So, You’re an Accidental American. What’s Next?

Imagine living abroad all your life, never having visited or spent time in the US. One day, you are informed that you may be subject to thousands of dollars in penalties for failure to file and pay US taxes. Thus begins the journey of understanding the intricacies of US tax law for Accidental Americans.

What Is an Accidental American?

The typical story of an Accidental American — A US citizen who lives abroad and is unaware of their American taxpayer status and obligations.  This situation may arise in various ways: 

• They may be born in the US but leave the country soon after.
• They may be born abroad, but one or both of their parents are US citizens.
• In some circumstances, Green Card holders who let their Green Card expire without officially renouncing their immigration status are labeled Accidental Americans.

Such is the case with French resident Fabien Lehagre, who was born in the US but left at the age of two. Twenty-eight years later, he discovered he had US tax-filing obligations after receiving a letter from his bank asking for his US tax identification number. Soon after, he established the Association of Accidental Americans.

Taxes for Accidental Americans

Accidental Americans are subject to the same US tax obligations as any other American taxpayer. Unlike many other countries, the US practices citizenship-based taxation, meaning that individuals are taxed based on their citizenship rather than their residence. As a result, Accidental Americans’ worldwide income is subject to US taxes. 

It’s worth noting that there is no statute of limitations for unfiled tax returns, which means that the IRS can collect taxes, penalties, and interest for each year. Failure to file FBARs (Foreign Bank Account Report) for foreign financial accounts exceeding $10,000 can also result in significant penalties. Additionally, Americans living abroad may need to file additional reports for foreign businesses, investments, pensions, and trusts, which could lead to more penalties. 

How Can Accidental Americans Become Tax Compliant—Minus the Penalties?

Fortunately, a pathway toward compliance can help you avoid late filing, payment, and information return penalties. The IRS announced the availability of the Streamlined Filing Compliance Procedures in 2012 for those living abroad. Over the years, it has made changes, including making these procedures available to US residents.

Those that can benefit from streamlined filing procedures include individuals and estates of individuals.

To satisfy the Streamlined Filing Compliance Procedures:

• Taxpayers must certify that their failure to report all income, pay all taxes, and submit all information was due to non-willful conduct. Non-willful conduct includes negligence, inadvertence, or mistake or conducts resulting from a good-faith misunderstanding of the requirements of the law.
• The IRS must not have initiated an audit of the taxpayer’s returns for any taxable year.
• Any prior penalties relating to previously filed tax returns must be paid.
• The taxpayer must have a valid Social Security number or taxpayer identification number.

To use the Streamlined Filing Procedures:

• Submit complete FBAR returns for the most recent six years.
• If living outside the US: submit complete original individual income tax returns (or amended, if original returns have been filed), including all information returns, for the most recent three years for which the due date has passed. Ensure that you have lived outside the US for at least one year; a 330-day physical presence test outside the US must be met during this year.

Which Penalties Are Avoidable With the Streamlined Filing Procedures?

The IRS can impose a number of different penalties for not filing tax returns and paying taxes. The list is extensive, but the typical penalties assessed include failure to file penalties, failure to pay tax penalties in a timely manner, accuracy-related penalties, and substantial underreporting of income, which is a criminal charge. There are also a number of international-related penalties for not filing informational reports to provide information on foreign accounts, foreign financial assets, foreign company ownership, and foreign trust ownership through retirement or pension accounts.

Under the Streamlined Filing Procedures, all penalties can be waived. In addition, unfiled returns older than those included in a Streamlined filing generally do not need to be filed. 

Also, many taxpayers who get caught up find that no income taxes are owed when they utilize the Foreign Earned Income Exclusion (FEIE) or Foreign Tax Credit to offset their foreign income.

What If I Don’t Qualify for the Streamlined Filing Procedures?

There are certain situations where the Streamlined Filing Procedures are not available to taxpayers; for example, when lack of filing was willful. Taxpayers may have other options they can use if this is the case. These options include:

• IRS Criminal Investigation Voluntary Disclosure Program—this limits exposure to criminal prosecution
• Delinquent FBAR Submission Procedures—these procedures are in place for taxpayers without the requirement to file delinquent or amended income tax returns but who have not filed FBAR.
• Delinquent International Information Return Submission Procedures are in place for taxpayers who have no requirement to file delinquent or amended income tax returns but have not filed one or more required international information returns.

We Have Helped Many Accidental Americans Get Caught Up. We Can Help You, Too!

Several avenues are available to get caught up with US filing obligations that do not necessarily involve paying hefty penalties to the IRS. Greenback can help guide you through the process of what works best for you to become compliant with your US taxes. If you’re ready to be matched with a Greenback accountant, click the get started button below. For general questions on expat taxes or working with Greenback, contact our Customer Champions.