Are you an accidental American, wondering what are the repercussions of your new found identity? Believe it or not, millions of people around the world are classified as “accidental Americans”, which means they hold American citizenship they never knew they had, subjecting them to unexpected tax burdens and reporting requirements.  Sounds confusing? You’re not alone.  This article will unpack the mysteries of accidental American status, explore your options, and help you navigate the path forward.

How did I become an accidental American?

The path to accidental American citizenship can be as surprising as the status itself, as there are multiple reasons that lead to accidental American status:

• By birth: If you are born in the United-States, you automatically become an American citizen.
• Green Card holder: If you currently have a green card (even if expired), you are considered a U.S. person until your green card is either revoked or ‘properly surrendered’ to the Department of Homeland Security.
• By residency: Many people don´t know that you are only permitted a certain number of days in the United States before it is necessary to file U.S. taxes as a resident. The ‘substantial presence test’ determines whether your time in the United-States makes you a U.S. resident. 
• By family relation: If one of your parents is an U.S. citizen who was born or has spent at least 5 years in the U.S., you are an American citizen. 

Taxing Times for Accidental Americans 

Accidental Americans are often unaware of the US tax and financial reporting requirements associated with their US nationality. The United-States and Eritrea are the only two countries in the world that tax based on citizenship,(link to future article about citizen based taxation) not residency. In other words, even if they’ve never set foot in the United-States, accidental Americans are still obligated to file U.S. taxes. All Americans, irrespective of where they live, are obligated to report their worldwide income, assets, and investments to the Internal Revenue Service (IRS). It may not necessarily mean you owe taxes, but the reporting obligation still stands.

How to “streamline” your U.S. tax responsibilities

In 2012, the US federal tax authority introduced the Streamlined Foreign Offshore Procedures (“Streamlined”) for accidental Americans to get back on track with their US tax compliance. One benefit of this program is the reduction of penalties if an individual qualifies for the “Streamlined” filing procedures. However, it’s uncertain if the program will stay around for much longer, as it will certainly not last forever. We recommend reaching out to a Harrison Brook advisor to help you find a qualified tax advisor.

Banking options for Accidental Americans

Many people can thank their local bank for their discovery of their accidental American status. Under the Foreign Account Tax Compliance Act (FATCA) rules, financial institutions worldwide are required to report the assets of U.S. citizens, and are often the first to reveal to their customers that they are accidental Americans. 

Unfortunately, this usually puts into light the banking and financial limitations that Americans living abroad may face:

• Many foreign banks refuse to take on American clients due to the additional reporting obligations, which leaves them with less banking options. 
• Americans must declare all their financial accounts and assets to the IRS, as well as the US Treasury Department via the FBAR filing. 
• Certain foreign financial products, especially investments as we´ll see below, can bear a heavy US tax burden.   

The hoops and hurdles of investing as an Accidental American

One of the biggest financial issues of being an accidental American is discovering that many of your investments are heavily taxed in the US. This is the case for example of Assurance Vie accounts in France or Individual Savings Accounts (ISA) in the U.K. These accounts are considered PFICs by the IRS which are subjected to a heavy US tax burden. If your assets are not compliant with US tax rules regarding overseas investments, you may suffer a much higher tax rate than if your portfolio was correctly structured. Whereas, if you make the disastrous decision to not declare them, the penalties are quite severe. All accounts and investments should be discussed with an experienced cross-border advisor at Harrison Brook to assure that they are correctly invested and that you are not left with a heavy tax burden.

Renouncing U.S. Citizenship

Given these taxation dilemmas, some accidental Americans might wonder if they can simply renounce their U.S. citizenship. It’s a significant decision on the emotional front, but unfortunately, it is also costly, as there is a substantial processing fee, and some individuals may be subject to an exit tax. 

What to do if you are an accidental American?

We understand it can be a strange reality to be an accidental American, where you are considered a US national, but do not feel connected to the United-States either socially or patriotically. If you feel overwhelmed or confused with the legal implications, working with experienced, cross-border professionals can bring clarity, and ensure things are done correctly in order to avoid costly mistakes. 

At Harrison Brook, we have done the legwork to find the partners that comply with the complex web of regulations facing U.S.-connected individuals. We work hand in hand with a top-notch team of leading international estate, immigration and tax advisors in order to manage your finances properly. Harrison Brook is here to assist you with your cross-border financial needs, so don’t hesitate to book a meeting with us.