IRS Announces Penalty and Tax Free Path to Renouncing US Citizenship For Accidental Americans
Following the recent revelations that hundreds of thousands of Accidental Americans around the world face having their bank accounts closed at the end of 2019, the IRS has announced a penalty and tax free path that will allow many of these individuals to renounce their US citizenship without paying any penalties, and so keep their bank and investment accounts open.
Accidental Americans are foreigners who are born with the right to American citizenship but never take it up. This may mean that they were born and always lived abroad but they have at least one American parent, or that they were born in the US to foreign parents who were only in the States temporarily.
Because the US has a citizenship-based taxation system, all American citizens, including people with the right to US citizenship, are required to file US taxes every year, reporting their worldwide income, wherever in the world they live. This includes US expats as well as Accidental Americans.
The 2010 Foreign Account Tax Compliance Act (FATCA) requires all foreign banks to report their US citizen account holders’ details directly to the IRS, including their name, address, account number, US social security or ITIN (Individual Taxpayer Identification Number), and account balance. Foreign banks that don’t provide this information have to pay a steep tax when they trade in US markets.
Because Accidental Americans often don’t have a US SSN or ITIN though, the IRS introduced a temporary exception allowing them to just provide their clients’ date of birth, however the exception expires at the end of this year. At this time, all foreign banks with Accidental American clients who don’t have a SSN or ITIN will have to choose between either having to paying the FATCA tax, or closing their Accidental Americans’ accounts.
The IRS has now launched a possible solution though, allowing Accidental Americans to renounce their US citizenship without paying any back taxes or penalties, or requiring a US SSN or ITIN. This way they will be able to avoid the threat of their bank (and investment) accounts being closed, and be free from the US tax system permanently.
“The Relief Procedures for Certain Former Citizens apply only to individuals who have not filed U.S. tax returns as U.S. citizens or residents, owe a limited amount of back taxes to the United States and have net assets of less than $2 million.” – the IRS
The new program is called Relief Procedures for Certain Former Citizens, and it allows qualifying Americans who have renounced US citizenship since 2010, or who intend to renounce US citizenship, but who haven’t been filing US tax returns, to become compliant and set the matter to rest without paying any back taxes or penalties.
To qualify for the Relief Procedures for Certain Former Citizens program, a person must:
– have renounced or intend to renounce their US citizenship after 2010
– never having willfully (i.e. intentionally) avoided their US tax filing or reporting requirements
– have an aggregate tax liability of no more than $25,000 for the current year and previous five tax years (after application of all applicable deductions, exclusions, exemptions, and credits, including the Foreign Earned Income Exclusion and the Foreign Tax Credit)
– have net assets of less than $2 million.
What to do
Under the rules of the Relief Procedures for Certain Former Citizens program, Accidental Americans need to file the current year federal tax return (and FBAR – Foreign Bank Account Report – to report their foreign bank and investment accounts), as well as the previous 5 years tax returns and FBARs, if applicable.
They will then be able to renounce their US citizenship, without needing a US SSN, in complete US tax compliance and without facing any back taxes, penalties, or an exit tax.
Any Americans abroad who need assistance with their US tax situation should consult an expat tax specialist at the earliest opportunity to avoid fines and seek the most beneficial path forward given their circumstances.
Another program exists for regular US expats who are behind with their filing and who want to become compliant voluntarily without paying penalties but not renounce their US citizenship called the Streamlined Procedure.