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Emigration from the United States is quite a complex process. The emigrants or the emigrants’ children can be subject to US tax liabilities even if they have never set foot in the US. As we know, the United States stands amidst the very few countries in the world that use “citizenship-based taxation” rather than a territorial based system. It is safe to say that this citizenship-based taxation system creates all the fuss.

A State Department estimate suggested that there may be more than 9 million US citizens living abroad. Out of this, a whopping number of US citizens have no clue about their US citizenship and the different obligations that entail with it. This article will help you get a fair idea of accidental American citizenship, tax obligations, and how citizenship can be relinquished.

Who is an accidental American?

Simply put, an accidental American is a person who lives abroad but is still considered a US citizen according to US laws. There can be several ways a person might fall into the category of “accidental Americans”:

  • If a person was born to American parents while living abroad, he/she is considered a US citizen. Since the person is born in a foreign country, he/she is automatically a citizen of that country. But, as he/she is born to American parents, he/she also gets American citizenship.
  • Another scenario in which someone becomes an accidental American is when they are born in the US territory and leave at a very young age or as infants. In this case, even if neither parent is a US citizen, the child will still get US citizenship. So the bottom line is anyone born in the US territory is considered a US citizen.


Tax obligations for Accidental Americans

President William Clinton signed the Immigration and Nationality Technical Corrections Act (INTCA) on October 24, 1994. This act abolished the requirement to reside in the US to retain citizenship. It means the taxes have to be filed based on citizenship and not the location of residence. This fact raises the need for accidental Americans to file tax returns in the USA, even if they reside in foreign countries.

Even if they never visited the US before, Accidental Americans are liable to tax policies like any other regular US citizen. They are also entitled to enjoy the same privileges as any other US citizen. Unfortunately, for someone who does not intend to reside in the US, paying taxes can be frustrating.

Following are the various tax obligations one can have as an accidental American:

  • Filing tax returns in the US

Reports filed with the IRS or local tax collection agencies contain information used to calculate Income tax and other taxes. Accidental Americans must file income, estate, and gift tax returns with the IRS (Internal Revenue Service). They also need to have a nine-digit number called the Social Security Number (SSN). The US government uses the SSN to keep track of the lifetime earnings and the number of years worked. An accidental American must have his/her social security number to file their US tax returns.

  • Taxes on worldwide income

Worldwide income refers to the income generated by a person in any part of the world. According to US tax laws, accidental Americans are subject to tax on worldwide incomes. The money earned by the accidental Americans as wages, pensions, rents, royalties, and investments are subject to tax by the IRS.

  • FATCA

The Foreign Account Tax Compliance Act or FATCA is an effort of the US government to combat tax evasions by US citizens holding financial assets in foreign countries. According to this tax compliance act, US taxpayers who have financial assets of an aggregate value of more than $50,000 need to report these assets’ information on Form 8938. Accidental Americans are also liable for reporting the financial assets to the US government. Failing to comply may lead to fines and penalties.

  • Form 3520 and 3520-A

A foreign trust with at least one US owner needs to file Form 3520-A annually. Form 3520-A provides information about the trust, its US beneficiaries, and the US person(s) who claims to be the owner(s) of any part of the trust. Form 3520 is different from 3520-A in terms that it also includes gift transactions. Transactions, including foreign trust, foreign gifts, or foreign benefaction, need to be reported to the IRS by filing the form 3520.

  • IRS forms 5471 and 5472

A US company that has a foreign owner or shareholder needs to file form 5472 with the IRS. More aptly, Form 5472 is an information return of a 25% foreign-owned US corporation or a foreign corporation engaged in the US Business. Form 5471 is also an information return, but it needs to be filed to the IRS by foreign companies owned by US persons.

  • PFIC- Passive Foreign Investment Company

It is a foreign corporation where either at least 75% of the gross income is “passive,” or at least 50% of the company assets are investments. PFICs are subject to extremely strict tax guidelines by the IRS. US investors who own shares of any PFIC need to file IRS form 8621.

Difficulties faced by accidental Americans

  • Lack of knowledge of US laws:

For someone who does not live in the US, being informed of the US laws is very unlikely. When one day, suddenly, a person realizes that he needs to file taxes in a country he does not even live in, it is natural to panic. We agree that US citizenship and tax laws are quite complex and can be difficult to understand.

  • Unaware of the need to file taxes:

Being an offspring of an American citizen(s) or being born in the US territory automatically makes one a US citizen is quite bizarre to most people. Most of the time, they are unaware that they need to file various taxes in the US regardless of the country of residence. It invites inevitable chaos in the lives of accidental Americans.

  • Obtaining SSN:

Even simple processes like opening a bank account and getting a new job can become complex for accidental Americans if they do not have their SSN. Not having SSN can become a huge stumbling block for such people. Social Security Number is necessary for every accidental American, but obtaining one can be tumultuous. Such individuals need to visit the US embassy in the country they reside in and apply for the SSN. It can be a tiresome process.

Relinquishing citizenship

These difficulties persuade most accidental Americans to renounce their US citizenship. Section 349 of the Immigration and Nationality Act (INA) governs a US citizen’s right to surrender his or her US citizenship. A person wishing to relinquish his/her US citizenship needs to visit the US embassy in the country they live in and sign the oath of renunciation.

But further complexities arise for people who are Long-term Residents (LTR) of the US. Long—term US residents need to fill a form known as “Form 8854”. Accidental Americans automatically come into the category of long term residents as they hold US citizenship since the day they were born.

Form 8854 (Part I and II) has to be filed by an accidental American looking forward to renouncing his/her citizenship. Form 8854 also needs to be filed by anyone who expatriated (relinquished US citizenship and terminated long-term residency) on or after June 24, 2004.

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