they do so before they reach 18.5 years of age, and on the basis that they have not been residing in the US for more than 10 taxable years prior to the relinquishment date.

HOW CAN WE HELP?

Assessing your options and becoming compliant with the law once you have determined that you or your child may be an Accidental American can be complex. If you would like assistance, our US tax specialists – Douglas Michael, Jessica Hodgson, or Niamh McKenna – or your usual AAB contact, would be happy to assist.