Accidental American Status Tax Liabilities
Accidental American Status Can Lead to Huge Tax Liabilities
Having status as an American citizen, legal permanent resident, and other circumstances can translate into a tax obligation to the US government. People who are unsure about their status are not advised to wait and see what happens in the end. Contrary wise, they should look into this question to determine their status and whether any tax obligation is owed to the United States government. The best course of action is to tackle the situation head-on before it deteriorates into what could potentially become a major tax headache.
That said, this line of thinking begs the question of how is it possible for anyone to become an accidental American citizen? In facr, there are several ways one can end up in such a situation, but there are a few archetypal circumstances under which such a mistake has greater chances of taking place.
How can a Person Unknowingly Have or Fail to Realize That They have US Citizenship?
By United States law, people born in the United States automatically receive citizenship. They are in a class of individuals that hold birthright citizenship. Sometimes people are born here, but because, as babies, they are brought back to the country of their parents’ citizenship shortly after they are born, they are not aware that they are citizens of the US by birthright and may not learn until they are well into adulthood that they have U.S. citizenship.
There are some cases in which, in light of personal or financial situation, one may come to the conclusion that he no longer desires to be American. For example, in a letter written by expatriates to then President Obama, a couple recounted their experience when they unexpectedly had to relocate from the US to Toronto, Canada. While the couple originally intended to keep their U.S. citizenship, the wife’s career as a lawyer required her to also become a Canadian citizen and then take and pass the Ontario bar exam in order to practice. After forty-three years residing in Canada with their daughter, holding both U.S. and Canadian passports, they sent their letter.
What they related was that because of the way in which the U.S. government’s handles taxes, including FBAR and FATCA disclosure requirements they, “feel like second class citizens at best, or criminals at worst.” She spoke of the numerous filing obligations that she said made her feel guilty and under undue pressure prove her own innocence. She went on to highlight the tax disadvantages expatriates are subject to, including the United States’ government’s near-punitive procedures of Canadian mutual funds. Americans living in the U.S. pay 15 percent on domestic capital gains while Americans living in Canada pay taxes at 38 percent on comparable investments.
In closing, she lamented that “we are not alone in contemplating or taking this very dramatic and previously inconceivable step of relinquishing our U.S. citizenship. What a sad state of affairs for America and for its citizens everywhere.”
Amount of Expatriating Americans Reaches All-Time Highs
Internal Revenue Code section 6039G of the Health Insurance Portability and Accountability Act (HIPAA) of 1996 requires the IRS to publish a list of U.S. citizens who have chosen to voluntarily relinquish their citizenship and expatriate. Although there are those who believe that the list may not be totally comprehensive, it does offer a lucid perspective on the how America’s global tax laws affect how Americans value their US citizenship and its obligations. The number of reported expatriations reach 31,415 in 2014 – the highest annual total since the statistic has been tracked. During the quarter 1 of 2015, 1,335 people had opted for expatriation putting 2015 on track to exceed 2014’s record total.
What can an Expatriate do Satisfy Their Tax Obligations?
There is always an opportunity for expatriates to comply with FACTA, FBAR, and all other tax filing and payment requirements. Indeed, for some citizens the procedures tend to be particularly cumbersome and expensive. Some people feel that maintaining a connection to the United States may no longer be viable. Nonetheless, citizens who desire to renounce their citizenship should not do so lightly. Renouncing your citizenship may get you out of your U.S. tax obligations, but it does not function as a “get out of jail free” card for past tax issues. Giving up U.S. citizenship also means that you would no longer be at liberty to enter and leave the United States freely as before or enjoy the benefits of citizenship.
In the first place, to renounce citizenship costs a renunciation fee of $2,350. If you had accounts in other countries that were left undisclosed, you are still obligated to deal with them, and civil penalties can significantly diminish the value of your accounts or eat up its entire value. Furthermore, U.S. citizens who have an average net worth of more than $2 million or average net income tax of $160,000 over the past five years are also required pay an exit tax.
OVDP and Streamlined Programs Provide Another Option
If you are already facing tax problems, giving up American citizenship might not be the most strategically or financially sound option. Streamlined compliance programs and Offshore Voluntary compliance programs can help taxpayers to mitigate the penalties they face while returning to full compliance with the U.S. Tax Code. If long-term liabilities and problems could potentially remain anyway, then it might make more sense to thoroughly review all the pros and cons of renouncing your citizenship.