Americans Living Abroad Becoming Trapped by Citizenship Based Tax Rules

by Ray Clancy on February 13, 2015

Accidental Americans are finding themselves caught in a tax trap as they are considered liable for payments even if they have never set foot in the United States.

These are people who consider themselves foreigners but in fact they are not. They live in a foreign country but hold dual citizenship, whether or not they know it. They are considered US citizens and therefore have US federal tax obligations and perhaps even foreign bank account reporting requirements.

Because the US is one of the only countries that employs citizenship based taxation system, meaning the worldwide income of Americans is taxable regardless of where you live.


US is one of the only countries that employs a citizenship-based taxation system, meaning the worldwide income of Americans is taxable regardless of where you live.

According to Greenback Expat Tax Services, these accidental Americans are finding out that they may owe the IRS for many years of unpaid taxes and unreported bank accounts and the amounts and penalties can be crippling.

There firm points out that there are several ways people could fall into this category. One common scenario is when a person was born while their American parent(s) was living abroad. They are an American, albeit Accidental.

Another could be if an individual was born on US soil while his foreign parents were in the country but they quickly returned to their country of origin to raise their child. That would still make the child an American.

Yet another situation could be created from a basic lack of knowledge. For people who choose to become naturalized citizen elsewhere, may believe that this action automatically ends their American citizenship. It doesn’t. Unless they file and obtain a Certificate of Loss of Nationality from the US Department of State, they will possess dual citizenship and remain a US citizen with tax obligations.

‘Up until recently, the IRS wasn’t actively pursuing the delinquent taxes of those Americans living abroad, so accidental Americans were never alerted to their surprising citizenship status,’ said a spokesman.

‘But that’s all changed. In 2010, the US launched a major initiative to uncover tax cheats hiding money and assets abroad. The most well-known part of this initiative is FATCA, the Foreign Account Tax Compliance Act. FATCA requires taxpayers to report specified foreign assets if they exceed certain thresholds, which vary based on filing status and residency. In addition, foreign financial institutions are now required to report on the assets of their American clients,’ he explained.

‘With FATCA making global headlines, it has become clear to Americans abroad that the long arm of the law will eventually reach them. Many accidental Americans are realising that they should have been reporting foreign bank accounts and filing US taxes. With so much information being disseminated about US taxpayers’ filing obligations and the ability to access anything from anywhere on the world wide web, ignorance is no longer a valid excuse with the IRS,’ he added.

The firm points out that while this group aren’t the intended ‘targets’ of US initiatives, the search for crooks has opened up the door of unfulfilled tax obligations of millions of US expats and accidental Americans. ‘They are caught in the crossfire of this massive legislative ac and the financial implications for the innocent but overseas can be extreme,’ the spokesman explained.

‘The US has a very complex tax system which is based on citizenship, not location. With a citizenship criterion that is different than many other countries, this can create a difficult situation for US citizens living abroad, especially individuals who may not have realised they were US citizens and had any filing/reporting requirements to the US Government,’ he concluded.

{ 1 comment… read it below or add one }

John February 14, 2015 at 11:17 am

It infuriates me that I have to report all of my financial information to America, and I am pretty sure that if they tried to penalize me on errors, I would readily go to jail rather than pay. This is my hard-earned retirement money. I have a wife who depends on it and children at school I help fund. This is a practice you’d expect in Russia, China, or back in Nazi Germany, not in the land of the free. It is becoming intolerable for us expats. How myopic and stupid can America get?


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