Are you an accidental American? At first, this may sound like a silly question. After all, a German person knows he is German, a Japanese person knows she is Japanese, and so forth. How could someone who has never lived in the United States and who does not identify with the United States, still be considered American by the U.S. tax authorities?
If you were born in the United States and/or hold a U.S. passport or green card, you will be considered an American for tax filing purposes in the United States.
In fact, there are numerous scenarios under which one would be considered a resident for tax purposes in the United States, even if they do not live in the U.S. or do not spend much time there:
- A person born in the United States and/or holding a U.S. passport
- A person possessing a U.S. green card
- A person with at least one parent who is a U.S. citizen
By U.S. Department of State estimates, there are nearly 9 million Americans living overseas. Normally, this would not be an issue, because most countries do not tax based on citizenship. However, the United States taxes its citizens globally, which means, if one is considered a U.S. person, they must file income taxes reporting their worldwide income, and, in some scenarios, also file estate and gift tax returns.
What’s more, a person considered a U.S. tax resident must also report ownership of their foreign bank accounts and pension accounts, not to mention any ownership in foreign corporations that is greater than 10 percent of the entity, as well as ownership of foreign mutual funds, among other reporting requirements.
To further complicate matters, many people who may be considered U.S. persons for tax purposes and have U.S. tax filing obligations will need to obtain a tax identification number in order to file a tax return. Obtaining a tax ID number such as a Social Security number or individual tax identification number (ITIN) requires documentation (such as a birth certificate) to be provided and special forms to be submitted along with their tax return. For someone living outside the United States, this may be a challenge, as they may need to submit a Form W-7 to obtain a tax ID number with an acceptance agent certified by the Internal Revenue Service (IRS). To date, there are no more than a handful of acceptance agents in the entire country of Australia, for instance, so even doing this presents challenges.
Given that these challenges exist, what if one finds out they have a U.S. tax filing obligation but does nothing about it? What are some of the penalties associated with non-compliance in U.S. tax matters? In addition to the failure-to-file penalty (which occurs when one does not file a tax return or files a late tax return), failure-to-pay penalty (which occurs when one files a tax return but does not pay the tax owed on a timely basis), and interest charged on the amount of tax owed, there are numerous penalties associated with not reporting foreign assets, such as bank accounts.
For instance, if the non-compliance is deemed non-willful, the penalty for not filing a Form FinCEN 114 (also colloquially known as the FBAR) to report foreign bank accounts can be $10,000 per year per account. If the non-compliance is deemed willful, the penalty can be up to 50 percent of the account balance. If the non-compliance is deemed to be a criminal rather than a civil case, the penalty can be up to $250,000 and 5 years in prison. Further, as part of the Foreign Account Tax Compliance Act (FATCA), foreign financial institutions are required to share with the IRS information on their American clients, or face penalties themselves.
Therefore, if you were born in the United States, even if you do not live there or have never lived there, but you have not filed a U.S. tax return, you may currently have a tax filing obligation. Further, you may also have a potential filing obligation if at least one of your parents is American and they hold assets such as property, or they have gifted a certain amount of money or property to you.
In these sorts of scenarios, you may very well be in non-compliance with U.S. tax obligations and will likely require the assistance of a professional well-versed with helping Americans get back on track with their tax filing obligations while minimizing or eliminating any risk exposure and penalties.
If you are an accidental American, and you have not filed tax returns or reported foreign assets, you may currently be “off the grid”, but you only have one shot at getting back on the grid. We recommend you engage the services of a qualified tax professional experienced in dealing with U.S. expat tax matters.
The Asena group of companies and its partner firms specialize in assisting U.S. taxpayers living overseas with their tax filing obligations in a professional, courteous, and kind manner. Please get in touch with us today for a no-obligation consultation to determine whether you may have U.S. tax filing obligations.