As some of my readers know, I am now a contributor writing on Forbes. My coverage area is US international tax law for overseas Americans and foreigners. My article is copied below. It first appeared on Forbes April 9, here.
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While American citizenship often is perceived as a great privilege, not everyone sees it that way. In fact, many individuals unexpectedly face burdens with U.S. citizenship that are caused by the country’s complex web of immigration laws.
Birth within U.S. borders automatically confers citizenship, irrespective of the circumstances. This applies even if the child is born with a foreign citizenship and regardless of whether the child’s foreign parents were only temporarily present in the U.S. Certain visiting foreign diplomats are granted an exception.
Furthermore, children born overseas also acquire U.S. citizenship at birth if at least one parent is an American citizen who has lived in the country for at least five years, two of which had to occur after reaching age 14. It is understandable that people who acquire U.S. citizenship in this way but have lived abroad all their lives may never realize they have it. Birthright citizenship results even though the child’s birth is not registered with a U.S. embassy or consulate and even though the individual may not have ever received a U.S. passport.
The Complexities Of U.S. Immigration Rules
A compelling real-life story highlights the intricacies of U.S. immigration rules and how they can lead to unexpected results. A child is born to a mother holding dual Saudi Arabian and American citizenship. Although the mother was not born in the United States, she lived there from age 2 to 20, becoming a naturalized citizen at 19. After marrying a Saudi Arabian national at 20, she returned to Saudi Arabia, where the couple’s son was born.
The mother met the technical requirements of physical presence within the U.S. to bestow birthright citizenship to her son. But was this enough given the fact she was not a U.S. citizen until the age of 19 and left the country one year later? Despite leaving the U.S. a year after becoming a citizen, the child’s status as a citizen from birth was confirmed by two U.S. consulates.
The child’s parents were gravely concerned since U.S. citizenship caused frightening legal and tax complications. They sought to renounce their son’s U.S. citizenship, which could not be done under American law. Relinquishing citizenship is a personal right belonging solely to the individual. Another person (such as a parent or guardian) cannot act on behalf of the U.S. citizen (such as a child) to bring about renunciation. To renounce, the individual must undertake the expatriation voluntarily and with the requisite intent to relinquish the rights and privileges of U.S. citizenship. Children younger than age 16 are presumed not to have the requisite maturity and knowing intent.
The Plight Of The Accidental American
This kind of dilemma sheds light on the predicament faced by accidental Americans. They are individuals who are born with unexpected United States citizenship, typically do not live in the country, have firmly established lives elsewhere, probably don’t have a U.S. passport, and may not even visit the country. They often learn of their U.S. status when contacted by their foreign financial institution, which is following legal requirements to report U.S. persons under the U.S. Foreign Account Tax Compliance Act.
Accidental Americans are still subject to the gamut of U.S. tax and financial asset reporting laws but often do not understand their obligations. They must annually pay tax on worldwide income, are responsible for estate and gift taxes and must meet many tax information filings that the typical stateside citizen is not required to complete. Examples include reporting foreign financial assets such as overseas bank and brokerage accounts, special reporting of ownership in foreign corporations, reporting gifts or bequests from non-U.S. persons and more.
While renouncing U.S. citizenship is not complicated from the Department of State perspective, it is no easy task from a U.S. tax perspective. Complications arise unless individuals can certify full U.S. tax compliance for the 5-year period prior to renouncing. This often means filing back returns, while paying tax, interest and possible penalties.
Giving up U.S. citizenship may be impossible if individuals are minors or facing mental health challenges that can call into question the required intent to relinquish. They must continue to meet all U.S. tax responsibilities until the required intent can be established.
IRS Relief Procedures For Accidental Americans
Recognizing the challenges faced by accidental Americans, the Internal Revenue Service has established tax relief procedures for those who have successfully given up U.S. citizenship but not been tax compliant. The procedures enable them to come into compliance with U.S. tax obligations without incurring any tax, penalties or interest. These procedures offer a path to escape the American tax system for those who meet the strict criteria.
When Exiting U.S. Citizenship Is Not Possible
The tax relief procedures mentioned above cannot help individuals who cannot expatriate due to issues such as age or mental health challenges. In these scenarios, it is very important to structure economic affairs accordingly. Careful planning is essential to minimize tax implications and ensure long-term financial stability. If expatriation will never be possible, other longer-term plans are needed.
A well-meaning parent or guardian may often look to foreign (non-U.S.) trust structures to ensure care of the individual, or succession plans. However, setting up such a foreign trust with a U.S. beneficiary can result in a very harsh tax outcome that may ruin the intent of the investment plan.
In navigating the complexities of U.S. citizenship and taxation, the journey of accidental Americans underscores the importance of informed decision-making and strategic planning to ensure financial well-being and peace of mind across borders.
Posted April 17, 2024
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