Following recent revelations that up to 40,000 Americans living in France are at risk of having their bank accounts closed at the end of this year, it transpires that US expats who haven’t provided their foreign bank with their social security number or ITIN (Individual Taxpayer Identification Number) around the world are faced with the same issue. In Europe alone, this equates to an estimated 300,000 people.
The majority of those affected are so-called Accidental Americans, folks who either have an American parent but have always lived abroad, or who were born in the States to foreign parents who were there temporarily (as students perhaps, or just on holiday). In both scenarios, they may never have claimed American citizenship, but because they have the right to, they are still supposed to file US taxes. The most famous Accidental American is perhaps Boris Johnson, the current UK Prime Minister, who was born in the US and who received a US capital gains and back taxes bill 45 years later when he sold his UK home.
US tax rules
Unlike most countries, the US taxes based on citizenship, so all US citizens are required to file US taxes, reporting their worldwide income. When they file, they can claim one or more IRS provisions to prevent double taxation and reduce their US tax bill, but they still have to file. They also have to report their foreign businesses, bank and investment accounts, and foreign assets, if they exceed certain total value thresholds.
In practice, US citizens abroad didn’t used to have to file, in the sense that the IRS had no way of enforcing US tax rules outside the US. This changed though with the introduction of the 2010 Foreign Account Tax Compliance Act (FATCA), which compels foreign banks to hand over their American account holders financial and contact data directly to the IRS. Almost all foreign banks and investment firms are now complying. Furthermore, the US has signed tax information sharing agreements with most foreign governments, so it knows which Americans should and shouldn’t be filing.
“British banks are terrified of huge fines from US regulators if they continue to serve US citizens but fail to share information with the US Internal Revenue Service.” – the Guardian
The new law
Under FATCA, foreign banks must provide their American account holders’ US social security numbers or ITINs to the IRS. Banks that don’t may face sanctions. Banks are relying on their account holders to provide these though, and some expats, including Accidental Americans, don’t normally have one, leaving banks in a position of having to either face IRS sanctions, or close Accidental Americans’ accounts.
The IRS gave banks until the end of 2019 to resolve the dilemma, accepting just account holders dates of birth in the interim, however there’s no easy way to provide SSNs or ITINs of folks who don’t have one, and as the deadline approaches, banks may be faced with no choice but to close Accidental Americans’ accounts to avoid sanctions.
In France, the chairman of the French Banking Federation recently wrote to the French foreign minister to make him aware of the situation and ask him to seek a solution. The issue is now making headlines in the UK, the Netherlands, Canada, and Belgium, too.
What Accidental Americans should do now
Accidental Americans are faced with a very difficult situation. If they don’t have a US social security number or ITIN, they face losing their bank accounts. If they now get one though, they will have to start filing US taxes. While most Americans living abroad don’t end up paying US taxes after claiming either the Foreign Earned Income Exclusion of the US Foreign Tax Credit, they will still incur costs filing. They should also be aware that there’s an IRS program called the Streamlined Procedure that allows Americans living abroad to catch up without facing penalties by filing just their last three tax returns.
Another option is renouncing US citizenship (or the right to it), however this also involves catching up with US tax filing first, and then paying a $2,350 renunciation fee.
Some Accidental Americans may benefit from obtaining a social security number or ITIN and filing US taxes though, such as parents who can also apply for US social security numbers for their children and then claim an annual $1,400 refundable Child Tax Credit payment, which over several years should more than outweigh the costs of compliance.
In the first instance, we recommend that Accidental Americans talk to their bank, and contact their elected representative, to ascertain their options, as well as discussing their situation with a reputable US expat tax specialist.