Who are Accidental Americans?

“Accidental Americans” are people who, although they have not lived in the United States and have no direct link to the country, have U.S. citizenship due to factors such as being born in U.S. territory or having one of their parents be an American citizen. Often, these individuals face citizenship-related challenges, such as the obligation to file tax returns, despite never having resided in the United States.

What tax obligations do they have in the USA?

“Accidental Americans” have several tax obligations in the United States, even if they have never resided there: They must file the tax return, Form 1040, annually with the Internal Revenue Service (IRS), reporting their worldwide income, along with Form 8938, if they have financial assets outside the U.S., which is part of the Foreign Account Tax Compliance Act (FATCA). The U.S. taxes its citizens on their global income, meaning they must report and pay taxes on income earned anywhere in the world. These obligations can be complicated and costly, leading many “Accidental Americans” to seek specialized tax advice with US Tax Consultants

Do they also have tax obligations in the country of residence?
Yes, “Accidental Americans” residing in Spain or Portugal also have tax obligations. The main tax obligations are:
As tax residents, they must declare their worldwide income in their tax return, Impuesto sobre la Renta de las Personas Físicas (IRPF) or Declaração de Imposto de Renda de Pessoa Física” (DIRPF), which includes income earned both in locally and abroad, and they are also required to file either Modelo 720 in Spain or the Schedule J in Portugal, reporting assets or at least, bank accounts abroad. It is important for “Accidental Americans” to seek tax advice to understand and comply with both legislations, as there are agreements that help them avoid double taxation in the U.S. and Spain&Portugal.

Even if they have not lived, worked, or have income from the USA?

Yes, “Accidental Americans,” by virtue of being U.S. citizens, must file Form 1040 (the U.S. tax return) even if they have not lived, worked, or have income in the U.S. It is true that they must file the tax return, Form 1040 with the IRS, if their worldwide income exceeds certain thresholds, which vary by filing status and age; for example, Accidental Americans who are married to a non-American citizen have a threshold of only $5.

Of course, they cannot forget to file the FinCEN 114 if they have financial accounts abroad, in Spain or Portugal

What are the biggest challenges for Accidental Americans in their tax return, Form 1040?
“Accidental Americans” face several challenges when filing their tax return on Form 1040. On one hand, there is the complexity of the system, as U.S. tax laws are complex and can be difficult to understand, especially for those who are not familiar with them; the obligation to report worldwide income, meaning they must report all their income regardless of its origin, which complicates matters further; and double taxation, which without adequate knowledge of tax treaties, they face the risk of being taxed in both countries.

In addition to Form 1040, they may need to file additional forms, such as 8938, 5471, 8621, and FBAR, which increases the administrative burden. It should be noted that they must also consider that the IRS penalizes the purchase of investment funds outside the U.S., known as PFICs, and also requires them to make a comprehensive declaration in the case of owning more than 10% of a Foreign Corporation.

On the other hand, there is misinformation, as many are unaware of their tax obligations until they face problems, which can lead to complicated situations, and the consequences for failing to file their tax return or doing so incorrectly can result in severe penalties, including jail time, which adds pressure and anxiety. Therefore, I cannot stress enough that, due to these challenges, it is highly recommended that “Accidental Americans” seek professional advice to ensure proper compliance.

What options do the IRS provide for them?

The best option is the Streamlined Foreign Offshore Procedure if they meet the requirements; it is a simplified procedure established by the IRS in 2012 to facilitate American citizens’ tax regularization in cases where they have not complied with their obligations, fundamentally not having filed any individual tax return in the past (Form 1040) or not having informed about the financial accounts that the holder has opened abroad (FBAR), guaranteeing the taxpayer that the IRS will exempt them from any liability for possible past tax crimes.

US Tax Consultants offers free, no-obligation online consultation.

In Portugal:  https://outlook.office365.com/book/USTaxConsultantsPortugal@ustaxconsultants.pt/

In Spain: https://outlook.office365.com/book/USTaxConsultants1@ustaxconsultants.net/