Things You Need to Know When it Comes to U.S. Taxes For Individuals: Accidental Americans

TAXATION

It is becoming more well-known that United States citizens have income tax filing requirements from their home country, regardless of where they reside. However, there are some people who do not know they hold U.S. citizenship. Are you potentially one of these “accidental Americans”? Read on to learn more …

What is an “accidental American”?

An “accidental American” is someone who has inadvertently acquired U.S. citizenship. This can include people in the following situations:

• A child is physically born in the United States, even though they may not have remained there.
• A child born in wedlock that:
  • has two U.S. citizen parents, and at least one parent resided physically in the United States or one of its outlying possessions at the time they were born

  or

  • has one U.S. citizen parent and one U.S. national parent (lawful permanent resident, or “green card holder”), and the U.S. citizen parent was physically present in the United States or one of its outlying possessions for at least one continuous year

  or

  • has one U.S. citizen parent and one non-U.S. parent, and the U.S. citizen parent was physically present in the United States for at least five years, with at least two of those years being after the parent was 14

Additional rules apply for a child born out of wedlock to U.S. citizen parents, and they have specific requirements depending on what year the child is born and whether it is the father or the mother that is the U.S. citizen.

As it can be complicated to determine whether someone in fact has U.S. citizenship, it will help to discuss your situation with a U.S. immigration lawyer.

What are your benefits and responsibilities as a U.S. citizen?

If you are a U.S. citizen, you are eligible to have and travel on a U.S. passport. Among the other benefits are that you can:

• travel to the United States without a visa
• vote in U.S. federal elections
• sponsor family members to move permanently to the United States
• obtain U.S. citizenship for your children

Generally, you would also have the responsibility to pledge allegiance to the United States and give up allegiances to other countries. However, some countries – notably Canada – have agreements in place with the United States for dual citizenship.

You must also file a U.S. income tax return to report your worldwide income annually, regardless of whether or not you are physically living in the United States. There are mechanisms, such as the foreign earned income exclusion or foreign tax credits, that will reduce or eliminate double taxation on the income reported in both the United States and the country where you physically live.

In addition to the income tax return, you may also be required to file additional information reports. Some of the more common ones include:

• FinCEN Form 114: Report of Foreign Bank and Financial Accounts (FBAR).
  • This form is required when the maximum value of all financial accounts outside of the United States that you own individually or jointly, or for which you have signing authority, exceeds $10,000 USD in aggregate.
• Form 5471: Information Return of U.S. Persons With Respect to Certain Foreign Corporations.
  • This form is required when you are a U.S. person with share holdings in a non-U.S. corporation. The required sections of the form are dictated on the share transactions that took place during the calendar year, as well as the percentage of ownership you have by vote or value.
• Form 8621: Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.
  • This form is required when you are a U.S. person with shareholdings in a non-U.S. corporation that is classified as a Passive Foreign Investment Company. Common examples are non-U.S. mutual funds, exchange traded funds and some real estate investment trusts.

To learn more about some common U.S. tax misconceptions, see the article Mistakes Canadians make with U.S. taxes in the previous issue of Business Matters.

What are your U.S. income tax voluntary disclosure options?

If you find yourself in the situation of being an “accidental American” and are delinquent on your U.S. income tax filings, there are voluntary disclosure programs available. Under these programs, you could be subject to lower civil penalties than the default penalty amounts or, if you qualify for the Streamlined Foreign Offshore Filing Compliance Procedures, you could potentially face no penalties.

The voluntary disclosure program that you qualify for depends on your situation. One determining factor is whether your delinquency was willful (on purpose) or non-willful (not on purpose). If your situation is more on the willful side of the spectrum, it is advisable to go through the voluntary disclosure process with a U.S. tax lawyer to reduce and/or avoid criminal penalties as well as civil penalties.

To learn more about the voluntary disclosure options available to you, see Voluntary Disclosures Program in the April issue of Business Matters.

Do you have to keep your U.S. citizenship?

Even though you may be an “accidental American,” you can choose whether to keep your U.S. citizenship.

However, as the renunciation is generally irrevocable – it cannot be reversed – it is not a decision to make lightly. If you are thinking of renouncing, please speak to a professional in the U.S. immigration space so that you avoid any potential issues. The websites below can give you further interpretation, but only a professional immigration counsel can advise on what would apply in your circumstances.

U.S. Citizenship and Immigration Services. Policy Manual. Chapter 3 – U.S. Citizens at Birth
https://www.uscis.gov/policy-manual/volume-12-part-h-chapter-3

U.S. Citizenship and Immigration Services. What Are the Benefits and Responsibilities of Citizenship?
https://www.uscis.gov/sites/default/files/document/guides/chapter2.pdf

U.S. Department of State – Bureau of Consular Affairs. Renunciation of U.S. Nationality Abroad
https://travel.state.gov/content/travel/en/legal/travel-legal-considerations/us-citizenship/Renunciation-US-Nationality-Abroad.html

Internal Revenue Service. Report of Foreign Bank and Financial Accounts (FBAR) (filing information)
https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-
accounts-fbar