Why tax matters are complicated for ‘accidental Americans’

Tom LR Griffiths from Ingleton Partners on the challenges faced by "accidental Americans" in ensuring compliance with the IRS

The world of tax compliance for US expats is complicated enough. But for a category termed ‘accidental Americans’, the battle with the Inland Revenue Service (IRS) is even more challenging. 

An accidental American is a person who is considered by the IRS to be a US citizen. However, the person in question is completely unaware of their situation. For example, they could have been born in the US but only lived there very briefly before moving to the UK. Or, they could have one US citizen parent and one UK citizen parent. 

Accidental Americans must file tax returns 

Accidental Americans must file income tax returns with the IRS. They are also obliged to file gift and estate tax returns where applicable and report any foreign accounts they have to federal authorities. In order to become compliant, accidental Americans need a Social Security number or an Individual Taxpayer Identification Number (ITIN). This further complicates the situation for people who don’t even realise they are obliged to file. 

For example, let’s examine a person born in the US to fully British parents. She stayed in the US after birth for around 12 months before moving to the UK, where she has remained ever since. Although she considers herself to be British, the IRS, insist she is a US citizen. 

They may not even find out there’s a problem until they open a bank account and put down a US city as place of birth. Even if they consider themselves British, telling a bank their place of birth will today prompt a request for a Social Security number. This is because all banks are required to automatically report foreign bank accounts held by US expats to the IRS. 

Unexpected tax obligations with the IRS

There are thousands of accidental Americans living in countries throughout Europe. They may have never known their obligations but are now discovering they have to file taxes with the IRS and file foreign account information with the US Treasury department. 

According to the US State Department, there are a total of around nine million US expats living abroad. But accidental Americans don’t consider themselves as an American living abroad – they see themselves as a citizen of the country they live in. 

Those who have discovered then need to comply, and are trying to do so, find the process difficult. In order to get hold of a Social Security number or an ITIN, they need to track down a lot of documentation. All of this must be sorted before they can file taxes. 

As foreign banks must share information with the IRS about US-owned bank accounts, they are now requesting ITIN and Social Security numbers. Which is how many accidental Americans are finding out they have any kind of obligation with the IRS at all. 

It’s all about the Foreign Account Tax Compliance Act

The Foreign Account Tax Compliance Act (FATCA) is at the heart of the issue. This is the law that requires US expats and citizens to tell the IRS about their foreign accounts. 

To do this, they must file an FBAR (Foreign Bank and Financial Accounts) with the US Treasury’s Financial Crimes Enforcement Network. Any US citizen with at least one account outside of America, and whose total accounts have reached $10,000 at any one time during the tax year, must file an FBAR. Failure to do so can mean sizeable fines. 

Violations considered to be ‘non-wilful’ by the IRS lead to a $12,921 penalty. People who deliberately decide not to file an FBAR can be fined up to $129,210, or half oef the value of their account. 

As well as filing an FBAR, US citizens must also file Form 8938 to the IRS. This covers foreign assets. Not everyone must file this form, whether you need to or not depends on where you live and whether your asset holdings reach a specific threshold.

Streamlined procedures and amnesty programmes

Amnesty programmes were introduced by the IRS to simplify FATCA compliance for US expats. These streamlined compliance procedures are available for those who haven’t been compliant and involve filing three years of back taxes to fulfil their obligations. 

Additional amnesty is available for people who have renounced their US citizenship. Under both schemes, they must still file and pay back taxes to the IRS. More than 600 former US citizens renounced their citizenship in Q2 2019 accord to the IRS, in a move to avoid the complexity of US tax compliance. 

As previously mentioned, under FATCA, foreign banks must share information directly with the IRS about any American account holders on their books. They have until 2019 under rules by the IRS to obtain either a Social Security number or an ITIN from US citizens or they themselves will be penalised. 

The problem is, many US expats simply don’t have a Social Security number, and obtaining one is not easy. They have to go to the US embassy in the country where they’re living. To apply for a Social Security number at the embassy they must provide an official birth certificate and documents that clearly prove where they have been living. 

If you are an ‘accidental American’ or a US expat living in the UK and you’re unsure about your tax obligations, contact the team at Ingleton Partners.  We have decades of experience in navigating the vagaries of the US tax system, and can help you become compliant.