Around the world, “accidental Americans” living abroad are facing unexpected U.S. tax bills. Accidental Americans are people living abroad without any real ties to the United States, but who still have U.S. citizenship. America follows a citizenship-based taxation system, meaning U.S. citizens are subject to U.S. taxes on worldwide income, no matter where they live. This is resulting in many accidental Americans owing U.S. taxes on income earned in the countries where they live, often without even knowing they were American citizens.
This has come about because of the Foreign Account Tax Compliance Act (FATCA) enacted by Congress in 2008. FATCA requires non-U.S. financial institutions to report information on accounts owned by U.S. citizens. Because many accidental Americans are unaware of their American citizenship, they may unexpectedly discover multiple years’ worth of U.S. tax debt.
Becoming an Accidental American
There are several common ways for a person to become an accidental American, including the following scenarios:
Foreign Parents – Born in America
These people were born to foreign parents while they were visiting America. They are American citizens by virtue of being born in the U.S. However, they grew up in the foreign country after their parents returned from the U.S. and have no ties to America.
American Parents – Born in Foreign Country
Other accidental Americans were born to parents who were both U.S. citizens, but while they were living in a foreign country. This individual will become a citizen of the country where they were born and may live there until adulthood if their parents remain. But they are U.S. citizens based on their parents’ American citizenship.
Failure to Renounce U.S. Citizenship
These are U.S. citizens who permanently move to other countries, become citizens in those countries, but fail to renounce their U.S. citizenship. Many assume they are no longer American citizens. However, they actually maintain dual citizenship until they take active steps to renounce their U.S. citizenship.
FATCA Reporting and Taxation Requirements
FATCA requires foreign banks to report to the U.S. on financial accounts held by U.S. citizens. Foreign banks face high taxes when dealing in U.S. markets unless they comply with this reporting requirement. As a result, nearly all major foreign banks and financial firms will report this information, which includes balance amounts.
In addition, FATCA imposes IRS reporting requirements on U.S. citizens abroad. These requirements go into effect for foreign assets over a certain value, and only on certain types of assets, known as qualifying assets.
Accidental Americans With Unexpected U.S. Tax Debts
The effect of FATCA on accidental Americans has been unexpected U.S. tax debts, which are often substantial. Some examples from an NBC News report on the problem include the following:
- A 40-year-old French entrepreneur born in France to a French mother and American father. He was unknowingly a U.S. citizen because of his father’s American citizenship. His attorneys informed him he would owe over $100,000 in U.S. taxes on the sale of his business, even though he had already paid French taxes on the sale.
- A 33-year-old French commercial manager born in California to a French father and American mother. When he was two years old, his parents divorced and he moved to France with his father. He only discovered his U.S. citizenship and large U.S. tax bill when his French bank contacted him asking for his U.S. tax identification number.
Thorn Law Group | Washington DC International Tax Attorney
If you are facing U.S. tax issues related to foreign income, contact the Thorn Law Group today to see how a Washington DC international tax attorney can assist. For an immediate consultation, contact Kevin E. Thorn, Managing Partner, at 202-349-4033, or email him at email@example.com.