Are You an Accidental American?

Understanding Your International Tax Obligations

Could I be an Accidental American?

It’s a common question, as a surge of individuals have moved abroad or have family connections within the U.S., coupled with a lack of understanding regarding international tax obligations. We’ve provided some common questions and answers based on real conversations with Americans living abroad and foreign advisors with American clients.

How do I know if I’m an Accidental American?

In general, an Accidental American is a person that is deemed to be a U.S. citizen by U.S. laws, but barely has any tangible connections to America. The following are two common scenarios:

• You were born in the U.S., but you, your parents and/or your family left soon after you were born – children born in the U.S. are technically U.S. citizens.
• You were born abroad, but at least one of your parents is a U.S. citizen – children born to a U.S. parent obtain U.S. citizenship.

Do I still have to report and pay taxes even though I don’t live and work in America anymore?

Yes, unlike many other countries, the U.S. taxes its citizens on a worldwide basis instead of a territorial basis. U.S. citizens are taxed based on their citizenship regardless of where they are living and working. Your residency does not preclude you from reporting your income and paying your taxes in America. This requirement also applies to those who are Accidental Americans.

Am I subject to U.S. estate tax as an Accidental American?

Accidental Americans can face unique estate tax implications because, as technically a U.S. citizen, you would be subject to U.S. estate tax laws, which impose a tax on the transfer of assets at death. As a U.S. citizen, you are subject to worldwide estate taxation, meaning global assets are subject to U.S. estate tax regardless of where they reside or their assets are located. The current estate tax exemption (as of 2024) is $13.46 million, but this limit is set to decrease after 2025 unless Congress acts. For Accidental Americans, this can create challenges if they reside in a country with its own estate tax regime, potentially leading to double taxation. Additionally, compliance with U.S. tax reporting obligations, such as filing annual tax returns and potentially an estate tax return upon death, can be burdensome. It is crucial that Accidental Americans seek legal and financial advice to navigate such complexities, as failure to comply may lead to penalties or complications for heirs.

How will the U.S. ever know that I’m an Accidental American?

The truth is that it isn’t a problem until it’s a problem, and there are several instances in which your Accidental American status becomes prominent. One way is through attempting to enter the U.S. on a non-U.S. passport, especially since the U.S. requires its citizens to enter using a U.S. passport. Another way is through the Foreign Account Tax Compliance Act (FATCA), through which the U.S. entered agreements with many other countries to identify U.S. citizens. Most financial institutions around the world now require their customers to verify their U.S. citizenship status through Know Your Client (KYC) procedures. There are also harsh penalties placed on foreign banks for not reporting information on U.S. citizens to the Internal Revenue Service (IRS). In some instances, banks have closed the account of their customers after discovering they are American to avoid the hassle of reporting to the IRS. A person’s American status is also discovered when the person is named the beneficiary of a deceased U.S. family member’s estate. This means you will need to apply for a U.S. tax ID to provide to the estate, and you’ll have to file a U.S. tax return to report any income associated with your distributions until the estate is closed.

Accidental Americans can also be impacted by other filing requirements. For instance, the Foreign Bank and Financial Accounts (FBAR) filing requires any and all foreign bank accounts that reach over $10,000 at any given time in a calendar year to be reported. There are also several different filing requirements that could apply to your specific tax situation, and there could be large penalties and interest for never filing a tax return.

Can these penalties and interests be avoided?

Fortunately, there are options available for compliance while avoiding some penalties and interest. The IRS designed the Streamlined Filing Compliance Procedures for Americans living abroad who are certifying that their failure to file was not a result of willful conduct. The eligibility criteria for the streamlined program include:

• Certifying your intent – You must certify that your failure to report all income, pay all taxes and submit all information was due to non-will conduct, or that your lack of compliance was a result of a good faith misunderstanding of the requirements of the U.S. law.
• Not in civil examination – The IRS must not have initiated a civil examination of your tax returns for any taxable year.
• Prior penalties – If applicable, you must pay in full any penalties relating to previously filed U.S. tax returns before submitting any returns under this procedure.
• SSN/ITIN – You must have a valid Social Security Number or valid Individual Tax Identification Number.

What if I already paid taxes and/or reported in the country where I’m a resident?

There is some relief when reporting and paying taxes in the U.S if you’ve already reported and paid taxes in the jurisdiction of your tax residence. For example, the Foreign Earned Income Exclusion, Foreign Tax Credits and other Treaty Benefits may apply to you when reporting your income to the U.S.

If you’ve determined that you are an Accidental American, you can seek the help of a trusted advisor to help you navigate your situation. Windham Brannon’s international tax experts are here to help you with the tax obligations that Accidental Americans face. If you need support, please reach out to your Windham Brannon advisor, or contact Brandi Samuel.