Are you an accidental American? Are you among the individuals who are considered a U.S. citizen – because you were born there or because you had at least one parent who is a U.S. citizen – but are unaware of this status? Then you must file income, estate, and gift tax returns with the IRS according to CNBC.
Earl of Manchester, England, may not feel like he is an American. The IRS would say otherwise. He is a so-called ‘Accidental American’.
The 54-year-old was born in Tennessee, to British parents. He stayed in the U.S. for about a year before moving to the United Kingdom, where he has lived ever since.
“I have an American birth certificate and a document that’s a registry of live birth from the British consulate,” Earl said. “I’ve always considered myself a British citizen.”
This wasn’t a problem until Earl opened a bank account in England and put down “Nashville” as his place of birth on the application.
His answer kicked off another request from the bank: “We need your Social Security number (SSN).”
Earl is among thousands of “accidental Americans” residing in Europe who are finding out that they are subject to tax reporting requirements from the IRS, as well as foreign account filings with the Treasury Department.
About 9 million Americans reside abroad, according to the U.S. Department of State. They are considered U.S. citizens but are unaware of their status. They may have been born in the U.S. but resided here briefly, or they have at least one parent who is a U.S. citizen.
The U.S. taxes individuals globally based on their citizenship, meaning they must file income, estate and gift tax returns with the IRS. They must also tell federal authorities about their foreign accounts.
Compliance can be complicated. Accidental Americans must obtain a Social Security number or an Individual Taxpayer Identification Number to report to the IRS and begin filing their taxes.
Further, foreign banks are required to share information with the IRS on their American account holders, so the institutions are now asking these customers for their Social Security number or ITIN.
If you’re someone who happens to be born in the U.S. to French or German parents and you leave at an early age, you don’t associate with being a U.S. person. One day, you get a letter from your bank saying you’re an American and that they need your Social Security number. Your first response is ‘I’m not American’. In that case you’re an accidental American.
But if you do not provide your bank with a SSN or ITIN, there is a change your bank account will be blocked.
At the heart of the matter is the Foreign Account Tax Compliance Act, or FATCA — the law which requires Americans to tell federal authorities about their foreign accounts.
These Americans must file a report of Foreign Bank and Financial Accounts, or FBAR, with the Treasury Department’s Financial Crimes Enforcement Network.
You’re required to file an FBAR if you had an interest in or signatory authority over at least one account outside the U.S., and the aggregate value of all the foreign accounts exceeded $10,000 at any time in the year.
Failure to submit an FBAR comes with hefty fines.There’s a $12,921 penalty for non-willful violations, while individuals who flout the law could face fines of up to $129,210 or 50% of the account.
Separately, citizens who file an FBAR may also need to submit Form 8938 to the IRS. This is known as a statement of specified foreign assets. Whether you’re required to submit this form depends on where you reside and whether your foreign asset holdings meet a set threshold.
The IRS has sought to simplify FATCA compliance for Americans abroad through streamlined compliance procedures and additional amnesty (Relief Procedures for Certain Former Citizens) for those who have given up their citizenship.
In both cases, these people must file back taxes. The complexity of tax compliance has led some Americans overseas to renounce their citizenship. More than 600 people took this step in the second quarter.
Foreign financial institutions have compliance requirements with FATCA — they must share with the IRS information on American account holders.The IRS gave these banks until the end of 2019 to obtain an ITIN or Social Security number for these clients or else face penalties.
Foreign financial institutions have to comply with FATCA, but the truth is that many U.S. citizens don’t have a Social Security number, and to get one is a pretty trying process.
These individuals must go to the U.S. embassy in their country of residence, apply for a Social Security number and provide an official birth certificate and additional documents to prove they’ve been living abroad all this time.
For instance, Xavier, 68, and originally born in Washington, D.C., has had to travel more than 300 miles to the Federal Benefits Unit at the U.S. embassy in Paris to apply for a Social Security number.
The authorities asked for an official birth certificate, which Xavier couldn’t obtain because he didn’t have sufficient documentation and proof of identity. He’s now working on getting an ITIN instead, which warrants another trip to the embassy.
“I can cope with this well: I speak English and I have time because I’m retired,” Xavier said. “Other people can’t do this so easily, and I maintain that some will never be able to follow this procedure.”
We, the founders of Americans Overseas, were born in the Netherlands and obtained our American nationality through our (American) mother.
When we heard about the US tax system for the first time around 2013, we were in total disbelief (it can’t be true!), anger (how can they do this?), fear (am I going to get fines or pick up other problems?), and panic (what should I do?). It is (unfortunately) true that there is an additional American tax levy. But there’s no information from local government, and when approached, the consulate referred us to the IRS, and the IRS was impenetrable.
That’s why we started this initiative to help people from all over the world by providing proper information about the US tax system to avoid unnecessary panic, and offering help free of obligation and free of charge. If needed, we have a network of affordable professionals (accountants) who can help you with your tax obligations.
If you have more questions about the new relief program you can contact us at Americans Overseas.
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