Accidental Americans: How to Catch Up on US Expat Taxes
At first glance, the term “Accidental Americans” doesn’t make a whole lot of sense — after all, how do you become an American by happenstance? But the truth is, Accidental Americans are surprisingly common. One banking organization put the figure at around 110,000, which is believed to be a very conservative estimate.
As American persons, all of these Accidental Americans have tax obligations, and failing to meet them can come with steep fines and serious penalties. Finding this out all of a sudden can be nerve-wracking, but it’s far from hopeless. Below, we’ll go over what an Accidental American is, what their tax obligations are, and how to get caught up on them.
What is an Accidental American?
The term “Accidental American” refers to someone who lives in another country and has no legal or cultural connection to the US, but whom the US government still considers to be a US person. And according to the US tax system, all US persons are subject to taxes, regardless of where they live.
It’s very possible to be a US person without realizing it. Any child born in the US is automatically considered a citizen at birth, regardless of how much time they later spend there. And the children of US citizens are also eligible for citizenship.
Let’s look at a couple of examples:
- Anne was born in the US, where her parents — who were born and raised in France — were completing their master’s degrees. The whole family moved back to France when Anne was two years old, where they have now lived for 20 years.
- Fernando’s mother, a US citizen, came to Argentina through a study abroad program decades ago. While there, she met and married Fernando’s father and had Fernando. The family has lived there ever since.
It’s not just citizens who can be Accidental Americans, though. Permanent residents can also be Accidental Americans, even if their green card has expired. Let’s bring an example to life:
- Terry was born and raised in Australia and lived there all his life until he moved to the US for work. He obtained a green card that was valid for 10 years but moved back to Australia in 2008, six years after receiving it.
Many Accidental Americans who are unaware of their status only find out about it when their bank contacts them after receiving an inquiry from the US government.
Read more: US Expat Taxes For Accidental Americans – What You Need To Know
Accidental Americans & US Taxes
In working with our own clients who are Accidental Americans, we understand (and empathize) – it oftentimes does not seem fair, but anyone considered a US person — whether they hold an expired green card, were born in the US, or acquired citizenship through a parent — must file taxes with the federal government, or face heavy fines.
The only way a US person can free themselves of this obligation is to officially renounce their US citizenship or abandon their green card. Both of these, however, are long and difficult bureaucratic processes that often come with their own financial penalties in the form of an exit tax. What’s more, doing so can make visiting or moving back to the US much more complicated.
As a result, many Accidental Americans choose to file their back taxes instead. Luckily, it’s often a quicker, simpler, and less expensive process than you might think.
Requirements of Filing
Each year, Accidental Americans must declare their income (even if earned abroad) on IRS Form 1040. They may also need to:
- Disclose their banking accounts in foreign countries (if the total of these accounts is $10,000 or more) using the Report of Foreign Bank Accounts (FBAR) on FinCEN Form 114
Catching Up With the Streamlined Filing Compliance Procedures
If you’ve just realized you qualify as an Accidental American and need to file back taxes, know that you’re far from alone. In fact, confusion around taxes is so common among expatriates that the IRS implemented a program called the Streamlined Filing Compliance Procedures, which allows taxpayers to catch up on their taxes without additional late fees or financial penalties. To qualify for this program, Accidental Americans must:
- Have a verifiable Tax Identification Number, or TIN (for individuals, this is almost always a Social Security number)
- Declare that their failure to file taxes was non-willful. In other words, they didn’t purposefully ignore their tax obligations — they just misunderstood or didn’t know about them
- Have spent at least 330 full days outside of the US in a given tax year and not maintained a US home
- Not have previously been subject to a civil investigation by the IRS
And of course:
- Agree to pay any taxes they may owe
If you do qualify for this program, you will need to file:
- Tax returns for the last three years that you’ve missed, using the 1040 Form and any other forms required according to your circumstances (such as Forms 8938, 3520, or 5471)
- An FBAR (FinCen Form 114a) for the last six years
- Form 14653, certifying and explaining why you fell behind on your taxes
After successfully filing these forms and paying any taxes associated with them, the IRS will consider you up-to-date on your taxes.
Read more: Streamlined Filing Compliance Procedure: The 6 Most Frequently Asked Questions (And Answers!)
Avoiding Double Taxation
More good news — even if you do owe back taxes as an Accidental American, you may owe a lot less than you’re worried about. The US has tax treaties with a number of other countries that prevent expats from paying taxes on the same income to two different countries. A couple of other items worth looking into:
The Foreign Tax Credit (FTC)
The FTC allows those who qualify for it and file Form 1116 to deduct the amount that they have paid to a foreign government from the amount of tax that they owe the US government. If you live in one of the many countries where the income tax is higher than in the US, you may not owe anything at all — you could even receive tax credits that you can apply toward future tax payments.
The Foreign Earned Income Exclusion (FEIE)
The other main opportunity worth looking into is the FEIE, which allows expats to exempt the first $112,000 (as of the 2022 tax year) of their earned income from taxation using Form 2555. This only applies to earned income, though — you can’t apply the FEIE to unearned income, like interest on investments or money from a trust fund. And if you rent your housing abroad, you can also claim the Foreign Housing Exclusion, which appears on the same form.
Whether the FTC, FEIE, or both are right for you is highly dependent on your individual circumstances, so it’s best to consult a tax professional first.
Expert help for Accidental Americans
Discovering that you’re an Accidental American and possibly owe years of back taxes can be stressful, but you don’t have to figure it all out alone. And, quite importantly, there are programs in place to help you get caught up, penalty-free.
At Bright!Tax, getting Accidental Americans up-to-date on their taxes — while minimizing tax liability — is one of our specialties. We’ll work with you to make the process as smooth as possible.
Reach out today to chat with one of our highly-qualified CPAs!